Charts of the Week

Sahm rule triggered but S&P 500 remains resilient

What the chart shows

This chart illustrates the historical performance of the S&P 500 around the triggers of the {{nofollow}}Sahm Rule. The US recession indicator is triggered when the unemployment rate's three-month moving average rises above its low over the previous 12 months.

Behind the data

Data released last Friday showed the US unemployment rate rising to 4.3%, with nonfarm payrolls increasing by only 114,000 in July – both significantly {{nofollow}}worse than expected. This breached the Sahm Rule and amplified recessionary fears, negatively impacting risky assets like the S&P 500.

Historically, the S&P 500 on average tends to bottom after such a trigger.

The median performance indicates some downside risk over the following six months, but the interquartile and percentile ranges suggest a relatively positive performance over the subsequent year. So, while the market may face turbulence at first, recovery and growth are likely in the longer term.

Although empirical data tends to show an upward bias post-trigger, caution is advised due to less downward pre-trigger adjustment than usual.

Consumer cyclicals and technology poised to benefit from Fed rate cuts

What the chart shows

This chart shows the average performance of US sectors relative to the broad equity market over 12 months after the Federal Reserve (Fed) initiated rate cuts. The areas in red indicate sectors performing worse than the benchmark while green areas indicate sectors that are performing better.

Behind the data

Six months after the Fed initiates rate cuts, pro-cyclical sectors like consumer cyclicals and consumer services stand out. Over a 12-month horizon, consumer cyclicals, technology, consumer non-cyclicals, and healthcare sectors become prominent, driven by increased consumer spending, business investment, and attractive dividend yields due to lower interest rates.

On the contrary, utilities and finance typically underperformed the benchmark over the subsequent year.

Political policies could also significantly influence the upcoming monetary easing cycle beyond mere cyclicality.

Bitcoin and gold boost portfolio performance 

What the chart shows 

This dashboard simulates the returns of a classic US 60/40 portfolio, but with additional assets incorporated in increments of 10% or 20% -- reducing the original proportions of US stocks and bonds accordingly. For example, adding 10% gold to the portfolio changes the composition to 54% stocks, 36% bonds and 10% gold.

Behind the data

Recent recession fears have led the traditional 60/40 portfolio, composed of 60% S&P 500 stocks and 40% US 10-year government bonds, to outperform. Among the 11 additional assets we analyzed, only Bitcoin, gold and ESG-focused equities have shown potential to enhance returns. Conversely, incorporating other assets such as European or emerging market equities, US cash or high-yield bonds may dilute the portfolio’s overall returns.  

Improved manufacturing employment and rising prices complicate Fed decision-making

What the chart shows

This chart compares the Federal Reserve Bank of Philadelphia’s regional manufacturing survey results for employment with prices received over the past 20 years. It uses scatter plots and regression analysis to illustrate the relationships between current and future outlooks.

Behind the data 

Manufacturing hires improved over the past six months, shifting from a period of recovery to optimism for both current and future outlooks in July. 

Meanwhile, prices received for manufacturing goods – indicative of goods inflation – have shown growth in both current and future indices. These improvements in employment and prices complicate the Fed’s decision-making process, as they must balance economic growth with inflationary pressures. Consistency with long-term trends further underscores the complexities the Fed faces in formulating monetary policy.

European optimism poll reveals stark divide

What the chart shows 

This chart visualizes the results of the European Commission’s semi-annual poll, which surveys EU citizens on whether they feel optimistic or pessimistic about the future of the European Union (EU). The data is sorted by the combined shares of respondents who feel either very optimistic or fairly optimistic, ranking the most EU-optimistic countries at the top and the most EU-pessimistic ones at the bottom.

Behind the data

Only 65% of EU citizens feel optimistic about the Union's future, with the highest optimism – 80% – in Denmark and Ireland. Nordic and Eastern European countries such as Lithuania, Poland and Romania also show higher optimism. In contrast, "old Europe," particularly France and Germany, display significant skepticism. Greece's low optimism is not surprising due to its history with the EU, marked by high inflation, economic hardships and significant public debt. But the concerns in France and Germany are more troubling, indicating deeper issues within these major economies.

Weak retail sales highlight China’s tough economic recovery

What the chart shows

This heatmap shows year-over-year growth in China’s retail sales across various categories, as indicated by the figures in each row. The blue-shaded tiles indicate high retail sales growth as compared to previous observations over the last three years for that category, and vice versa for the red-shaded tiles. 

Behind the data 

The data highlights the volatility in consumer behavior and its impact on China’s economic recovery, which faces significant hurdles amid the government’s 5% GDP growth target. Despite good progress in late 2023, Chinese consumers seem to have spent less in the first half of 2024. Recent retail sales reports were {{nofollow}}weaker than expected, resulting in a more pessimistic outlook in the heatmap and an overall growth of only 2% in June. 

