Charts of the Week

Evaluating fair value of Asian EM currencies against the USD

The USD Index and US Treasury yields have retreated somewhat from their long-lasting strength, as inflation moderation in April was relatively aligned with expectations. Let’s explore Asian emerging market (EM) currencies in terms of their fair values based on purchasing power parity (PPP) and interest rate differentials.

Purchasing power parity (PPP)

All listed Asian EM currencies are undervalued relative to the USD based on PPP or the law of one price. The degree of undervaluation ranges from mild in INR, TWD, and THB to significant in VND, PHP, and IDR.

Interest rate differentials

With the global monetary cycle still dominantly in focus, led by the Fed, interest-rate differentials could provide insights into FX values, including carry trade strategies. The short-term (2-year), medium-term (5-year), and long-term (10-year) differentials show that most Asian EM currencies appear to be undervalued, except for a possibly overvalued INR.

In conclusion, while many Asian EM currencies seem undervalued against the USD, the persistent inflationary pressures and economic resilience of the US may not allow the USD to weaken significantly in the near term, potentially limiting the appreciation of these emerging currencies.

United States: Are the non-farm payroll figures misleading the market?

This chart looks at two key labor market figures: non-farm payrolls and the Quarterly Census of Employment and Wages (QCEW). To make them comparable, we’ve aggregated the non-farm payroll figures to a quarterly frequency. 

Non-farm payrolls are a leading indicator for the US labor market. Published monthly frequency, they provide a high-frequency snapshot of employment trends. 

In contrast, the QCEW program publishes a quarterly count of employment and wages reported by employers, covering more than 95% of US jobs. 

The chart shows a historically significant spread between these two indicators. So which one more accurately reflects the current state of the labor market? 

Markets weigh up BoJ rate hikes amid excess inflation but low real wage growth

The Bank of Japan (BoJ) is in tightening mode, which contrasts with the approach of major global central banks leaning toward monetary accommodations. 

The chart shows expectations of higher policy rates, as evidenced by rising 2-year government bond yields and 2-year swap rates. This trend is further supported by elevated core inflation (excluding fresh food and energy), which has been in positive territory and is the highest observed in decades, recently reaching 2.9% in March. 

However, despite the BoJ’s intention to see sustainable wage growth to support rate hikes, real wage growth in March remained relatively flat. Additionally, economic growth falling below expectations does not bolster the central bank’s {{nofollow}}hawkish stance.

Tracking the RMB's growing share of global payments and transfers

De-dollarization has been a topic of debate over time, with the use of other currencies gradually increasing. 

This chart shows the growing role of the Chinese renminbi (RMB) in global financial transactions. 

Despite the significant rise in RMB usage for China’s overseas transfers and remittances, with the RMB surpassing 50% and overtaking USD shares in these areas, its share of global payments and trade finance markets remains around 5%, according to SWIFT. This indicates that while the RMB is gaining ground, the USD continues to dominate global transactions.

HK and China EPS estimates: recent upgrades for future years

While Hong Kong and China equities have been performing relatively well lately and have already reached their golden crosses, let’s revisit their earnings estimates.

The predictions for earnings per share (EPS) for both regions have been revised downward compared to six months ago. However, in the past three months, their EPS has been upgraded for the next few years (2025–26), despite remaining unchanged for this year in Hong Kong and experiencing a downgrade in China. This shows the market’s optimism for earnings growth in the medium term, despite some short-term revisions.

SF Fed news index v US consumer perceptions

This chart compares US economic news using {{nofollow}}the San Francisco Fed’s News Sentiment Index, with US consumers as measured by three indexes, illustrating the relationship through regression analysis.

The UMich index, which is influenced by personal finances, inflation and retail gas prices, shows that consumers have been more pessimistic compared to the economic news. 

The Conference Board (CB) Consumer Confidence index, which is closely tied to resilient labor conditions, indicates that US consumers have been more optimistic than economic news suggests, 

Overall, US consumer perception, derived from both the UMich and CB indices using PCA, appears to align with economic news but leans somewhat toward pessimism.

G7 inflation trends over the last six months

Last October, we debuted the inflation accelerometer, a dashboard designed to monitor price increase trends across the G7 nations over a six-month period. Each accelerometer – represented as a pie chart – represents inflation rates as percentages of their five-year rolling highs. 

