Charts of the Week

An innovative daily data series that’s pointing up for China’s economy

We’ve been posting charts pointing to a nascent recovery in China. Here’s another: the high-frequency YiCai Economic Activity Index. 

This indicator, which is updated daily, is an innovative amalgamation of data: it tracks traffic congestion, air pollution, a commercial housing sales index, and unemployment and bankruptcy indices based on internet searches.

This chart compares YiCai’s track record (in the lower pane) to growth rates for three conventional economic indicators in the top pane: retail sales, industrial production and fixed asset investment. (All three of these macro data figures will be released on Nov. 15.)

The YiCai index has been creeping higher lately. Will it once again prove to be a key leading indicator, as it was through the strong rebound of 2020-21 and the disappointments of 2022?

UK government borrowing in context

It’s been a year since the debacle of the Truss-Kwarteng “mini-budget” that would have seen Britain run massive deficits to fund tax cuts. By contrast, the Sunak-Hunt era has seen a quiet continuity of fiscal orthodoxy, as our chart demonstrates.

Chancellor of the Exchequer Jeremy Hunt, worried about higher borrowing costs, has fended off pressure for tax cuts. He also {{nofollow}}presided over a healthier-than-expected turn in the public finances as the UK economy defied some of the gloomier predictions of 2022. 

This double-paned visualisation tracks the UK’s public sector net borrowing (excluding public sector banks) month by month – both in absolute terms and as a percentage of gross domestic product (GDP).

The blowout borrowing of the pandemic era is highlighted in gray. Today, borrowing is roughly in line with the pre-pandemic era, at least in percentage-of-GDP terms.

{{nofollow}}This week’s King’s Speech suggested there will be more of the same. The government will “support the Bank of England to return inflation to target by taking responsible decisions on spending and borrowing,” the monarch told Parliament. 

The record short Treasury bets that have regulators worried

Hedge funds are making a record bet against US Treasuries. 

This chart uses data from the Commodity Futures Trading Commission to compile net long and short positions in US government debt. There are large short positions against two-, five- and ten-year securities.

While there will be some “fundamental” positioning betting Treasuries have further to fall amid sticky inflation and “higher for longer” Fed rates, most of the short bet is attributed to the “basis trade” – an arbitrage of price differences between cash bonds and futures. Hedge funds borrow a lot of money for such trades – hence the “leveraged funds” referred to in the chart title.

The size of the bet {{nofollow}}reportedly has regulators worried about financial stability risks – especially since yields fell in the first week of November (which some observers say was short-covering of that very same bet, as well as the result of optimism about a “soft landing” for the economy).
Notably, the well-known hedge-fund manager Bill Ackman recently {{nofollow}}exited his own short bet against 30-year Treasuries, saying the trade (and the world) had become too risky.

Europe’s cooling inflation heatmap might show why Lagarde paused

This visualisation revisits one of our favourite themes: an inflation heatmap. Less than a year ago, eurozone inflation was broadly advancing across sectors and geographies.

Today, the harmonised index of consumer prices (HICP) measure of inflation is slowing in almost every country in the currency region – and it has even turned negative in the Netherlands and Belgium.

Will inflation keep cooling off? {{nofollow}}That’s “certainly our forecast,” European Central Bank President Christine Lagarde recently said after she hit the pause button on rate hikes.

An analysis showing the strong Swiss franc is overvalued

The Swiss franc has been the strongest performer among the G10 currencies this year. {{nofollow}}Observers are attributing this to the franc’s safe-haven appeal at a time of geopolitical stress, as well as the central bank’s vow to support the currency if necessary to reduce inflation.

This chart models the franc over the long term, aiming to identify periods of overvaluation and undervaluation based on economic theory including the “law of one price” and interest-rate parity*. The blue line tracks the CHF/EUR rate but multiplies it by the spread in short-term interest rates, and then generates a trend line. (If the Swiss are offering a higher interest rate versus the ECB, the franc is expected to appreciate versus the euro, and vice versa.)

We’re in a period of overvaluation versus the euro by this metric, two standard deviations away from the trend. The franc hasn’t been substantially undervalued under this analysis in more than a decade. ‍

*An academic paper discussing these theories can be found {{nofollow}}here.

