Charts of the Week

"Higher for longer" in the Fed dot plot

This chart shows why the Federal Reserve’s latest move was called a “hawkish pause.” The “higher for longer” interest-rate scenario is weighing on markets, even as policy makers unanimously voted to hold rates steady on Sept. 20. 

To assess what policy makers are thinking, we turn to the “dot plot,” the Fed’s de facto monetary-policy forecast. Board members and regional Fed presidents are polled, resulting in 19 “dots” showing where they see the Fed funds rate at the end of 2023, 2024, 2025 and 2026.

This visualisation compares the dot plots released after the June (blue) and September (orange) Fed meetings. Broadly, policy makers are now expecting fewer rate cuts. Two outliers have removed their predictions of significant cuts in 2024; five “dots” call for rates above 4 percent in 2026, a scenario that was not being envisioned three months earlier.

The second pane tracks the median prediction to show how the dot plot has generally shifted upward. Note that it still implies one more rate hike before the end of 2023.

JPMorgan boss Jamie Dimon, one of the most public faces of Wall Street, recently mused that the Federal Reserve might end up having to hike its key rate to 7 percent to tame inflation. None of the dots in the plot are going that far for now.

(In June, we wrote about how the dot plot was already creeping toward a higher-for-longer scenario, using a different visualisation.)‍‍‍‍‍‍‍

China’s falling exports by region

Chinese exports have been falling since May. As of August, exports were down by almost 10 percent year-on-year, the fourth consecutive monthly decrease on that basis, as our chart shows.

Our chart also breaks down demand from the various regions that import goods from China. (As such, it’s an alternative to a visualisation we published in August.) 

All export markets are displaying a decrease, with the exception of Russia. The rest of Asia (in green) had been a bright spot early in 2023, but no longer.  

The travails of the EU’s biggest economy

The phrase “sick man of Europe” was coined to refer to the late Ottoman Empire. In more recent decades, commentators have applied the phrase to dysfunctional economies. In the 1970s, it was Britain; in the 1990s, it was Germany as its economy struggled post-reunification.

The German economy roared back to life from the mid-2000s, benefiting from an export and globalisation boom and spearheading European growth. But since the disruptions from the war in Ukraine, some observers are bringing the “sick man” label back as barriers to globalisation and the end of cheap gas from Russia complicate the nation’s industrial model. 

We compared Germany – using bars to make Europe’s largest economy stand out more clearly from the lines on the chart  – to the aggregate euro zone as a whole (including Germany) and other EU nations. GDP is compared to pre-pandemic levels for all countries.

Germany’s economy resisted the Covid crash much better than some of the others. But for more than a year, its performance has trailed its neighbours. Germany’s economy is barely bigger than it was at the end of 2019; even French GDP is 1.7 percent above that level, and other nations have rebounded even more strongly.

The inverted US yield curve is reaching early ‘80s proportions

An inverted yield curve – which occurs when long-term interest rates are lower than short-term ones – used to be a reliable warning that a recession was coming soon. The theory: the yields reflect how traders are predicting that higher borrowing costs will slow the economy, prompting central banks to cut rates in the future.

We have written about the inverted curve several times over 2022-23. But an inversion has become a standard feature of the market, even as forecasters backed away from predicting recession.

This chart visualises the 10-year/2-year US government bond spread over the past five decades. The spread reached severely negative territory several times in the late 1970s/early 1980s period, when Paul Volcker ran the Fed. After that, much smaller inversions preceded the early 1990s, early 2000s and GFC recessions (highlighted in gray).

The second panel tracks the number of consecutive days that an inverted yield curve lasted. We have just exceeded 300 days – the longest inversion since 1980.

As some commentators have written recently, the inverted yield curve may not be as reliable an indicator as it once was.

The slow rebound of air travel in and out of China

China's air travel market has seen a significant upturn after zero-Covid policies were relaxed this year. But the rebound is domestically driven.

As this chart shows, passenger numbers for air travel inside the country have just returned to the pre-pandemic long-term trend.

International air travel, however, remains less than halfway to that long-term trend line.