Since its initial release, there have been no new local inflation peaks in any of the G7 countries. Encouragingly, all nations have experienced a deceleration in inflation, with all except Italy stabilizing around the 2-3% mark. Notably, France and the UK have shown significant progress in curbing inflation over the last six months. In contrast, the US has seen minimal improvement, maintaining inflation levels at around 40% of its five-year high.

Global economic recovery gains momentum as financial conditions ease

Recent {{nofollow}}updates from the OECD highlight that the global economy has been performing better than initially expected, particularly in the US. This chart analyzes various economic activity indicators alongside a Global Financial Conditions Index (FCI). We created this composite by integrating {{nofollow}}the IMF’s Developed Markets (DM) and Emerging Markets (EM) FCIs through Principal Component Analysis (PCA). This method included an Autoregressive (AR) model to predict third quarter trends, optimized by selecting the most effective lag length. 

The graph indicated positive trends, as reflected in the global Manufacturing Purchasing Managers’ Index (PMI), industrial production and trade data, all of which have shown signs of recovery recently. The global FCI corroborates these findings, approaching an easing position that favors a supportive macroeconomic environment.

Visualizing three years of S&P 500 sector shifts

This chart presents a colorful ‘quilt’ representation of S&P 500 sector performance over the last three years, showcasing  by comparing the monthly performance of 11 S&P 500 industries, from Real Estate and Financials to Industrials and Energy. For each month, the performance of these sectors is analyzed by calculating the 20^th, 40^th, 60^th and 80^th percentiles, grouping each sector into performance brackets for comparative analysis.

Shades of blue and green represent sectors that have outperformed their peers, while various red hues indicate underperformance, as detailed in the legend. By following the horizontal progression of colors for each sector, you can track its relative performance over time, creating a visual tapestry of market dynamics. Additionally, the closing month S&P 500 price return index is plotted along the left y-axis, providing a reference for overall market trends corresponding to the sectoral shifts.

Bullish trends emerge in Hang Seng and CSI 300 as golden crosses appear

Hong Kong and China’s equity markets are showing optimism as the Hang Seng and CSI 300 indices rally, supported by China’s accommodative economic policies and attractive valuations. Technically, both indices have already reached a “golden cross,” where their 50-day moving averages have exceeded their 200-day moving averages. This technical milestone typically indicates potential upward momentum in the markets. 

The above chart tracks these movements clearly, with green triangles marking the golden crosses for each index. Despite these positive technical indicators, investors may still exercise caution due to ongoing economic uncertainties in China, particularly in the real estate sector. The persistence of these trends will be key to determining whether the recent bullishness signals a long-term recovery or a short-lived rally.

Global central banks' rate expectations diverge 

Central banks around the world are sending mixed signals about their monetary policies. The above, updated with data from one of our partners, Oxford Economics, shows the expected shifts in policy rates by various central banks by the end of 2024, based on the futures contracts expiring this coming December. It illustrates market expectations for rate adjustments as a response to evolving economic conditions globally. 

Recent developments show that Sweden’s Riksbank and the Swiss National Bank have aligned their strategies, opting for the first policy rate cuts, while the Bank of England has chosen to hold its rate steady as of last week. Notably, while most central banks – including the Federal Reserve, European Central Bank and the Bank of Japan – are projected to cut rates by the end of 2024.

ECB Analysis of Systemic Stress in the Euro Area Financial Sectors

This chart, based on an {{nofollow}}ECB working paper, tracks systemic financial stress in the euro area, breaking it down into sub-indices including equities, bonds, FX, money market and financial intermediaries. Each component reflects a different aspect of the financial system’s health, with the data presented as a one-month moving average as of September 2024. 

Systematic stress has shown a general decline since September 2022, indicating a period of relative stability. However, a noticeable uptick in the stress level associated financial intermediaries poses a question: Is this merely a temporary fluctuation? Or does it signify the onset of deeper financial instability? 

The lower part of the chart, which depicts the correlation of these indices with systemic stress, offers additional insights into how closely each index’s movements are related to overall financial health.