Rate-cutting central banks are returning

We can’t really say we’re in a globally synchronised hiking cycle anymore. As our chart shows, almost one-fifth of the 79 central banks we track are now cutting rates.

Last week, Brazil's central bank lowered its key policy rate, joining its counterparts in Peru, Costa Rica, Poland, Chile and Hungary.

Emerging markets were some of the leaders in hiking rates to control inflation, and they’ve similarly taken leadership in a cutting cycle.

Our geopolitical risk index is spiking again

As the conflict between Israel and Hamas enters its second month, and Iranian proxies attack both Israel and American targets, we’re revisiting this geopolitical risk index from Economic Policy Uncertainty.

This academic group creates indices relating to policy challenges ranging from infectious diseases to wars, tracking newspaper archives going back decades.

The situation in Gaza has driven the risk index sharply higher, but it remains well below the shock of Russia’s invasion of Ukraine in early 2022.

Stock valuations according to GARP

It’s a "{{nofollow}}stock picker’s market," Barron’s suggested earlier this year. This investing cliché suggests that selecting growth stocks with appealing valuations will be paramount in an environment where broader indexes are stagnant. ({{nofollow}}Indeed, the S&P 500 finished October down 2 percent amid earnings-related selloffs in some high-profile names.)

The strategy in our scatterplot visualisation is “growth at a reasonable price,” or GARP. Using FactSet data, we created buckets of large-capitalisation US stocks by sector, searching for relative undervaluation. Our “earnings growth” x axis compares estimates for the next 12 months to the 12 months after that; our “historic price-earnings valuation” y axis compares the forward P-E ratio’s deviation from the 10-year average.

This analysis found that telecommunications stocks have the greatest GARP potential: they’re well below their historic price-earnings ratios and analysts are estimating dramatic earnings growth over the next two years. Consumer services, utilities and energy also perform well in this analysis. The reverse was true for consumer cyclical and business-services stocks.‍‍‍

The Taylor Rule and where rates “should” have been

When assessing Federal Reserve policy, it’s interesting to look at the {{nofollow}}Taylor Rule, created by a Stanford University economics professor. It’s a rough guideline for a central bank’s response to inflation; typically, formulations include the concept of a “natural” rate of interest, based on factors including price levels and real incomes. The Taylor Rule also usually calls for a relatively high rate when inflation is above target. 

This chart compares Fed policy to two formulations of the Taylor Rule based on different assumptions about the natural rate of inflation.

Since the financial crisis, and especially since the pandemic, the Taylor Rule has usually called for tighter policy than the Fed delivered. (Taylor himself was often a critic of what he perceived as the Fed’s “easy money.”)  As inflation has slowed after the Fed’s historic tightening cycle, the rates have converged. 

Investors’ steady inflows into turbulent markets

This chart tracks the evolution of global fund flows into equity and bond markets over the past two decades by calendar year.

Even with {{nofollow}}the S&P 500 sliding since July as the market digested “higher for longer” Fed policy, and even as the bond rout continued through 2023, investors continued to place money in both asset classes until very recently, as our chart shows. It wasn’t a repeat of the excitement about equities in 2021-22, but cumulative flows for the year are still quite positive. 

Last year is notable for the money that flowed out of bonds after a historic selloff.

A bullish trajectory for Japanese confidence

This visualisation is one of our “clocks” that track the business cycle. It’s showing how, sentiment-wise, Japan remains in expansion mode.

It does this by assessing two indicators: the nation’s leading index (which points to the coming trends in the economy, using inputs such as job offers and consumer sentiment) and the coincident index (which aims to identify the current state of the economy through data such as factory output). The government’s latest readings for both will be released on Nov. 8.

It doesn’t seem like a slowdown is imminent. Staying in the “expansion” quadrant will make it easier for the Bank of Japan to consider “lift-off” from the world’s last negative interest-rate policy in 2024.

French and German gloom, Asian optimism for PMIs

We regularly examine the purchasing managers index (PMI), an indicator that tracks sentiment among executives in the manufacturing sector. 