Inflation eases in Venezuela but economic challenges persist

What the chart shows 

This chart tracks Venezuela’s inflation rate over the past 35 years, segmented by the presidential terms of Hugo Chávez and Nicolás Maduro and using a logarithmic scale for clarity. It highlights the dramatic shift in the country’s economic stability between the two presidencies. 

Behind the data 

Venezuela’s {{nofollow}}recent presidential elections have faced allegations of fraud, intensifying social unrest. Despite Maduro’s self-declared victory, international observers, including the European Commission and the US, criticized the election’s integrity. The previous 2018 election was also deemed flawed and led to significant unrest. Recent results have again triggered widespread protests, with many citizens alleging electoral fraud.

The economic instability under the current regime is linked to severe inflation, currency devaluation and widespread poverty. Inflation, which was below 40% during Chávez’s tenure from the late 1990s to 2013, skyrocketed under Maduro, peaking at over 344,000% in early 2019. While inflation has since eased to around 50%, the ongoing economic challenges suggest a long road to recovery for Venezuela. 

JPY undervaluation presents contrarian opportunities

What the chart shows:

The chart displays USDJPY and its fair valuations derived from 10-year yield differentials and purchasing power parity (PPP). Using 3-year and 20-year rolling regressions reflects shorter- and longer-term aspects of capital flows and inflation dynamics, respectively. Additionally, it provides USDJPY scenarios based on 2.5-3.5% 10-year US-Japan bond yield differentials and visualizes USDJPY’s long-run subsequent returns compared to PPP fair valuation deviations.

Behind the data:

The {{nofollow}}BoJ tightened its monetary policy, raising the policy rate to 0.25% and reducing bond purchases. The {{nofollow}}Fed held rates steady but {{nofollow}}signaled a possible cut in September. These narrowed the 10-year US-Japan bond yield gap to around 3%. Given scenarios of 2.5-3.5% 10-year yield differentials, USDJPY is estimated to be around 129-146. 

The PPP model shows JPY undervaluation against the USD above +2 standard deviations, indicating potential for long-term reversion.

However, overestimated core inflation and {{nofollow}}slowing real wages in Japan may challenge BoJ’s hawkish stance, suggesting USDJPY overvaluation—even reverting—might persist.

Is the US economy peaking amid tech-driven optimism?

What the chart shows:

The chart displays the US Sentix Economic Index, the US Investors Intelligence Investment Index, and the S&P 500. The upper pane illustrates the economic and investment sentiment indices in terms of z-scores using monthly data from July 2002 to the present, compared to the year-over-year growth of the S&P 500. In the lower pane, the US economic-investment z-score differentials are displayed with ±1 and ±2 standard deviation (s.d.) bands.

Behind the data:

When US economic sentiment lags investment sentiment significantly (below –1 s.d.), it suggests pessimistic macro and investment cycles, as seen during the Global Financial Crisis, the euro area sovereign debt crisis, and the COVID pandemic. 

Currently, the macro-investment sentiment gap is negative but not beyond –1 s.d. while the cycle remains an uptrend, primarily led by technological advancements and AI prospects. However, the upcycle shows signs of peaking, and the increasing economic-investment discrepancy might be cautionary.

Tech sector dominates global fund inflows

What the chart shows:

The chart uses data from EPFR to illustrate the sectoral breakdown of global net fund flows aggregated since the beginning of the year.

Behind the data:

The AI-driven rally, particularly around the "Magnificent 7," has significantly impacted global fund flows, with the technology sector receiving around 10 billion USD by the end of July. Conversely, other sectors saw significant outflows, collectively losing almost 25 billion USD. This trend highlights the concentrated investor interest in tech amid broader market adjustments, reflecting a substantial shift in investor focus towards technology and telecommunications.

Record divergence between S&P 500 market-cap and equal weight indices

What the chart shows:

The chart illustrates the one-month rolling return correlation between the S&P 500 market-cap weighted index and the {{nofollow}}S&P 500 equal weight index from the 1990s.

Behind the data:

Previously, we have shown the S&P 500 index diverging significantly from its equal-weight index. Specifically, their ratio—market-cap relative to equal weighting—has been surpassing +2 standard deviations but has not yet exceeded +3 standard deviations, as it did during the dot-com period.

Their dynamic return correlation provides comparable results. It is noticeably low during both the dot-com and COVID-19 eras but high during periods of tranquility. However, in early July 2024, the recent correlation revealed an even more remarkable observation as it tumbled to a record low of about zero.