Discrepancies in measuring the US economy

This chart compares US gross domestic product with gross domestic income. GDP includes an economy’s expenditures: consumption, net exports, investment and government spending. GDI, which is more challenging to measure, comprises its income: the sum of all wages, profits, and taxes, minus subsidies. 

Since one person’s expenditure is another’s income, GDP and GDI should, in theory, be equal. However, statistical discrepancies mean there can sometimes be sizeable differences. (These discrepancies are one of the reasons why economic statistics are so frequently revised, demonstrating the importance of Revision History.)

We’re experiencing a historically large spread between these series in year-over-year terms, with GDP exceeding GDI by almost 3 percentage points. We saw the opposite extreme in 2021, where the spread was about 4 percent in GDI’s favour. But the figures were later revised, more than halving that spread. Will history repeat itself?

Given that the GDP-GDI spread widened for unclear reasons during the pandemic, this poses a challenge for policy makers assessing the health of the economy. Some observers believe that GDI is the better long-term indicator, and thus the economy is not doing so well.

Funds keep flowing into US money markets

Higher rates since mid-2022 have meant steady inflows into money-market funds, as our chart shows. Both retail investors and institutions are attracted by higher returns on their cash.

This visualisation splits the inflows into institutional and retail investors, and tracks the month-on-month change. A spike can be seen in early 2023, when the Silicon Valley Bank failure and related tensions in the banking system prompted depositors to shift funds to money markets. (Institutional investors also sought to park their cash in a less volatile corner of the market during that crisis.)

But the month-on-month, week-on-week increases have continued, especially among retail investors.

Hurricane occurrence in the United States

This ‘bubble string’ chart visualises the occurrence of hurricanes in the United States over time, categorised by their intensity and month. The data spans from June 1851 to September 2022 and comes from the National Oceanic & Atmospheric Administration (NOAA).

Each category is color-coded and labelled on the y-axis to the right. The size of the bubble size corresponds to the number of hurricanes in that category for a particular month.

A reflection on 100 editions of Charts of the Week

It’s the 100^th edition of Charts of the Week – your road map to making the most of Macrobond’s visualisations and a succinct digest of trends in the global economy. 

As we reach this milestone, we’re looking back to where it all began. 

The first COTW was published on October 1, 2021. The world economy remained deeply disrupted by Covid-19, even as governments had mostly lifted lockdown measures and rolled out vaccines. As such, half of our charts focused on the market for tourism and international travel more generally, which remained largely depressed.

This chart visualised data from the US Transportation Security Administration, measuring the number of people who passed through airport security checkpoints. The second pane showed the shortfall when compared to the 2019 average.

We’ve updated this chart to show its evolution to the present day. As you can see, US air travel slowly but surely normalised to pre-pandemic levels. 

Historical trends: The Fed's hiking cycle and timing of recessions

There has been much speculation about when the Federal Reserve will end its hiking cycle and when the next recession will hit. Our chart sheds light on the relationship between these two factors by examining how long it takes for the economy to slip into a recession after the Fed stops hiking rates.

The chart reveals a historical pattern: during the 1970s and 1980s, recessions followed closely on the heels of rate hikes. However, things have changed since then, as the gap between the peak interest rate and the onset of a recession has widened. In three out of four cases, a recession occurred more than a year after the Fed's rate hikes concluded. 

This begs the question of whether the current situation will buck this trend, or if we should prepare ourselves for the possibility of a delay of up to a year before the next recession emerges.

Asset class valuations visualised‍

Investing in US equities, particularly in the technology sector, has been a popular choice amongst investors and has generated impressive returns over the past decade. However, given the current economic climate characterised by high interest rates, inflation, and recessionary risks, other asset classes and regions are becoming increasingly appealing and may offer potentially profitable returns. 

This chart shows the "Z-Score" of different assets, based on 20-year average valuation measures. A Z-Score measures how far an asset's valuation has strayed from its mean level. A score of zero indicates that the valuation is identical to the mean and a score of 1.0 indicates that the price is one standard deviation above the mean. Negative scores indicate that it's slipped below the mean.

In this visualisation, we compare the current Z Score of several assets’ valuations vs the end of 2019. When the current valuation is higher than it was at the end of 2019, the stripe is shown as GREEN, while it is shown in RED if the valuation is lower than at the end of 2019. The stripe also shows the range that the valuation has moved between the end of 2019 and now. 