This visualisation compares PMI across major economies. It gives an idea of why the European Central Bank chose to put rate hikes on hold: the economic engines of France and Germany are suffering on a global basis. (They’re both far below the “neutral” PMI level of 50.)

Asian economies, highlighted in green, are generally faring better – especially India and Indonesia. The US is right on the neutral line.‍

Changing perceptions of ECB rate peaks using Euro short-term futures

The Euro Short Term Rate, or €STR, is the primary overnight money-market benchmark rate, reflecting how expensive it is for banks to borrow in the very short term. Futures for the €STR are considered to be a representation of market expectations for the ECB’s key policy rate.

This chart tracks the current futures curve against two past counterparts – in particular, recent “peaks” for what was seen as the ECB’s likely terminal rate last winter (Dec. 27) and this spring (March 8).

As inflation proved sticky, there was a dramatic change in expectations between December and March; the terminal rate was pushed up by about 75 basis points. Since then, and with the ECB likely on pause for a while, the curve has flattened. 

Different eras for US real yields

As price increases slow and central banks raise interest rates, it’s interesting to see how US 10-year yields have fluctuated when adjusted for inflation.  

This chart breaks down the evolution of real US 10-year yields by creating an average for each decade. The real yield peaked in the early 1980s, when Federal Reserve Chairman Paul Volcker was famously engaged in sharp rate hikes to bring down inflation that was even higher than it was 2022-23.

As we can see in the 1970s, bonds were a bad bet; inflation largely wiped out your yields. By contrast, investors who bet that Volcker would succeed in his quest were rewarded handsomely. The average post-inflation return was 5 percent in the 1980s – making it the best decade.

1970s-style returns returned in the 2010s – this time due to disinflation and ultra-low rates. And we’re still in negative returns so far in the 2020s after a historic, inflation-driven bear market.‍‍‍‍‍‍‍‍‍‍‍

Factoring in Fed hikes (or cuts) after next week’s likely pause

Fed policy makers convene next week, and the market consensus calls for them to stand pat on interest rates.

This table peers into 2024 by using the implied probabilities for rate levels predicted in the Fed funds futures market.

Will Jay Powell announce one more hike before the end of the year? The market is pricing in a 29 percent chance of this outcome. 

As this chart shows, the chance of two more rate hikes over the next year (which would bring the key policy rate to a 5.75- 6 percent range) is viewed as unlikely, though not impossible. 

There’s a 50 percent chance that we’ll still be on “pause” mode in May; by the end of 2024, a 90-percent-plus chance of a pivot to rate cuts has been priced in.

Taiwan’s semiconductors boost the trade surplus to a historic high

Amid perennial geopolitical tensions and a wobbling global economy, Taiwan can always count on demand for its high-end semiconductors.

Taiwan Semiconductor Manufacturing (TSMC), whose customers include Apple and Nvidia, {{nofollow}}recently reported better-than-expected third-quarter figures. While the company had been navigating one of the chip industry’s cyclical downturns, analysts said TSMC is poised for another leg of growth amid demand for AI chips. 

This chart aims to show the outsized effect of the semiconductor industry on Taiwan’s trade balance – which recently touched a historic surplus. The chip industry is included in the “machinery & transport equipment” segment. All other sectors (in purple) are experiencing a trade deficit.

Japan’s labour market over the decades

As Japan maintains the world’s last negative interest-rate policy and the yen sinks, the central bank is watching for sustained wage growth before it moves into positive territory. 

This visualisation shows the sea change in the Japanese job market over the decades. In the first pane, we track the ratio of job openings to applicants (the blue line, measured on the right-hand axis) to year-on-year wage growth, as measured on the right-hand axis. 

After the famous “lost decades” for Japan, the trend line for the former changed radically in the 2010s. Starting in about 2014, the number of available jobs exceeded the number of applicants. Despite that, year-on-year wage growth has stayed relatively muted (so far), and the market has not returned to pre-pandemic tightness levels. 

However, wage-driven services inflation (as well as underlying inflation, which excludes food and energy) is now above the 2 percent target for the first time since 2014, as the second pane shows. 