Such a historically non-existent correlation may not be overlooked amid AI-motivated markets that underpin large-cap concentrations, as opposed to the diversifications reflected in the equal-weight index.

Early summer volatility spike raises market caution

What the chart shows:

This chart compares the VIX throughout the calendar year, with the blue line representing 2024, the green line showing the historical mean, and the purple line depicting the historical mean excluding extreme years (2008 and 2020).

Behind the data:

Historically, volatility tends to increase at the end of summer. This year, VIX spiked significantly in July due to upcoming Federal Reserve meetings, Democratic delegate votes, and earnings reports. Although rate cuts and political confirmations might ease investor concerns, the early and sharp rise in VIX above 20 indicates heightened market caution. Market confidence may be bolstered by anticipated rate cuts and political clarity, but current volatility signals cautious investor sentiment.

Tech fuels recovery in China’s exports

What the chart shows:

The chart shows China’s export growth contributions by category, smoothed using a three-month moving average, highlighting machinery and equipment, basic metals, transport equipment, etc.

Behind the data:

‍{{nofollow}}China's exports have been recovering, driven by global manufacturing improvements, front-loaded orders, and low-base effects. Key contributors include tech-related products like phone sets, automatic data processing machines, and electronic circuits. 

As {{nofollow}}China leads in high-tech and AI sectors, its export trends remain critical global economic indicators. The recovery indicates China's growing influence in global trade, particularly in high-tech industries, which may shape future economic dynamics.

Surge in Chinese copper exports amid high inventories

What the chart shows:

This chart looks at Chinese copper inventories (blue line) and copper exports (green line).

Behind the data: 

Throughout 2024, Chinese copper inventories rose while exports increased significantly due to limited domestic demand. This trend reflects broader commodity market dynamics where sluggish domestic consumption drives producers to seek higher international prices, despite potential trade tensions. The surge in exports amidst high inventories suggests strategic shifts in response to domestic economic conditions and global demand pressures.

Six rate cuts predicted over the next year

What the chart shows

This chart illustrates implied Fed funds futures probabilities based on CME Group futures pricing. The far-left column marks the day of the FOMC rate decision. The second column shows the implied Fed funds rate on that date. For example, on November 7, 2024, the market expects the Fed Funds rate to be 5.05%. The subsequent columns depict the probabilities of what the Fed funds rate will be at the following FOMC meetings. For instance, the next meeting (July 31, 2024) sees a 93.8% chance that the policy rate will remain the same and a 6.2% chance of a single 25bp cut.

Behind the data

Fed Funds futures have been moving swiftly. The market now predicts a 90% chance of a 25bp cut during the September FOMC meeting​​. Additionally, the market is leaning towards there being three 25bp rate cuts by the end of 2024 and three more by July next year, a sharp contrast to the one rate cut expected a few weeks ago​​. This shift is driven by {{nofollow}}cooling inflation and a {{nofollow}}slowing labor market despite a {{nofollow}}solid GDP report. Upcoming PCE, CPI, and payroll releases will be crucial in determining the extent of rate cuts over the next few months.

Central banks repriced towards dovishness

What the chart shows

This chart depicts the magnitudes of futures-implied policy rate cuts for 2024 and 2025 for selected major central banks amid an early accommodative cycle and their recent and upcoming monetary policy meetings (Fed: August 1, ECB: July 18, BoE: August 1, BoC: July 24).

Behind the data

Developed markets, particularly the US, have made progress in disinflation. Consequently, futures markets have been repricing central banks towards dovishness, implying relatively larger rate-cut repricing. Concurrently, Fed policymakers have signaled that the Fed is moving {{nofollow}}closer to rate cuts. However, due to persistent underlying inflation risks, it is anticipated that {{nofollow}}reductions in the major central banks’ policy interest rates will be gradual. Recent futures pricing (as of July 25, 2024) implies total rate cuts this year for the Fed, ECB, BoE, and BoC to be approximately 70, 85, 57, and 109 bps, respectively. For 2025, futures indicate approximately 97, 75, 81, and 83 bps, respectively. Meanwhile, the ECB and BoC have already lowered their reference rates by 25 and 50 bps this year, respectively.

PMI on the rebound?

What the chart shows:

This chart presents the Purchasing Managers' Indices (PMIs) for the past three years, with green boxes indicating expansion and red boxes indicating contraction. It reveals that emerging markets initially contracted early in the cycle but have since rebounded, whereas developed markets have only recently begun to recover from their contraction phase.

‍Behind the data:

During the central banks' hiking cycle, it is crucial for policymakers and the market to consider the spillover effects of efforts to combat inflation. The impact of these interest rate hikes extends beyond immediate financial adjustments, influencing various sectors of the economy. PMI numbers indicate that these hikes have created significant challenges for both the economy and companies. Increased borrowing costs and tightened financial conditions have slowed down business activities, reduced consumer spending, and strained corporate profitability. This underscores the importance of balancing inflation control with potential negative consequences on economic growth and stability.