Assessing China’s economic health beyond GDP

While China’s GDP growth for the {{nofollow}}first quarter exceeded expectations, other key economic indicators such as retail sales, industrial production and fixed asset investment presented a mixed picture. 

In this context, the {{nofollow}}Li Keqiang Index offers an alternative perspective on China’s economic health. Named after Li Keqiang, the 7^th Premier of the People’s Republic of China, this index focuses on three essential indicators: electricity consumption, bank loans and rail freight volumes, which Premier Li favored over traditional GDP as more accurate reflections of real economic activity. 

This chart shows that recently, the Index has tended to suggest more robust economic activity than the official GDP figures, indicating a possible upside bias in assessing China’s economic health. 

India’s economic resilience through alternative growth indicators 

The chart provides a detailed nowcast of India's economic performance, using key indicators such as railway freight earnings, electricity demand and gross credit activity, akin to the alternative measures used in China’s Li Keqiang Index.  

It shows a sustained economic momentum, with the green line indicating that despite fluctuations, the underlying economic structure is poised for continued growth. The differences between the nowcast and the actual GDP data, shown in purple, underscore potential underreported strengths or weaknesses in the economy, offering a more nuanced insight into India's economic trends than GDP figures alone. 

This comprehensive approach reveals an economy that, while facing challenges, demonstrates considerable resilience and potential for future growth.

South Korea’s news sentiment index predicts positive shift in equity earnings

The chart illustrates the relationship between South Korea's news sentiment index and its equity earnings over time, highlighting how changes in media sentiment can precede shifts in financial market performance. 

Developed by the Bank of Korea, the {{nofollow}}Korean News Sentiment Index (NSI) uses natural language processing to analyze news texts from the internet, aiming to gauge the overall economic mood. This index serves as a leading indicator, often predicting economic sentiment around two months in advance of equity earnings reports.

We see that the NSI (in green) fluctuates ahead of the broad market returns of Korean equities (in blue), with noticeable divergences and convergences over the years. For instance, a significant spike in the sentiment index in 2009 precedes a rise in equity earnings, suggesting that positive news sentiment was an early signal of improving economic conditions that eventually reflected in financial statements.

Currently, the NSI indicates an uptrend, suggesting a positive outlook on the economy that may soon be reflected in equity earnings. This makes the NSI a valuable supplementary tool for investors and analysts looking beyond traditional financial metrics and valuations to assess the market outlook for Korean stocks. 

US reports slow job growth in March 

US job growth slowed more than expected in April. Nonfarm payrolls increased by 175,000 jobs, the smallest increase in 6 months. In addition, revisions from the Bureau of Labor Statistics showed 22,000 fewer jobs created in March and February than previously reported. This jobs report falls far below the yearly average of 233,000 jobs and puts it more in line with the pre-pandemic mean which is 190,000.

Signs of a cooling labor market bring some optimism about the possibility of a sooner rather than later cut from the Federal Reserve. 

Federal Reserve maintains rates amid inflation concerns

This chart displays the implied probabilities of future Federal Reserve interest rate levels based on Fed Funds futures trading, offering a snapshot of market expectations for US monetary policy across several upcoming FOMC meetings. 

Notably, while the current rates are maintained at 5.25% to 5.50%, the market sentiment shifts significantly towards a lowering of rates by the end of 2024. This trend suggests a growing anticipation of an easing monetary policy, reflecting the Fed’s cautious approach to achieving sustained progress towards its 2% inflation target before considering any rate reductions. 

The Fed's decision to keep rates unchanged, despite persistently high inflation above 3%, coupled with a strategic slowdown in balance sheet reduction, aims to stabilize the financial system and manage liquidity effectively, preventing potential shortages of reserves reminiscent of the 2019 quantitative tightening issues. 

These policies highlight the Fed's meticulous approach to monetary adjustments, indicating a deliberate path forward amidst evolving economic conditions, which remains critical for global financial markets and has significant implications for developing nations and emerging markets facing pressures from a strengthening US dollar.

Surge in employment across most sectors post-pandemic

The Covid-19 pandemic has profoundly altered employment dynamics across various sectors globally. The above chart delves into the employment changes within the global large-cap market, comparing employee numbers in different sectors to those at the onset of the pandemic in Q1 2020. 