As the BoJ announces its latest policy update on Oct. 31, stay alert for more labour market data released on the same day.‍

Rich and poor Americans’ post-pandemic savings cushions

Between government income support, windfall returns from tech stocks and lockdowns’ blow to consumerism, the pandemic made a big difference for Americans’ savings – whether they were rich or poor. 

This chart is a follow-up to our chart from earlier this month, which showed how the US “savings cushion” was revised to be plusher than originally assumed.

We segmented Americans into five “net worth buckets” and compared their deposits in checking and savings accounts to the last quarter before the pandemic (Q4 2019), adjusted for inflation. 

The purple bars represent the peak gains in peoples’ bank accounts. The dark blue reflects how those gains have shrunk, due to inflation, spending and debt paydowns. For the bottom 90 percent of the wealth distribution, the extra savings are almost gone.

Perhaps surprisingly, the merely affluent did relatively better than the ultra-wealthy; the top 1 percent of households by wealth, excluding the richest 0.1 percent, saw their savings jump more than 42 percent. They have also retained the most savings of any group, with almost 17 percent more inflation-adjusted dollars in the bank than four years ago. 

Seasonality isn’t kicking in this year for the strong US job market

Even after a historic rate-hiking cycle, the US labour market has tended to defy gravity. This chart shines another light on this resilience.

This visualisation tracks seasonality in US employment. Jobless claims are usually highest during the winter, as companies tend to announce more layoffs later in the year; meanwhile, students tend to enter the workforce mid-year. This results in a W-shaped chart. 

As a result, labour figures are often “seasonally adjusted” to strip out the effect of predictable trends. 

This chart, however, is very much non-seasonally-adjusted. We’re experiencing an anomaly: jobless claims are not doing what they usually do in the autumn, and are evolving on a trajectory lower than the 10-90 percentile band.

Cooling (and re-heating) inflation in emerging markets

This Tetris-style chart considers inflation momentum across 14 emerging markets, starting in January 2020. (Like last week’s “accelerometer,” this visualisation aims to track the speed of inflation for multiple economies at once.)

This time, we’re defining inflation momentum as the monthly change in the year-on-year headline CPI rate. Red cells indicate month-on-month acceleration; blue cells, a deceleration.

The white line cutting across the cells tracks the percentage of these 14 countries that are experiencing accelerating inflation on any given month. 

After an increasing wave of blue throughout 2022 and much of 2023, the red cells are mounting a comeback. Brazil, Turkey and the Philippines are among nations that have flipped back to accelerating inflation.

Bitcoin rallies on ETF enthusiasm‍

{{nofollow}}Stocks have been under pressure lately, but Bitcoin might be back. 

The cryptocurrency has roughly doubled in price over the past year and almost reached USD 35,000 this week, an 18-month high, as our chart shows. 

The recent enthusiasm is likely related to {{nofollow}}BlackRock’s proposed iShares Bitcoin ETF. It was listed on the Depository Trust and Clearing Corporation (DTCC) last Monday in what was considered a mini-win for crypto investors. 

The concept of a crypto ETF is still under review by the SEC, however. Indeed, Bitcoin wobbled when BlackRock’s ETF vanished from the DTCC website a day later, but it later reappeared.

The second panel reflects trading volume as measured by value. This remains subdued compared to Bitcoin’s 2021 heyday.

The inflationary Aussie consumer price basket

Australia’s third-quarter consumer price index (CPI) is released on Oct. 25. Amid persistent inflation, {{nofollow}}the nation’s central bank has been making hawkish noises. This chart breaks down Australia’s CPI basket by showing the proportion of items where prices are rising more than 8 percent year on year (in red), less than 2 percent on the same basis (in green), and several inflation ranges in between. We’ve overlaid the Reserve Bank of Australia’s key interest rate during that time.

The large swath of green shows the prevalence of a low-inflation norm over the three decades before the pandemic. That came to an end in 2022, as inflation breadth started looking more like the early 1990s. 

The most recent data shows a small rebound in the percentage of shopping-basket items with relatively stable prices. The RBA will want to see that trend continue for policy makers not to resume rate hikes. ‍‍‍‍‍‍‍‍‍

Pricing in a weaker Israeli shekel

Israeli Prime Minister Benjamin Netanyahu said this week that his nation’s conflict with Hamas will be a “long war.” Currency traders appear to be pricing that message in.