Divergent DXY on different presidential election winners

What the chart shows

This chart shows the movements of the USD Index around three months before and after the latest two US elections in 2016 and 2020, in which Trump and Biden won the presidential elections, respectively.

Behind the Data:

The data points to a stronger USD when Trump won in 2016, but a weaker USD after Biden won in 2020, likely due to their differing policies. 

{{nofollow}}Under Trump, tax cuts that enhanced fiscal deficits and imposed tariffs that kept trade and global geopolitical tensions elevated positively influenced the USD Index. 

Under Biden, massive fiscal expenses that weighed on fiscal deficits and less intensity in global supply chain and trade reshoring and deglobalization helped put downward pressure on the USD. 

For the upcoming election later this year, similar policy implications under Trump, currently the favorite, and Biden's successor Harris might yield comparable outcomes for the USD Index.

Strong year for US equities

What the chart shows

This chart displays the number of trading days per year that the market has reached an all-time high. The blue bars represent the total for the entire year, while the green dots indicate historical values up to the current day of the year. Remarkably, this year has already seen the S&P 500 close at an all-time high for 38 days, a feat achieved only four times previously: in 1964, 1995, 1998, and 2021.

‍Behind the data

‍Despite the market's reduced expectations early this year for interest rate cuts in 2024 and the eventful buildup to the upcoming US presidential election, the stock market has shown remarkable strength. It continues to demonstrate resilience and robust performance, suggesting sustained investor confidence and optimism even in the face of potential economic and political uncertainties. This strong market performance highlights the market's capacity to navigate and thrive amidst various challenges, reinforcing its role as a critical driver of economic activity and growth.

Nvidia’s volatility

What the chart shows

The chart illustrates the daily growth of the Magnificent 7 companies using a "beads on a string" format. Each bubble represents the daily growth for a single trading day, calculated as the percentage difference between the opening and closing values. Blue circles indicate days with growth, while red circles indicate days with negative growth.

Behind the data

As Nvidia emerged as a leader of the entire US stock market in 2024 amidst an AI-driven rally, its line depicting daily growth stands out as a notable outlier, showing significant growth on many trading days. Similarly, Alphabet, the parent company of Google, has experienced substantial fluctuations reflecting its volatile market performance throughout the year. Elon Musk’s Tesla started the year relatively stable, with its daily growth line indicating consistent performance initially. However, it has recently tumbled, showing a series of red circles highlighting a period of negative growth. In contrast, Microsoft, Apple, and Amazon are almost invisible on the chart, indicating their daily growth has been relatively minimal and less volatile compared to their peers, suggesting they have been lagging other tech giants in terms of market performance in 2024. Meta's performance, though not as volatile as Nvidia and Alphabet, shows a mixed trend with both positive and negative growth days reflecting the company's varying market response.

2024 and 2023 were the hottest years on record

What the chart shows‍

NOAA calculated the average temperature of the 20^th century from 1901 to 2000, then subtracted the average temperature in each year from this century-long average. This gives us temperature anomalies, indicating how far each year has deviated from the 20th-century mean. Each year is then categorized by how much cooler or hotter it was compared to the average. For example, in 2001, temperatures were 0.6 to 0.7 degrees Celsius hotter than the 1901-2000 average.

Behind the data

The world is hotter than it has ever been before. Both 2023 and 2024 are breaking record temperature anomalies. In 2023, temperatures were 1.38 degrees Celsius hotter than the 20th-century average. Thus far, 2024 is 1.22 degrees Celsius hotter than the 20th-century average. Despite many countries' efforts to cut global greenhouse gas emissions, average global temperatures continue to rise. If the world hopes to limit global warming to the 1.5 degrees Celsius goal set in the 2015 Paris Agreement, immediate and more aggressive actions are needed.

Time to move away from tech?

What the chart shows

This chart visualizes the relative strength (x-axis) and momentum (y-axis) of four S&P sectors against the S&P 500 Index over a specific three-month period. 

Sectors on the right side of the vertical axis (value of 100) have higher relative strength compared to those on the left. Sectors above the horizontal axis (value of 100) have increasing momentum, while those below have decreasing momentum.

This means that sectors in the top right quadrant have high relative strength and positive momentum and are expected to outperform the benchmark. The inverse is true for sectors in the bottom left. 

Sectors in the bottom right quadrant have high relative strength but declining momentum – which means they may start to underperform soon. Those in the top left quadrant may therefore start outperforming soon. 