Hedge Funds beat S&P 500 in bear markets

Looking at the chart above, we see a comparison between the annual returns of the S&P 500 and various hedge fund indices from HFR Research. The chart uses conditional formatting to highlight the performance difference between the S&P 500 and the corresponding hedge fund index. Green indicates better performance for the hedge fund index.

What's interesting is that hedge fund indices tend to outperform the S&P 500 only during the years when the equity index shows negative returns. This is, perhaps due to their ability to find returns in other asset classes when equity markets are down.

Oil market faces supply squeeze as output is cut

As Saudi Arabia decided to prolong its 1 million barrel-a-day output cut until the end of the year, announced jointly with Russia reducing its oil exports, the oil market is now facing a supply squeeze.

The chart above indicates, in the current market state, supply will be short of 3 million barrels at the end of year, aggravating tensions on the oil market as consumption surges. The combined announcement will force consumers to deplete their inventories, pushing oil prices up.

Rising energy prices have adverse impact on German industry‍

The chart analyses the headline industrial production and contrasts it with the industrial production levels of energy-intensive industries in Germany. The data is recalibrated to 100 in 2015.

There has been a decrease in the share of car manufacturing, which has led to a downturn in the German industry. This has put pressure on Berlin to revive the economy. The region's industrial hub has been adversely affected by increased energy prices, higher interest rates, and reduced trade with China - its second-largest export market.

Indian foreign direct investment shows steep decline

Foreign direct investment (FDI) in India has experienced a significant decline since the beginning of the year, as evidenced in the chart above. The data reveals a decrease of nearly 50% in foreign investments compared to the same period last year, measured on a 12-month cumulated basis.

Typically, only repatriation of capital adversely affects FDI inflows, which is represented by the purple columns in the chart. However, it has been a decade since gross inflows have contributed negatively to net inflows. Several factors, such as high inflation, recent geopolitical tensions, and weak demand in the United States and Europe, have led to a depletion of inflows, primarily in the start-up sector.

The market’s take on a future ECB pivot

In a split decision, the European Central Bank lifted its key interest rate by a quarter point to 4 percent yesterday, the highest level since the institution was created in the 1990s. The ECB also cut growth projections while lifting inflation forecasts. However, analysts and markets interpreted the ECB’s guidance as suggesting this “dovish hike” is probably the last one, and the euro fell. 

To quote the central bank directly: “interest rates have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to the target.” 

What is the futures market telling us today?

This chart looks at euro short-term rate futures as a guide to market expectations for further ECB rate moves. Indeed, there are few bets on another rate hike in the remainder of 2023. And the chart also implies that the central bank will pivot to its first rate cut in the spring. 

This chart has moved substantially over the past day. Markets had expected one more hike in 2023, but weren’t sure when it would come. Macrobond users can click through to the chart and toggle the date to see how it looked before the ECB’s meeting.‍‍‍‍‍

More American workers are striking

Given the tightness in the US job market, it should be no surprise that there are more labour disputes than there used to be. 

For the first time ever, the United Auto Workers are on strike against all of the Big Three car makers at once.. In theory, 145,000 workers could walk off the job, but for now, fewer than 13,000 workers are striking in targeted action against three plants. 

This chart measures the total number of people on strike in a given year since 1990. (Only strikes involving more than 1,000 individuals are tracked, and the breaking UAW news overnight is too fresh to be included.) The second pane creates “eras” to compare by calculating five-year averages.

Generally, the post-1990, pre-pandemic period was notable for how few labour disputes occurred. The only year to have more striking workers than 2022 was 2003, when 70,000 supermarket staff walked off the job in Southern California. Will the UAW shatter that recent record?

Shanghai commodities: precious metal bulls, nickel and fuel oil bears

This chart looks at the futures positioning for different commodities on the Shanghai Futures Exchange. Investors who are betting on price increases or declines are netted out to create an overall positive or negative position.  

The right-hand columns show the commodities’ price performance in yuan. It’s notable that investors are betting nickel has further to fall after declining more than 25 percent this year, partly due to a disappointing recovery in Chinese demand. 