The Israeli shekel has dropped more than 4 percent against the dollar since Hamas’ Oct. 7 attack, reaching an eight-year low of about 25 cents. That prompted the Bank of Israel to say it would deploy USD 30 billion in reserves to support the currency. 

This chart compares the Oct. 6 curve for USD/ILS to the one we see today. Despite the Israeli central bank’s support, traders are pricing in an exchange rate through 2025 that’s about one US cent below the pre-conflict scenario.

The Fed’s favourite inflation measure has only been revised higher lately

The US releases data on personal consumption expenditures (PCE) next week. The Federal Reserve is known to pay closer attention to measures of PCE rather than the better-known CPI (which puts a heavier weight on shelter, food and energy).

This chart tracks core PCE over the past decade – comparing the data’s initial release value to its final, revised print, using our Revision History tool.

While the two lines track each other quite closely, the second panel is fodder for inflation hawks: every core PCE data point has been revised upward for three consecutive years. 

Gauging the speed of G7 inflation

As policymakers assess whether inflation is slowing sufficiently, this dashboard enables us to track the progress of price increases across the G7 industrialised nations over the past six months. 

As automotive dashboards have speedometers, we’ve dubbed this an “accelerometer” – visualising the speed of inflation every month over the past half year.

The individual accelerometers (or pie charts, or Trivial Pursuit pieces) track the inflation rate as a percentage of its rolling 5-year high. 

Broadly, the most recent readings show a definite slowdown from six months earlier. But there are regional particularities, and recent months have seen an inflation “plateau,” or even moderate acceleration.

Japan, which is particularly focused on wage growth as the weak yen imports inflation, has hardly seen price increases slow at all.

The World Trade Monitor’s recession signal hasn’t kicked in (yet)

The Netherlands Bureau for Economic Policy Analysis (known by its Dutch acronym {{nofollow}}CPB) will publish an updated edition of its {{nofollow}}World Trade Monitor on Oct. 25. 

Fittingly for a nation that pioneered international merchant capitalism, this respected Dutch publication compiles a “merchandise trade aggregate” as a measure of global trade.

Since this indicator’s inception in 1992, merchandise trade had always grown on a year-on-year basis – except for the last three US recessions: the 2001 dot-com hangover, the global financial crisis of 2008-09, and the 2020 pandemic plunge, as our chart shows.

Like the persistently inverted US yield curve, the merchandise trade aggregate has been ringing an alarm bell, but there has been no recession in sight. The indicator has stayed in negative territory through much of 2023.

The Shenzhen stock index is having a historically bad year

China’s disappointing economic rebound this year has been reflected in the stock market. 

This chart tracks the performance of the Shenzhen Composite Index over the course of this year, comparing it to this benchmark’s median and mean trajectories. We also compare it to the 25-75 percentile range of historic performance (highlighted in gray); the index just stepped outside that zone, entering the bottom quartile of historic performance.

The Shenzhen exchange is generally seen as a home for more entrepreneurial stocks than the bigger equities traded in Shanghai. It is also more associated with individual investors than the institutional trading that prevails in Shanghai.

As such, it’s quite a speculative index: the median annual return is less than 3 percent, while the historic average return is a whopping 19 percent (almost double the {{nofollow}}historic equivalent for the S&P 500) due to the outsized gains of 2007, when the benchmark doubled.

Air freight rates are attempting takeoff in Asia

Macrobond carries several datasets from {{nofollow}}Drewry, the shipping consultancy: its well-known World Container Index (a measure of seaborne trade) and detailed air freight rates.

This visualisation charts the different trends in air freight for three continents. We aggregated rates to ship goods from major airports in Asia, the US and Europe.

Since mid-2022, there has been a broad, worldwide price decline (as measured on a three-month percentage change basis) as the post-pandemic resurgence in shipments dissipated. 

It is interesting, however, that Seoul and Shanghai are seeing an upturn recently. This could dovetail with the OECD leading indicator we published last week, showing relative optimism for China.