Behind the data:

Information Technology (purple line) has been the highest performing S&P sector so far this year, reflected in its position in the Leading quadrant. But momentum appears to be declining as it heads into the Weakening quadrant. Could IT soon underperform? 

Conversely, the Financials sector has emerged from the Lagging to Improving quadrant, displaying low relative strength and rising momentum, possibly indicating the cusp of recovery. 

US instantaneous inflation trends bolster probability of rate cuts

What the chart shows

This chart shows the trends in US core Consumer Price Index (CPI) inflation rates from 2021 to the present using three different measures: year-over-year (purple line), month-over-month annualized (green columns), and instantaneous (blue line), which is calculated with a parameter to indicate to what extent more recent observations are more heavily weighted, i.e., weighing between year-over-year and month-over-month inflation.

Behind the data

Inflation is crucial for monetary policy stances and decisions, particularly those of the Federal Reserve. Conventional inflation measures depict yearly and monthly trends. However, these can exhibit biases due to outdated data and short-term noise, respectively. As such, {{nofollow}}instantaneous inflation could be a sensible indicator that balances data noise with the accuracy of immediate price changes.

In 2023, instantaneous core CPI inflation in the US was relatively lower than the annual changes, suggesting continued moderation driven by lower monthly changes. Conversely, in early 2024, the surge in instantaneous core inflation above the annual rate likely indicates more persistent inflation risks. However, thanks to the recent softening of monthly underlying prices in the US, including the May-June 2024 CPI reports consistently {{nofollow}}falling short of expectations, the instantaneous core CPI inflation fell below the yearly rate again. This supports the increasing likelihood of the Fed’s rate cuts, especially in the upcoming September 2024 meeting.

Rising Shanghai freight rates signal potential upside risks for US inflation

What the chart shows

This chart shows the relationship between the Shanghai Containerized Freight Index (SCFI), China Producer Price Index (PPI) and the US CPI. 

In the top pane, we see how changes in Shanghai’s shipping rates precede China’s PPI by about six months. Since the global financial crisis (GFC), the correlation between the two indexes is 0.78, indicating a strong positive relationship.

In the bottom pane, we then see how changes in China’s PPI could be a leading indicator of the US CPI by about six months. The post-GFC correlation here is 0.60, indicating a moderate positive relationship, plausibly via global supply chain and global trade. 

All this suggests that changes in shipping rates in Shanghai can predict future inflation trends in China and the US. 

Behind the data

China’s CPI inflation rose by 0.2% in June 2024 from a year ago – lower than the {{nofollow}}anticipated 0.4%. Meanwhile, 0.8% YoY PPI inflation {{nofollow}}aligned with consensus forecasts. 

Amid {{nofollow}}ongoing geopolitical tensions in the Red Sea, global and Shanghai freight rates have shown an upward bias, although recent weekly prices suggest some signs of peaking. 

Consequently, China’s PPI inflation, which follows the shipping costs by several months, continues to be under upward pressure.

This, in turn, suggests that, from the supply side, US CPI may experience increased inflationary pressures in the coming months.

UK inflation hits Bank of England target as main components ease

What the chart shows

This chart provides a detailed view of year-over-year inflation rates for major subcomponents of the UK’s CPI as of June 2024. 

The large dots denote the figures for June 2024, while the small dots represent the figures for the previous month. 

The arrows show the direction of change between the two. 

The chart also shows the relative weights (Y-axis) of each subcomponent in the overall CPI to illustrate the relative importance of each category in the inflation measurement. 

Behind the data

UK inflation hit the Bank of England’s (BoE) 2% target in May 2024 for the first time in three years following the worst inflationary surge in a generation. 

The following month, headline and core CPI inflation measures {{nofollow}}remained at 2% and 3.5%, respectively.

With headline inflation finally at target, pressure appears to be mounting on the BoE to reduce the policy rate by 25 bps to 5% at the next meeting on 1 August albeit elevated core inflation. 

The moderation over recent months in main components such as recreation and food suggests a potential easing in inflationary pressures, supporting arguments for a rate cut. 

Divergent investment trends in developed markets: equities gain and bonds struggle

What the chart shows

This scatter chart compares year-to-date (YTD) total return performance of large-cap stocks with government bonds of all maturities across various developed markets since 10 July. 

Each data point represents the intersection of a country’s stock market and bond market performance; the position of each point shows how its stocks and bonds have performed relative to one another. ‍

Behind the data

The chart highlights the diverse performance of stocks and bonds in developed markets for 2024, underscoring how different economic conditions and policy decisions across countries can impact the returns of these asset classes. 

The widespread negative performance of bonds in most economies is a cause for concern. The situation is particularly worrisome in France, Japan and the UK.