Rubber and fuel oil prices, meanwhile, are up, but futures positions indicate that speculators believe these commodities will unwind their gains.

As for the biggest net long positions, they’re in silver and gold. Notably, the Chinese central bank has been stocking up on bullion throughout 2023. As for silver, it too is a precious metal, but one with more industrial applications, including emerging green-energy technologies. 

Seasons for positive or negative economic surprises in the eurozone

This chart tracks the Citigroup Economic Surprise Index – which aims to measure whether economic data is coming in below or above analysts’ expectations. 

For the euro area, Citigroup’s methodology suggests there is an interesting seasonality effect: over time, the average shows that indicators tend to beat estimates in the winter and disappoint in the summer.

For the first half of 2023, the eurozone’s Economic Surprise Index was more positive than the historic trend. Since the end of June, reality has been more disappointing than usual.

Peaks and troughs in Chinese housing

This chart takes a 10-year look at the residential real estate market for 70 major cities in China, giving some context for recent years’ slump and a short-lived rebound in 2023. 

Using monthly data, these cities were grouped into three buckets: month-on-month property price increases (red), decreases (blue) or no change (orange). 

For most of the past decade, 60 percent or more of China’s big cities were experiencing monthly price increases, as the preponderance of red on the chart shows.

The slump in 2014 is notable, as is the rebound in 2015 after the central bank lowered interest rates. 

France’s nuclear plants are back in business in time for winter

In December, we wrote about France’s ill-timed nuclear power-plant repairs. Maintenance issues required EDF to power down several reactors just as Russia cut gas supplies to western Europe and the Nord Stream pipeline was sabotaged. Electricity prices soared.

This week, we are revisiting that chart of French nuclear power output, and it’s a much happier picture. As the purple line shows, 2022 output set 10-year lows. But the line for 2023 output is in dark blue and has been steadily gaining against the 10-year average – recently surpassing it. 

This is a hopeful sign for the European electricity grid as the Russia-Ukraine war grinds on and the continent faces another winter with much less gas from its traditional source. Indeed, France overtook Sweden to become Europe’s top net power exporter recently, while Germany, which recently shut down its last nuclear plants, has moved from power exporter to importer. 

Government budget deficits close the Covid chasms

More than three years after the worst of the pandemic, governments are repairing the public finances.

This chart looks at governments’ budget deficits or surpluses as a percentage of GDP. It compares the most recent quarterly figure to the second quarter of 2020, when the pandemic was having its peak fiscal effect: populations were locked down, tax receipts were plummeting as a result, and governments were rolling out emergency support to businesses and workers whose jobs had disappeared overnight.

Norway’s oil wealth makes it a special case on this chart – running the smallest deficit in 2Q 2020 and the biggest surplus today. Australia has been smashing its earlier surplus forecasts amid a robust labour market and healthy commodity prices. 

The oil market and the US SPR

Oil has been in the news as Saudi Arabia and Russia decided to extend production cuts for the rest of the year. There is another noteworthy government player when it comes to this critical commodity: the US Strategic Petroleum Reserve. Famously, President Biden ordered that oil be released from the SPR in 2022 to cushion consumers against the Ukraine war’s impact on gasoline prices. 

This visualisation’s top pane tracks the year-on-year change in the price of Brent crude (in blue) against the year-on-year change in total US oil inventories (in green, on an inverted axis).

As the chart shows, historically, these variables are negatively correlated and the lines move in unison: when inventories go down, prices go up, and vice versa. (The post-pandemic demand snap-back is notable in late 2020: inventories plunged and prices rebounded.) 

However, the 2022 SPR episode is clearly visible as a gap opened up between the two lines. The second “inventory breakdown” pane shows why this occurred: the SPR (in purple) kept releasing oil while commercial oil companies rebuilt inventory.

While that “commercial” segment has been rebuilding reserves lately, the SPR has not: it remains at its lowest level since 1983, with the Department of Energy waiting for a cheaper refill price.‍‍‍‍‍‍‍‍‍

A closer look at India’s buoyant economy

The world’s eyes are on New Delhi, where Indian Prime Minister Narendra Modi is hosting the G-20 summit. He is presiding over a hot stock market (as we wrote about recently) and an economy whose growth has defied regional headwinds, including China’s slowdown and a spike in food prices over the past year. Amid a government infrastructure push, GDP growth in the second quarter was 7.8 percent compared with a year earlier. 