A potential green light for stalled economies

China was in the headlines in 2023 for an underwhelming rebound, and Britain’s travails post-Brexit are well-known. But according to the OECD, these two nations have improving economic momentum – relative to their own past five-year experience, that is. 

This chart tracks the OECD’s Economic Composite Leading Indicator for 17 major economies. In the OECD’s words: it’s “designed to provide early signals of turning points in business cycles,” using future-sensitive economic data points that measure early-stage production and respond rapidly to changing circumstances.

Readings are divided into red, yellow and green based on their percentile over five years. We also added smaller dots to show the six-month trajectory. (We published a similar “traffic light” visualisation for the US in February.)  

Worryingly for the world economy, a plurality of nations are in the red zone, suggesting their best recent days are behind them. Deterioration over six months is noted for Germany, Turkey and South Africa. But the indicator shows improvement for the US and Japan.‍‍‍‍‍‍‍‍‍‍‍

Exploring the spikes in global stock markets

This chart has a global take on equities, examining mid- and large-cap stocks in 76 countries. Our analysis counts how many countries’ equity markets have reached a rolling 52-week high (in blue) or low (in red). 

The resulting “stalagmite and stalactite” visualisation provides an insight into the current, more subdued equity dynamics when compared to the global financial crisis in 2007-09, as well as the panic that followed the outbreak of Covid-19. The two US recessions are highlighted in grey.

The red “stalactites” are spikier than their blue counterparts – suggesting that moments of pessimism are global, but optimism is more local.

Geopolitical events and oil prices

Oil prices jumped immediately after Hamas attacked Israel. As the war escalates, threatening to involve more players in the oil-rich Middle East and potentially complicating energy trade routes, our chart analyses the short-term effects of previous geopolitical events on Brent crude.   

Saddam Hussein’s invasion of Kuwait in August 1990 had the most notable effect on oil markets. Less than two months later, prices had doubled. 

9/11 saw a very short-term spike, but oil prices quickly began tumbling amid concerns that a recession driven by the attacks would reduce demand.

Will either pattern repeat itself this time? At the time of writing, this week’s oil-price spike was fading. Traders will be considering the interplay between a weaker global economy alongside the spectre of a wider conflict – as well as OPEC’s determination to cut production. 

Curbed enthusiasm from the IMF

We’ve written several times about the International Monetary Fund’s forecasts. Early this year, it boosted its 2023 outlook on optimism about China’s reopening. But in April, we noted that the IMF had a history of reducing its medium-term forecasts.

In an atmosphere of slowing global growth, the IMF updated its World Economic Outlook (WEO) again on Oct. 10. In the chart above, the right side displays the new GDP growth expectations for various nations in 2023. The left side measures the (mostly downward) revisions compared to the IMF’s previous outlook published in April.

India is forecast to post the strongest growth, at 6.3 percent. Germany and Sweden are notable: they’re among the few countries to receive upward revisions, but the IMF predicts a recession for both.

A fatter savings cushion Stateside

In August, we looked at the stock of excess savings US consumers had accumulated since the beginning of the pandemic. It appeared that this cushion was deflating quickly. 

However, the picture has swiftly changed. When US gross domestic product figures were revised on Sept. 28, statistics on savings were revised as well. Households will have more flexibility to navigate a slowing economy and higher borrowing costs than some observers had expected. 

As our chart shows, revisions increased the current stock of excess savings by 350 billion USD. (This was mainly due to significant upward adjustments made to the income component, which aggregates three variables: employee compensation, proprietors’ income, and rental income.)

US yield curves over the past five years

What a difference a few years, a pandemic and an inflation outbreak can make for the bond market. 

This chart visualises the monthly evolution of the US yield curve since 2018, bolded and highlighted in different colours every 12 months. 

Unsurprisingly, after a record rate-hiking cycle by the Fed, the current curve is at the top. Though the curve is inverted – indicating that longer-term rates are expected to be lower than their short-term counterparts – 30-year yields remain near 5 percent, indicating that the market doesn’t foresee a return to post-GFC inflation levels anytime soon.