In contrast, the equity market presents a more optimistic picture. Denmark's strong performance is driven by Novo Nordisk's weight-loss drug Wegovy, while the US stock market is buoyed by Nvidia, the leading technology company whose chips are powering the AI boom.

The declines in equity performance in Portugal and New Zealand indicate that not all markets are benefiting equally. 

Rising S&P 500 ratio sparks bubble concerns amid AI investment boom

What the chart shows

This chart displays the ratio (blue line) of the S&P 500 market-cap weighted index to the S&P 500 {{nofollow}}equal weight index from 1990 to July 2024, highlighting the performance of larger companies relative to smaller ones within the S&P 500. When the ratio is above 1, larger companies are outperforming smaller companies. When it’s below 1, the inverse is true. 

The shaded bands represent the different standard deviations around the trend line to provide context for the ratio’s historical volatility and the range within which the ratio has fluctuated.

The green line shows the long-term trend of the ratio. 

Behind the data

US stocks and the S&P 500 Index, largely propelled by AI narratives, have raised {{nofollow}}questions about possible bubbles as their valuations have been increasing in light of further AI prospects. One method to gauge such potential bubbles is by comparing the index to its diversified version, i.e., its equal weighting.

The ratio of the SPX market-cap-weighted index to the equal-weighted has been on the rise since the COVID-19 pandemic. It hovered around only +1 standard deviation (s.d.) from the long-term trend from 2020 to mid-2023, reflecting a relatively balanced performance. 

However, starting in mid-2023, the ratio began to climb more noticeably, exceeding +2 s.d. in June 2024. This surge suggests that larger companies are outpacing smaller ones, raising concerns about overvaluation, especially in sectors heavily influenced by AI. 

Still, it appears the ratio still has some room for growth compared to the dot-com bubble period in 2000-2001, when it surpassed +3 s.d. before plummeting.

Overall, the chart implies that while the current market shows signs of a potential bubble, it has not yet reached the extreme levels observed during the dot-com era. 

The level of GDP is what matters for commodities

By Roukaya Ibrahim, Strategist, BCA Research

This chart highlights that commodity prices are more sensitive to the level of GDP than the growth rate. 

The shaded regions refer to periods during which the G20 Composite Leading Indicator (CLI) is above 100. This indicator is designed to capture fluctuations in economic activity around its long-term potential level and provide a six-to-nine-month lead on business cycle turning points. A value above (below) 100 corresponds with expectations that the level of GDP will be above (below) its long-term trend. Meanwhile, a rising (falling) CLI implies that GDP growth is anticipated to accelerate above (decelerate below) long-term trend growth.

The chart reveals that energy and industrial metal prices typically rise on a year-over-year basis when the level of GDP is expected to be above its long-term trend, regardless of whether the CLI is rising or declining. This result is intuitive given that, ceteris paribus, an above-trend GDP level likely corresponds with an above-trend level of commodity consumption. 

Moreover, prices of these commodities generally decline during periods when the CLI is below 100, regardless of whether the CLI is rising or declining. This implies that commodity prices typically fall on a year-over-year basis when the level of GDP is expected to be below its long-term trend. Again, this result makes sense given that a below-trend level of GDP implies that the level of commodity consumption is also relatively weak. 

A reality check on China’s corporate profits

By Jing Sima, China Investment Strategist, BCA Research

After a two-and-a-half-month rally, Chinese stock prices are now aligning with the country’s subdued economic fundamentals.

Credit and money supply data remain downbeat despite recent measures to support the property market. The ongoing descend in money growth confirms that business activity remains weak, suggesting that corporate earnings will deteriorate over the next six months.

Without an improvement in corporate profits, Chinese stocks are unlikely to sustain rallies beyond two to three months.

How far is “far right” in Europe?

By Marko Papic, Chief Strategist, BCA Research

French politics has given global investors agita as they scramble to make sense of the trajectory of the country’s fiscal and geopolitical policy. Many still harken back to the Euro Area sovereign debt crisis when Euroskeptic policymakers – including Marine le Pen – roamed the continent, threatening to blow up the monetary union. However, this is a long gone era. The reason that Le Pen’s National Rally (RN) has found success is because her popularity is no longer capped by her Euroskepticism. Since the 2017 presidential election, Le Pen’s popularity has finally broken through the glass ceiling she imposed on herself by sticking to the maximalist anti-EU message. Much as with almost all of the anti-establishment parties on the continent, RN is today only “far” right on the issue of immigration. 

Misconception of Chinese household savings vs. consumption

By Jing Sima, China Investment Strategist, BCA Research

The belief that large bank savings by Chinese households will support consumption is misguided. Historically, changes in household bank deposits in China have shown little correlation with spending.