This table examines key economic indicators for various aspects of the Indian economy, with darker blue and red squares indicating readings that are notably statistically deviant from the rolling three-year average.

PMI for both services and manufacturing stand out – showing how executives in these sectors are notably optimistic about demand. 

On the negative side, slumping rail freight traffic and sales of fertiliser to the key agricultural sector are indicators to watch. 

Modeling more market momentum strategies

We’re modeling another investment strategy, following the “vigilant asset allocation” you might remember from last month.

This chart tracks the long-term results of a strategy called Composite Dual Momentum (CDM). It divides a portfolio in four, with each portion targeting a different part of the markets: equities, credit, real estate and “economic stress” (which means the safe-haven assets of gold and long-term US government bonds). 

CDM selects the best performing asset within each asset class (relative momentum) but only if their recent returns are positive (absolute momentum). If neither of these criteria is met, it invests in cash.

When comparing the 25-year performance of CDM to the traditional 60-percent-stocks, 40-percent-bonds allocation, the momentum play usually did better, especially during the GFC and the early 2010s. However, the strategy’s performance gradually eroded.

The second pane shows CDM returns as a multiple of the 60/40 since 1998, as well as the drawdown from the peak returns of both strategies. 

CDM has much smaller drawdowns, thanks to its high sensitivity to risk, but the “cash default” option has probably held back its performance lately. 

Germany’s lower confidence (and inflation)

This chart examines the interplay between business confidence and inflation in Germany. Recently, both have come down – showing how central bankers get inflation under control by raising interest rates and thus deflating “animal spirits” in the economy. 

This “clock” charts business confidence (the six-month change in the Ifo institute survey) against inflation (also expressed as a six-month-change to the year-on-year rate). 

Germany has been undergoing disinflation for most of this year, entering the bottom half of the chart. And as confidence erodes, we have headed to the bottom left quadrant – where we have added some grey dots nearby to represent readings during the global financial crisis.  

This is in stark contrast to where we started in the cycle – optimism amid relatively mild inflation in 2021. 

The Jackson Hole effect

Every August, the Kansas City Fed holds its annual symposium in the Wyoming mountain resort of Jackson Hole. Central bankers discuss economic trends, and their pronouncements regularly move markets. 

This table looks at the price performance of the S&P 500 before and after every Federal Reserve chairman speech in Jackson Hole since 1998. (We omitted 2013 and 2015 as Ben Bernanke and Janet Yellen, respectively, did not attend in those years.)

The Bernanke era was famous for hints about quantitative-easing programs delivered at Jackson: note the patch of bright blue in 2009-11 as longer-term market gains followed the Fed chair’s speeches. 

“The “win ratio” is the percentage of times that returns were positive in a given time horizon/column. It suggests a broad “Jackson Hole effect” exists – a boost for stocks after the Fed chair’s speech (fading over time without a Bernanke QE hint). Indeed, this year, markets interpreted Jay Powell’s speech as “no alarms, no surprises” and stocks went up. 

The left-most column uses Fed funds futures to show expectations of how rates were expected to evolve over the next year. Rates couldn’t go down any further in some of those Bernanke years. But in 2002, markets were pricing in a full 4 percentage points of Fed hiking after a strong recovery from 9/11 and the dotcom crash. (They were a few years early.)

US job cuts are slowing and less tech-heavy; more sectors are hiring again

As Jerome Powell attempts to cool a tight US labour market, the overall picture is mixed. Big layoffs in tech were a notable feature of early 2023. And for the first eight months of the year in aggregate, job cuts have more than tripled compared to the same period a year earlier. 

However, looking sector-by sector – and comparing the first five months of the year to the three months since then – the employment market is showing signs of resilience.

Layoffs are now more evenly distributed across sectors, and (mostly) happening more slowly. The worst-hit industry since June – telecommunications – saw a net 12,500 job cuts. (Pro-rating that sum to 20,750 for a five-month period would have put that sector in sixth place for layoffs in January-May.)