It shows that nearly all sectors experienced an increase in employee numbers. Notably, the energy, consumer cyclicals and non-energy materials sectors have seen the most significant increases, each expanding their workforce by over 57%. The Industrials sector, which ranks second in terms of absolute employee count, has also seen a substantial rise, with a 53% increase.

However, not all trends are positive; the telecommunications sector has experienced a 13% reduction in personnel, highlighting the varying impacts of the pandemic across different industries. 

The trade of the decade: owning macro volatility

{{nofollow}}Michael LoGalbo, CFA, Global Market Strategist, Macro & Multi-asset, New York Life Investments

In the 2010s, investors enjoyed a "peace dividend" from low geopolitical tensions. But this decade has seen a sharp rise in such risks, driven by US-China trade disputes, Russia's invasion of Ukraine and instability in the Middle East. These dynamics, exacerbated by climate change, energy security concerns, are reshaping market landscapes amid a global economic slowdown, underscoring the growing importance of geopolitical factors. 

As a result, owning macro volatility might emerge as the strategic move of the decade. Our suggested macro volatility portfolio, which includes gold, oil and bitcoin, aims to mitigate geopolitical risks through two primary channels: adverse supply shocks and deflation. 

Oil typically gains from supply disruptions while gold acts as a 'currency of last resort' during high-risk periods, dampening economic activity and heightening uncertainty. Bitcoin is included as a proxy for greater liquidity and risk-taking in a market flush with post-pandemic capital. Despite indicators of a slowing economy, liquidity continues to underpin investor risk-taking.

Federal Reserve takes a more balanced strategy

By {{nofollow}}Gareth Nicholson, Chief Investment Officer and Head of Managed Investments, Nomura International Wealth Management 

Investor confidence in the Federal Reserve has decreased over the last six months, with terms like "policy error" and "Fed mistake" gaining traction. This skepticism raises questions about the Fed's ability to manage monetary policy effectively.

However, central banks have learned from past mistakes, especially those from the turbulent 1970s when inconsistent policies led to high inflation and unemployment. Since then, the Fed has adopted a more structured approach, creating buffers between policy rates and inflation.

In the current cycle, its rate hikes have brought inflation to manageable levels while keeping unemployment steady, signaling a more balanced strategy.

Inflationary pressures persist amid geopolitical tensions

By {{nofollow}}Jieyun Wu, Global Economist at Taikang Asset Management

Despite disinflation, inflation risks persist across developed countries due to high services inflation and ongoing geopolitical conflicts. This heatmap provides a global view of inflation trends in developed and emerging markets (DMs and EMs). Reflecting the past 12 months, it shows generally softer inflation globally. However, in DMs, the US and the Netherlands are seeing a marginal resurgence in inflation. Among EMs, Turkey and Russia face high inflationary pressures, while China’s inflation has recovered somewhat from deflationary levels.

Is the Eurozone inflation under control?

By {{nofollow}}Turnleaf Analytics

Eurozone inflation has touched a new record low since July 2021 coming at 2.4% as of end of April. But does the trajectory going forward look well within the 2% target of the ECB? This is a relevant question as the answer to it might help anticipate the next policy response by the ECB. By crunching hundreds of relevant macro and alternative data variables from Macrobond, Turnleaf Analytics's model projects a more volatile picture over the next year with inflation staying possibly above the 2% target most of the time (red line). Inflation markets paint a similar albeit more optimistic picture (green). Compared to the recent inflation prints from the US, the situation in the Eurozone seems more under control, although not fully so yet.

US manufacturing and services indices point to economic growth

By {{nofollow}}Frans van den Bogaerde, CFA, Economist, IFM Investors

This chart shows a detailed breakdown of the ISM manufacturing and services indices, key survey-based indicators of US economic activity. The latest data (for March 2024) show a softening in US private sector services growth, to 51.4 from 52.6 the previous month, though overall services output continues to expand (any reading above 50 as shown by the green boxes is an expansion). 

Manufacturing activity, by contrast, substantially improved, rising 2.5 percentage points to 50.3 (the first expansion since September 2022). 

As services account for a much higher proportion of US economic activity, it is a better indicator of growth. On a historical basis, however, the rate of growth suggested by both services and manufacturing is subdued – with both measures coming in at around their 20th percentiles relative to the last 20 years.