Unlike US consumers, Chinese households did not receive direct cash transfers from the government during and after the pandemic. The sharp rise in bank deposits since 2018 is due to asset reallocation rather than increased savings from household income. Although the total household bank deposits have more than doubled, most of this increase is in time deposits (savings accounts and CDs). Checking account balances have remained almost unchanged over the past decade.

To sum it up: even though Chinese households have accumulated more bank deposits in recent years, much of this is held in savings accounts by wealthier individuals, who have a low propensity to spend. Therefore, household savings are unlikely to drive significant growth in consumption.

Korea’s export recovery in perspective

By Arthur Budaghyan, Chief EM/China Strategist, BCA Research

Even though Korean exports have rebounded, most of this recovery has been due to semiconductor exports. After collapsing in early 2023, semiconductor overseas shipments have surged. Korea is producing high-value-added memory chips, and demand for these has surged in the past 12 months. 

Excluding semiconductor exports, exports have improved only marginally. This and other global trade data suggest that the global trade recovery has been primarily driven by surging demand for AI chips and improvement in US imports/domestic demand. Outside these, there has been a little recovery in global exports.

Why have EM stocks underperformed?

By Arthur Budaghyan, Chief EM/China Strategist, BCA Research

‍

There is a reason why global equity investors have been moving out of EM stocks for several years. EM and Emerging Asian EPS in US dollars have been flat for 13 years, with considerable cyclicality. Investors do not pay high multiples for profits that have not grown at all but have experienced considerable cyclical fluctuations.

By contrast, US EPS has been growing rapidly with reasonably low volatility. That is why equity investors have been abandoning EM and flocking to US stocks. Hence, for EM equities to enter a structural bull market, their EPS should grow reasonably fast with low volatility. For now, EM and EM Asia EPS are still contracting.

Underlying inflation is slowing

By Mathieu Savary, Chief European Investment Strategist, BCA Research

Despite recent hiccups in core and services CPI, the Eurozone’s underlying inflation remains consistent with rate cuts by the European Central Bank (ECB). Trimmed-mean CPI now seats below core CPI, while supercore CPI and PCCI are still well behaved. These observations suggest that the ECB will not be stopped in its track and will cut rates more this year.

How much more though? Inflation is not really the constraints on the ECB today. Growth is. The European credit impulse is picking up from depressed levels, real wage growth is above 2%, and global trade has regained some vigor. Consequently, the ECB risks boosting growth too much if it starts easing policy aggressively. This would generate inflationary pressures down the road. As a result, the ECB will move in line with the pricing of the €STR curve and it will cut rates twice more in 2024.

Biden's odds plummet as Trump takes lead in presidential race

What the chart shows:

This chart from PredictIt illustrates the fluctuating odds of various candidates winning the 2024 presidential election, based on betting market data. As of July 5, 2024, Donald Trump leads at 58 cents per share with approximately a 58% chance, while Joe Biden's odds have dropped to 23%.

Behind the data:

This significant shift in Biden's odds coincided with the first presidential debate on June 27 in Atlanta, Georgia. The debate performance sparked concerns among both Democrats and Republicans about Biden's fitness for a second term, particularly due to his age (he would be 86 by the end of his potential second term.) This has led to increased speculation about alternative Democratic candidates, with California Governor Gavin Newsom and Vice President Kamala Harris seeing their odds rise to 22% and 6%, respectively. The coming weeks will reveal whether Biden's debate performance has a lasting impact on his re-election prospects. 

US job market faces pressure as downward revisions signal potential slowdown 

‍What the chart shows:

This chart shows the revisions to US nonfarm payrolls (NFP) from 2021 to the present, highlighting the differences between initial release estimates and the latest adjustments. The green areas indicate periods where revised data showed higher job additions than initially reported, while the red areas show periods where job additions were revised downward. The dotted line represents the non-recessionary average of 157,000 new hires per month.

Behind the data:

Despite monetary policy restrictions, the US job market has shown resilience, reflected in the better-than-expected NFPs in several months over the past quarters and years. NFPs have also consistently exceeded the non-recessionary average since early 2021. However, since 2023, there has been a downward revision trend (red areas) with only occasional upgrades (green areas), a contrast to the more frequent positive adjustments seen in 2022. The upcoming {{nofollow}}release for June (scheduled for 5 July) will be closely watched, with expectations of a slowdown to approximately 180,000–190,000 job additions.

Elevated US debt burden poses risks to future economic stability

What the chart shows:

This chart displays the US debt ceiling and the current debt levels from 1995 to the present. The blue line represents the total public debt subject to the limit, while the red and green areas show the periods when the debt was above and below the statutory limit, respectively. The grey bars indicate US recession periods.