There’s also more green on the chart: about half the industries shown are doing at least some material hiring, offsetting at least part of their cuts. Energy, in particular, has been consistently adding staff and shedding a negligible number of jobs. 

A PPP model says the Swedish krona should be worth even less vs the euro

The Swedish krona is weaker than ever against the euro, stoking inflation and presenting a dilemma for the central bank. (We wrote about some of the headwinds hitting the Nordic country earlier this year.) Is the selloff in the currency overdone?

This visualisation revisits an analysis we used earlier this year for the Chinese yuan: Purchasing Power Parity (PPP) and Interest Rate Parity (IRP). We compare the spot SEK/EUR rate to theoretical exchange rates that perfectly reflect these theories*.

PPP suggests identical goods should be traded at the same price across countries – and FX movements should reflect relative inflation, which is higher in Sweden. PPP thus suggests the krona should depreciate even further – to 12.4 per euro. (Speculation that the Riksbank might intervene in the market could be preserving the currency’s value.)

IRP theory suggests SEK/EUR is closer to the right level. 

The second panel shows periods of over- and under-valuation by these metrics. 

Remembering bearish Septembers in the stock market

August was disappointing for US equities, with the S&P 500 posting a decline of almost 2 percent. Investors hoping for a rebound are facing the benchmark’s historically worst month.    

As our chart shows, in 55 percent of the calendar years since 1928, the S&P 500 fell in September. (Macrobond users can click through here to a second chart showing another bearish stat: the average return for September is less than 1 percent, by far the worst monthly performance by this metric as well.*)

Should investors survive October (a month famed for some historic market crashes) and November, they can look forward to December: the historically most bullish month, when positive returns occurred almost 70 percent of the time.‍‍‍‍‍

M3 money supply is shrinking the most in 14 years (but with important differences from the GFC episode)

Last week, we examined the M2 measure of money supply globally; this week, we turn to Europe to look at recently released figures for M3, which is monitored closely by the European Central Bank. (M2 includes M1’s cash, chequing and savings account deposits, and other short-term saving vehicles; M3 adds repurchase agreements, money-market funds and debt securities with a maturity of up to two years.)

As the ECB considers the effects of its tightening cycle, it’s looking at a shrinkage in the money supply. For only the second time in the central bank’s history, the M3 aggregate is decreasing on a year-on-year basis. This last happened during the global financial crisis. 

This chart shows another interesting trend that is much different than 2009. This time, rates are rising, so the private sector has been moving money at a record pace out of overnight deposits (a component of M1, in purple – and now in negative territory) into higher-yielding deposit accounts (a component of M2, in surging green).  During the GFC, the reverse was true; rates were rock-bottom and investors were switching to cash.

Chinese homebuilding’s outsized role in the construction downturn

Last week, we examined how Chinese construction starts had deteriorated to the slowest pace since 2010. This chart breaks down construction investment by sector on a year-on-year, rolling year-to-date percentage basis, measuring trends in homebuilding, office development and the rest.

As our visualisation shows, residential construction has been the overwhelming driver over the past decade. After a plunge and rebound in the early days of the pandemic, total construction investment began shrinking on a year-on-year basis again in 2022. The market downturn is also reflected in the crises seen at developers Evergrande and Country Garden.

The second panel shows planned construction investments. This indicator had previously always increased on a year-on-year basis – but has been declining for three months.

The Atlanta Fed nowcast has been a bit too bullish lately

This chart looks at the Atlanta Fed’s GDPNow forecasts, comparing their evolution over the past four quarters to the ultimate data prints. (The methodology for these real-time “nowcasts” can be accessed here.)

For each quarter, we chart the evolution of the forecasts for annualised quarter-on-quarter economic growth. The forecasts’ range within each quarter is shaded. 

As we can see, the final nowcasts for Q2 2023 and, especially, Q4 2022 were well above the ultimate GDP growth print. 

The forecast for Q3 2023 is quite bullish, at 5.9 percent growth. Will there be a similar miss this time? One ominous sign is the latest data revision from the US Bureau of Economic Analysis: it reduced second-quarter GDP figures downward to an annualised quarter-on-quarter pace of 2.1 percent.