Analyzing fund flows in money markets

By {{nofollow}}Nik Bhatia, CFA, CMT, Founder, The Bitcoin Layer 

This graph displays the dynamics within the money markets as funds are allocated across various instruments. The four metrics tracked here are: total money market fund (MMF) assets under management, outstanding Treasury bills, the Fed's reverse repo facility (RRP), and daily Secured Overnight Financing Rate (SOFR) volumes in the repo market. Tradeoffs between money market instruments are visible as investors (MMF AUM) transition between accessible investments: T-bills, private market repo (SOFR), and the Fed's interest rate floor for non-banks (RRP).

Currently, SOFR volumes are rising as primary dealers experience increased inventory due to Treasury issuance, while elevated T-bill supply is raising rates to divert funds from the Fed's RRP facility.

CPI surge challenges potential rate cuts

By {{nofollow}}Byron Gangnes, Professor Emeritus, University of Hawaii

US Inflation measured by the Consumer Price Index has picked up recently, putting interest rate cuts at risk. The CPI rose 0.4% in February and March, more than 5% on an annualized basis. These strong monthly changes have raised year-over-year inflation to 3.5%, the highest since September. This is far above the Federal Reserve’s long-run 2% target. 

Part of the renewed inflation is coming from higher gasoline prices. But the Fed is unlikely to be concerned about this transitory component. Shelter inflation remains high but will ease as cheaper new leases are signed. 

That leaves other non-energy services as the main concern. Measured on a three-month moving average basis—which highlights the most recent changes—these prices have risen above a 6% annual pace. This broad category includes many services, but the two most important recent contributors have been auto insurance and medical care.

The trailing three-month numbers provide striking evidence that CPI disinflation has been stalled for eighteen months. The Fed will hold off on rate cuts for a while longer. 

Gold exports reveal diversification in Gulf energy surpluses

By {{nofollow}}Luke Gromen, CEO and Founder, FFTT LLC

This chart shows Swiss gold exports by destination, highlighting not only the well-recognized strong demand from Asia, but also the increasing exports to Persian Gulf countries. This is interesting because it implies a noteworthy shift: a growing portion of Gulf energy export surpluses, traditionally dominated by USD transactions, is being converted into gold, de facto. 

Is gold still a haven amid geopolitical tensions? 

Despite hopes of avoiding a global recession, geopolitical risks continue to impact economies and financial markets. As a result, safe-haven assets like gold attract broad interest. 

We analyzed how gold prices responded in the months following significant geopolitical events. For example, after a recent incident where Iran attacked Israel, gold prices have not shown a consistent trend.  

However, following a Hamas strike in October 2023, gold prices have generally trended upward. Ongoing geopolitical tensions are likely to continue influencing the demand for gold as a safe investment. 

Japanese consumer sentiment remains strong

Consumer spending in Japan, particularly in retail sales, has been robust since early 2022. To analyze this trend further, we used the {{nofollow}}Macromill weekly consumer survey, which provides regular updates on Japanese consumer sentiment. The data show that, despite some fluctuations, sentiment has remained consistently above the average since 2022. 

However, the index has yet to reach +1 standard deviation above the average. This means that while sentiment is positive, it hasn’t reached a level of optimism that would be considered exceptionally high. This could still signal encouraging prospects for Japan’s economic future and support the Bank of Japan’s efforts to normalize monetary policy.

Diminishing expectations for Fed rate cuts

The release of 'unexpectedly hot' CPI data earlier this month dispelled any doubts about the Federal Reserve cutting rates soon. Our chart shows that the market has lost hope for a rate cut at the next FOMC meeting in May, with a similarly low probability for June, at around 20%. 

Initial expectations of three rate cuts in 2024, starting in March, has not materialized and now short-term market expectations are increasingly pessimistic. The probability of a rate cut by the end of the first half of the year is now less than 50%. However, a cut in the autumn still appears likely.

US government bonds remain uncertain

Inflation remains higher than expected, delaying expectations for interest rate cuts. This makes investments in government bonds more uncertain.  We conducted a study on 10-year government bond returns in developed countries to look at how different bond yields affect bond values, considering factors such as duration and convexity. The resulting table can help investors understand how bond yield fluctuations may impact bond values.