Behind the data:

The US debt ceiling, a limit set by Congress on the amount of federal debt, has been a critical issue. The debt limit of $31.4 trillion has been suspended from June 2023 to January 2025, when Congress must raise it or risk a default on its debt, following the November 2024 presidential election. The {{nofollow}}suspension aims to prevent a catastrophic default that could freeze financial markets, potentially wiping out trillions of dollars in household wealth and negatively impacting economic activity and employment conditions. Recently, the IMF warned of the {{nofollow}}adverse consequences of high debt levels, such as higher fiscal financing costs and rollover risks. 

Record yield curve inversion continues without a recession

What the chart shows

The top section illustrates the spread between 10-year and 2-year Treasury yields since the 1970s, with periods of inversion (where the 2-year yield is higher than the 10-year yield) highlighted in red. The bottom section quantifies the number of consecutive trading days the yield curve has remained inverted, which is often considered a predictor of economic downturns. 

Behind the data

Historically, an inversion between the 2-year and 10-year Treasury yields has been viewed as a warning sign of an economic downturn. However, this time, it appears to be an exception – for now. As the chart shows, July 2024 marks the 24^th consecutive month of yield curve inversion without a recession, the longest streak on record. This is comparable to the 1970s when the US faced high inflationary risks and thus high policy interest rates. Similarly, the current period has seen a prolonged inverted yield curve, though there are hopes for avoiding a recession. 

As monetary policy enters an easing cycle, the 2-year bond yield—more closely tied to the Federal Funds rate—could be more vulnerable to downward pressure than the 10-year bond yield. This could result in a reduced yield curve inversion or even a return to a normal upward-sloping shape for the US Treasury yield curve. Economic conditions that normalize over time would also contribute to this shift.

S&P 500 seasonality suggests stronger returns at start of July 

What the chart shows

This chart depicts the seasonality of the S&P 500 index since 1928 by comparing the performance of the first (left dashboard) and last 10 (right dashboard) trading sessions of each month. It shows the average return, median return and the percentage of time the index was up during these periods. The chart also includes the standard deviation of returns to indicate the volatility and the distribution of returns within specified ranges. 

Behind the data

Focusing on the first 10 sessions of the month, July stands out with the strongest historical returns with a mean of 1.55% and a median of 2.07%. More so, across the first 10 trading sessions of the S&P 500 in July since 1928, returns have been positive 72% of times.

Looking at the last 10 sessions of the month, December stands out with a mean of 0.99% and a median of 1.15%. Returns have also been positive on 75% of occasions.

US dollar defies expectations with strong gains in 2024 

What the chart shows

This chart shows the contributions of various currencies to the changes in the US Dollar Index (DXY) since the start of 2024. Each color represents a different currency, with the height of each segment indicating its contribution to the overall index's performance. 

Behind the data

2024 began with consensus expectations of a weaker US Dollar due to stretched valuations. However, nearly halfway through the year, the dollar index (DXY) has gained around 4.4% year-to-date, raising questions about whether the consensus has changed.

The case for a weaker dollar in 2024 was based on deteriorating fiscal and trade deficits and a narrowing interest rate differential with other major economies. As the year unfolded, resilient growth and slower progress on inflation in the US pushed back rate cut expectations.

Meanwhile, other major central banks embarked on monetary policy easing ahead of the Fed. Consequently, as shown in the chart, the greenback gained broadly against all the currencies in the DXY. While long-term fundamentals still indicate that the dollar is richly valued, higher-for-longer rates in the near term could continue to support a stronger-for-longer dollar.

Crypto market declines despite Bitcoin ETF boost 

What the chart shows 

The chart displays the recent drawdown dynamics of the 16 biggest cryptocurrencies by market capitalization, indicating the percentage decline from their previous peak values. We can see significant declines across the various cryptocurrencies, with some experiencing drawdowns of over 80%.

Behind the data

During the spring, the crypto market experienced euphoria after the U.S. Securities and Exchange Commission approved the first 11 Bitcoin spot ETFs in January 2024. Following this approval, many cryptocurrencies soared significantly. However, once Bitcoin entered a stable period, many of its peer coins declined.

Recently, there have been drastic drawdowns in meme-inspired coins such as Dogecoin and Shiba Inu, as well as in some notable projects like Cardano, Avalanche and Ripple, all of which have dropped by around 80% from their peaks. Polkadot's situation is particularly concerning, as it approaches an all-time low despite its technical promise and robust development community.

On the other hand, the relative stability of Bitcoin and Tether during this period reaffirms their positions as more reliable assets within the cryptocurrency ecosystem. Toncoin's rise to an all-time high amidst this turbulence is intriguing and suggests that investors are still seeking new opportunities with perceived strong potential.