The US employment scenario gets jolted

On Tuesday, the Bureau for Labor Statistics published weaker-than-expected July figures for JOLTS – the Job Openings and Labor Turnover Survey. Has the Fed’s tightening cycle finally punctured the resilient employment market?

The top pane of our chart shows how the ratio of job openings to unemployed persons is declining. And as the second pane shows, job openings decreased for the third month in a row and are now down 26 percent from the most recent peak (March 2022). 

But is the labour market truly deteriorating, or just “normalising” as Jerome Powell seeks a soft landing? That 1.5 ratio of job openings to each unemployed person remains historically high. And the drawdown is much more gentle than it was in 2007-09 or 2020 – “hard landing” periods we highlight in grey.

Using futures to anticipate Fed rate cuts in 2024-25

We’ve visualised the changing expectations for US interest rates several times over the past year and a half. As the economy stayed strong during a historic hiking cycle, expectations for a Federal Reserve “pivot” were repeatedly pushed further into the future.

This chart uses futures contracts to calculate an implied US effective Fed Funds rate for the next 18 months. This visualisation also shows the number of implied hikes and cuts on the right-hand axis (assuming that each policy hike or cut will be uniform at 0.25 percentage points). 

A true “pivot” isn’t predicted until late spring at the earliest. And the Fed’s benchmark rate is still seen above 4 percent as 2025 begins – far higher than many observers would have thought possible a year ago.

Core inflation is worse than non-core in most of the EU

This chart visualises factors affecting the Harmonised Index of Consumer Prices in different European Union countries. HICP, with its standardised methodology across the EU, is the preferred inflation measure of the European Central Bank. (It principally differs from the US consumer price index by excluding owner-occupied housing.)

What stands out in this chart is that the orange dots show how core inflation (which excludes energy, food, alcohol and tobacco prices) is outpacing overall inflation in many EU nations. That’s a worry for ECB policy makers, as it potentially points to a wage-price spiral taking hold in many sectors of the economy.

This is reflected in the purple “other components” category in the individual nations’ bar charts. It’s the largest contributor to inflation for most of them, though food remains a significant factor pushing HICP higher. Meanwhile, the green section of the bars, which includes the energy prices that spiked last year, shows outright deflation in some countries.

The difference between nations is also quite stark. Hungary, with its weak currency, has long had Europe’s worst inflation problem. While President Orban has blamed sanctions on Russia for driving up gas prices, the energy component of Hungary’s inflation is now relatively minor, as it is for most of the rest of the EU.

German business confidence stuck at a red light

This morning, Germany’s Ifo Institute released August figures for its widely watched business survey – and it confirmed the nation’s economic contraction. The business climate index slid to a three-year low of -20.9.

The top pane of the chart uses Ifo’s “traffic light” configuration to compare the three-month change in reading to this measure’s historic range, which has been split into three slices: green, yellow, and red. This summer’s data points have been not just well into “red light” pessimism (the bottom 33 percent of all readings) but at the very bottom of the distribution. 

The bottom pane tracks the value change versus 3 months ago – including today’s reading: a decrease of 12.9 in August.‍‍‍‍‍‍‍

Why the euro-dollar FX rate moves

What drives the most important currency pair? There are various factors, but conventional wisdom says rate differentials are key: when the ECB was tightening in 2008 and the US was fighting the subprime crisis, for instance, the euro soared as capital chased higher yields.

This visualisation is the result of a rolling regression model we built, attempting to find correlations that explain why EUR/USD moved at a given point in time. We tracked two swap spreads. One is a proxy for the perceived future of rate differentials; the other is for which currency is losing more value to inflation. We added Brent crude – ECB research found that pricier oil is correlated with USD weakness – and we added a MSCI spread tracking whether US or European equities outperformed.

According to this model, inflation is having little influence at the moment. But future rate differentials have a substantial negative influence: if the spread moves in Europe’s favour, the euro strengthens.