At the bottom of our chart are highlighted curves from the worst pandemic years, 2020 and 2021 – before inflation had kicked in and policy makers around the world were vowing to keep rates low for some time.

The 2018 line, in red, might be considered the “old normal.” It’s notable that the 2019 curve, in orange, was inverted; traders were anticipating a non-pandemic-related recession in 2020. 

Countries have been overshooting their inflation targets for years

Central banks began declaring explicit, public inflation targets in the 1990s to boost their credibility. (Famously, the governor of the Bank of England is required to write a letter to the finance minister when inflation significantly overshoots.) In 2012, the Federal Reserve joined in under Ben Bernanke’s leadership, officially adopting a 2 percent target. 

With inflation proving sticky around the world, these targets are being tested like never before. 

The blue bars on our visualisation measure how long it has been since a country was within a percentage point of its central bank’s inflation target. Mexico and the US are closing in on three years. Only South Africa and Indonesia are less than a percentage point from their targets.

The orange/yellow bars, measurable on the Y axis, show the gap between the year-on-year consumer price index (CPI) increase and the inflation target. The UK has the widest gap. 

China is notable for having missed its 3 percent target on the deflationary side for seven months.

Inflation is sticky for more than 80% of Britain’s CPI basket

For a deeper dive into Britain’s inflation problem, we created a diffusion index for items in the CPI basket tracked by the Office for National Statistics. When overlap between categories is removed, we can identify 85 different sub-indices in this basket. 

The upper pane of the chart compares the percentage of these 85 categories where prices are rising more than 2 percent year-on-year (in red) with the percentage where increases are below that threshold or negative (in green).

The lower pane takes the same data but adjusts categories for their weighting in the overall inflation basket. 

The reversal since the deflationary days of the pandemic is stark: some 69 of the 85 sub-indices are in 2-percent-plus price-gain territory. When adjusted for weighting, the burden on the consumer by this metric is even worse. And worryingly for the Bank of England, the proportions have barely moved over the course of a year – in both panels.

A deep dive into German trade

We’ve written several times about Germany’s economic malaise. This visualisation takes a deeper look at Europe’s dominant exporter to show how various industries are performing.

Sifting through almost 100 market segments, our 12-month rolling analysis selects the top 15 exported and imported types of goods.

Unsurprisingly, the top export category for the home of Mercedes and BMW is vehicles. This sector is doing OK, with exports by value rising 19 percent year on year. But several other categories in the top 15 are stagnant at best.

On the other side of the trade balance, falling imports of oil and gas (presumably from Russia) can clearly be seen. ‍‍‍‍‍‍‍‍‍‍‍

Weighting the most recent CPI prints to create "instantaneous inflation"

This chart is inspired by a recent academic paper that discussed the concept of “instantaneous inflation.” Annualised monthly inflation rates are weighted to give more recent readings greater importance; this is then used to calculate a 12-month inflation rate. 

Macrobond created an instantaneous inflation model* – charted in purple – and compared it to traditional measures of the consumer price index: year-on-year (in blue) and annualised month-on month (in bars). 

Giving more importance to recent prints in this way is a method of capturing rapid price shifts. Until mid-2022, instantaneous inflation was above conventional CPI as prices increased more and more quickly each month. From the second half of 2022, the trend changes: prices increase more slowly, so the instantaneous inflation line falls below year-on-year CPI.

The latest data point shows the Fed’s dilemma: a 7.8 percent month-on-month CPI gain is pushing instantaneous inflation above annual CPI again. (The next CPI print is coming on Oct. 12.) 

Where the Fed historically had rates the last time inflation was this high‍

What was the “usual” Fed funds rate in past decades when US inflation was this high? This chart aims to compare the historic median to the present day – perhaps suggesting why more people are predicting “higher for longer.”

We selected four measures of underlying inflation: the core consumer price index (CPI) and core personal consumption expenditures (PCE), which both exclude food and energy; and the “trimmed mean” CPI and PCE, which exclude components with extreme price movements.

For August, these measures of inflation ranged between 3.9 percent and 4.5 percent year-on-year. We then calculated a Fed funds rate (FFR) median for every month since 1960 that these four measures were in a 50-basis point bucket that includes the August 2023 reading. (I.e. months when the two CPI measures were between 4 percent and 4.5 percent, and between 3.5 percent and 4 percent for PCE.)