US commercial real estate still challenging

US commercial real estate (CRE) continues to face significant challenges, even though many expect that a {{nofollow}}recession can be avoided. This is particularly important for {{nofollow}}regional banks that are quite exposed to CRE loans. To monitor the situation, we use weekly ‘back to work barometer’ indices that track how many people are going back to offices in major cities compared to before the pandemic. The latest numbers show that office occupancy is still much lower than it used to be, with rates about half of what they were before Covid-19.

Bitcoin ‘halving’ and impact on market prices

Roughly every four years, the number of new bitcoins that miners earn for adding transactions to the blockchain is cut in half. This event is known as “halving” and the next one is scheduled for 20 April. By reducing the number of new bitcoins, the supply decreases. 

You might expect that with fewer bitcoins available, their price would go up. But when we look at what happened after the last three halving events, the results show varied impacts on Bitcoin’s price. 

This chart tracks how Bitcoin’s price performed after the last three halving events. The outcomes were quite different each time, demonstrating that even with a decrease in supply, it’s hard to predict exactly how Bitcoin’s price will be affected.  

Economic indicators from China show mixed signals

China’s key economic activity gauges, including the manufacturing Purchasing Managers Indexes (PMI) (both {{nofollow}}official and {{nofollow}}Caixin), expanded ahead of expectations in March. A complementary high-frequency indicator worth considering is road congestion in major cities such as Shanghai, Beijing, Shenzhen, and Guangzhou.

India’s economic resilience highlighted by robust manufacturing and power demand

The Indian economy has experienced high growth, as reflected in its {{nofollow}}manufacturing PMI, which reached a 16-year high in March. Another vital indicator, electricity demand, especially during evening peak hours, correlates strongly with GDP growth. In 2024, electricity demand across India has surged, approaching the upper bounds of historical fluctuations across the country, underscoring the economy's continuing strength. This pattern confirms the resilience and expanding capacity of the Indian economy, aligning with broader economic growth trends.

U.S. tech stocks bolstered by AI prospects

US mega-cap tech stocks have demonstrated strong performance, driven by optimistic Artificial Intelligence-related prospects and overall economic resilience. A closer examination of the earnings revisions of these tech giants relative to broader large-cap equities shows that, since 2020, whenever US tech titans' earnings revisions outpace those of larger equities (using z-scores, seen as the green color in the chart), the Nasdaq 100 tends to outperform the S&P 500 and vice versa.

Currently, earnings revisions for these top tech companies are better than broader large large-caps, suggesting that the strength in US big tech stocks is likely to continue.

Sectoral shifts in U.S. REITs highlight economic transformation

The US REITs industry has experienced significant shifts since the pandemic, with the office sector seeing a marked decline due to ongoing challenges in persuading employees to return to physical office spaces. The telecommunications sector also shrank. Conversely, the industrials and self-storage sectors have grown, signaling a rebound in these areas of the economy following the pandemic.

The data center sector has also grown considerably, likely driven by the surge in demand for AI-related technologies. These trends reflect broader economic shifts towards digital and storage solutions post-pandemic.

Examining long-term market trends amidst economic stability

This analysis of US stock markets since 1935 highlights the cyclical patterns of bull and bear markets within the context of longer-term secular trends. It shows that a cyclical bear market often follows around seven years after the onset of a secular bull market.

As the US economy remains robust, current trends suggest that it could be heading for a new cyclical bear market if economic growth cannot maintain its current pace. Understanding these long-term patterns is helpful to inform investment strategies and economic forecasting.

Global inflation dynamics: A shift from hyperinflation to deflation

In recent years, the focus on inflation has shifted from high inflation rates to stabilizing inflation at acceptable levels. This analysis contrasts the extremes of hyperinflation, where rates exceed 10 per cent, with deflation scenarios in which inflation rates are negative. While hyperinflation has become less prevalent, from affecting nearly half of global economies to just 15 per cent, deflation is on the rise, with six per cent of countries seeing reductions in consumer prices compared to a year ago.

These trends are critical for understanding the global economic landscape and the varying fiscal challenges countries face.