Meanwhile, spreads between equity markets have the opposite effect: if US stocks underperform their European counterparts, that tends to strengthen the dollar. This could be related to the “dollar smile” theory: consider a “risk-off” market, where a selloff in US tech stocks coincides with a global flight to safety in the form of US Treasuries and USD.

The second panel shows each factor’s contributions to weekly returns – and also indicates the generally lower volatility in 2023 versus the 2022 “King Dollar” era.

Turkish rate shocks and diminishing returns for the currency

Turkey’s central bank shocked markets on Thursday, raising rates to the highest in more than two decades. (We had recently written about President Erdogan’s new economic team, considering the prospects that the nation would return to a more economically orthodox approach to interest rates and inflation.)

The key policy rate was lifted from 17.5 percent to 25 percent – surpassing the 20 percent consensus forecast. The lira soared.

Will the currency sustain these gains? The lessons of history suggest that previous tightening episodes resulted in diminishing returns.

This chart’s first pane tracks the key policy rate. The second panel tracks TRY vs USD. The shaded areas are the periods that followed rate increases of 2 percentage points or more. (The current period groups together several such increases.)

About two years of lira strength followed the big rate hike in 2006, relatively early in Erdogan’s tenure. Later interventions had an increasingly shorter-lived effect on the currency.  

Buy-and-hold didn’t work out in Japan

This chart revisits a previous theme: how long would you have had to hold a given equity index to ensure a decent chance of a positive return? 

Crunching data going back to 1986, we analysed the US, Japan, Australia and various European nations’ stock benchmarks.

On a two-year horizon, you would have been best off Stateside. The chances of a positive return were about 85 percent. The first 100 percent guarantee of positive returns comes at the 12-year mark – for Australia.

Japan, due to its 1986-1991 asset bubble, is a remarkable outlier.  Only the shortest time horizons had a better-than-even chance of a positive return.

Keeping an eye on global M2 money supply

Many strategists have a favourite inflation indicator. One of them is the M2 measure of money supply, which includes cash, chequing and savings account deposits, and other short-term saving vehicles. 

This chart measures the aggregate 12-month change in M2, measured in USD, across the largest central banks. Money supply grew at a record pace during the pandemic, exceeding the growth seen during the various quantitative-easing programs of 2008-15. This was followed by a record decline in 2022 as central banks tightened policy to tame inflation. (Only China posted positive money-supply growth over the entire time frame of the chart.) 

(One prominent Macrobond aficionado says M2 could have helped predict the 2021-22 inflationary episode, and might tell us what is coming next.)

Sluggish construction in China‍

As China’s real-estate market stutters, the effects can be seen on new construction. This chart tracks construction starts (measured by floor space) across calendar years, showing the median and high-low ranges since 2010. 

This year’s trajectory is currently 26 percent below the historic lows of that range. 

Most BRICS are in a spiral

The BRICS nations are in the news again. At the group’s summit in South Africa, the five-nation bloc – originally just a strategist’s concept two decades ago, grouping the biggest fast-growth emerging economies – said it would invite six new countries to join, including Iran and Saudi Arabia, as it seeks to champion the “Global South.” 

This visualisation uses IMF data to plot each nation’s progress over about 20 years. The X axis measures GDP per capita, relative to the US, in purchasing power parity (PPP) terms. The Y axis tracks growth rates in real terms, i.e. adjusted for inflation.

Measured this way, the five nations have been on very different paths – though all of them show a slowdown in real GDP growth terms over the decades. 

Only China has made significant and consistent progress converging with US affluence. South Africa, Brazil and Russia’s spirals reflect deterioration versus the US. 

Americans are hitting Vegas like it’s 2007 again

The gambling industry in Nevada continues to boom, even as the economy slows, inflation persists and Americans deplete their savings. Like demand for international travel, Las Vegas is benefiting from an extended period of deferred gratification post-pandemic. 

This visualisation measures “gaming win revenue,” the income that casinos make directly from their roulette tables, slot machines and card games. 

The first pane shows that this revenue source, measured as a rolling 12-month aggregate, shot through the long-term trend line in 2021. Perhaps ominously, the last time this occurred was the run-up to the financial crisis.

The second pane shows that monthly win revenue surged to a then-record of about USD 1.3 billion in 2021, and has stayed steady around that level ever since.