In all cases, the Fed’s median key interest rate was above 7 percent, compared with the current range between 5.25 percent and 5.5 percent. For trimmed-mean CPI, the Fed’s median rate was almost 9 percent when inflation was as elevated as it is today. 

(Futures markets still don’t believe Jerome Powell will match such Volcker-era tightening; a peak around 5.5 percent and cuts in the second half of 2024 are priced in.)

Bond forecasters are getting it wrong in a new way

The Survey of Professional Forecasters, conducted by the Philadelphia Fed, is one of the longest-running forecasting exercises in US macroeconomics. Given this history, which stretches back to 1968, we can visualise many years of expectations versus reality.

As our chart shows, from about 2003 through the onset of the pandemic, America’s top economists frequently predicted that bond yields would rise (the dotted lines), only to see yields fall before a smaller-than-expected increase (or falling some more). Put another way, there was a long-running tendency for observers to declare premature obituaries for the 35-year bond bull market.

After the worst of the pandemic, the bond bear market finally kicked in, but rising yields surpassed forecasters’ expectations. The most recent year shows how forecasters have turned bullish, i.e. calling for yields to start falling; for now, the market is again defying their expectations.

King Dollar is back

We wrote frequently about “King Dollar” in 2022. The greenback was strengthening against almost all currencies during the Fed’s historic tightening cycle.

After those gains unwound somewhat in early 2023, the strong dollar is back as the “higher for longer” view of US rates takes hold, the economy surprises with its resilience and prospects for a pivot to looser policy recede into the future.

This chart tracks the Dollar Index (DXY), which tracks the greenback against a basket major US trading partners’ currencies. In 2022, the dollar broadly experienced more volatility than it did in 2023, as seen by the sharper weekly gains (in green) and losses (in red) in the first panel.

But the second panel highlights how, measured by a “winning streak” metric, the current surge is even more impressive. DXY is about to appreciate for a 12^th consecutive week; the last time that happened was in 2014.

US-China bond-yield spreads and the dollar-yuan exchange rate‍‍

As US and Chinese rates diverge, the yuan is declining. The renminbi reached 7.34 per dollar last month, the lowest since 2007. 

This chart plots daily observations of the year-on-year change in CNY/USD and the spread between 10-year Chinese and American government bonds. 

The last two months of observations are highlighted in the oval (steady year-on-year depreciation and wide spreads). These readings coincide with the growing acceptance of the “higher for longer” US interest-rate narrative as prospects for a Fed “pivot” recede into late 2024. By contrast, China has been cutting key lending rates to support the economy.

Long-term, bonds almost never outperform equities

One of the clichés about investing is that equities generally outperform bonds over time. This maxim is backed up by our visualisation. 

The relative analysis is based on the S&P 500 and 10-year US government debt, evaluating historic performance going back to 1871. Bonds and stocks are examined on a total return basis, i.e. including interest, dividends and distributions as well as capital gains. 

Even on a one-year basis, there’s only about a one-in-three chance that bonds will outperform stocks.

Euro users’ SWIFT departure

This chart tracks currencies used for transactions on SWIFT (the Society for Worldwide Interbank Financial Telecommunication). This Brussels-based network handles global interbank payments. 

It revisits a visualisation we used in a blog earlier this year on the potential for global “de-dollarisation.” 

But not only is SWIFT becoming ever more “dollarised;” proportionally, the euro’s share is plunging more than that of the greenback is rising.

Two years ago, both currencies had about 40 percent of global payments. Now, the dollar now accounts for more than 48 percent of SWIFT transactions by value, while the euro’s use has almost halved, sliding to 23 percent. Both figures are 10-year records. 

It’s not clear why these trends have gathered pace in recent months. (Slumping German exports, combined with the re-emergence of King Dollar inflating the value of transactions in the US currency, perhaps?)  

The dollar isn’t shoving everyone else aside: BRICS nations may be having some success in their efforts to increase trade using their currencies. The share of Chinese yuan and “others” on SWIFT is creeping higher.