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Special edition: DoubleLine on the yield curve inversion, typical post summer instability, and a new normal in office occupancy
The Great Rate Divide
For much of the post-World War II era, whenever the Federal Reserve began to cut its policy rate, long term interest rates quickly followed suit and saw declines in yields, leading to strong returns across fixed income markets especially in longer duration bonds. With the Federal Reserve expected to start cutting rates this month, a question arises: will longer-term interest rates behave similarly this time?
Fed cuts have typically coincided with periods when the U.S. was heading into or already in a recession. This cycle seems to be different. While U.S. economic data suggests softening growth, the probability of a recession according to Bloomberg economists stands at only 30%.
Secondly, the yield curve has typically been either slightly inverted or flat when the Fed began cutting interest rates, with short- and long-term interest rates aligned. This time around there is a very visible divergence between the level of the Fed’s policy rate and the 10-year U.S. Treasury yield.
While longer-term treasury bonds have historically been a safe bet for investors anticipating post-rate-cut rallies, today's economic (and inflationary) context paints a more complex picture. The significant yield curve inversion and low odds of a recession complicate the outlook for long term yields unless the U.S. economy deteriorates more than currently expected.
Seasonal Instability
Summer is typically a period when financial markets experience a lull, as many investors and market participants step away from their desks to recharge. This year followed the usual seasonal patterns of low equity volatility until mid-July, when risk assets sold off and volatility surged, reaching a peak in the first week of August. Contributing to this event were weaker than expected economic data such as a disappointing June jobs report, higher than expected initial jobless claims, and a poor reading from the ISM manufacturing PMI, which gauges the strength of the U.S. manufacturing sector. These factors triggered fears the Federal Reserve was ‘behind the curve’ by maintaining a restrictive monetary policy even as the economy softened and inflation cooled.
This rapid unwinding of leveraged positions contributed to the CBOE Volatility Index (VIX), which measures market expectations based on the S&P 500 index options, spiking to an intraday high of 65, a level only seen during the Global Financial Crisis and the start of the pandemic in March of 2020.
August and September Typically Perform Poorly
Seasonal analysis of S&P 500 monthly performance shows that equities tend to sell-off in August and September. On average, the S&P 500 is down a cumulative -1.5% in August and September.
Interestingly, the August/September instability in equities may set the stage for stability in the following months. Since 1990, the period from October through December has consistently been the strongest period for stock performance with average monthly returns of +1.7% (+20.1% annualized). Equity volatility typically peaks around late September, and drifts lower in the fourth quarter. Enjoy the rest of summer, but keep in mind that September can be a turbulent month. But do not fret as the turbulence is usually short-lived.
A ‘New Normal’ in Office Occupancy
This chart shows the average office occupancy for the top ten cities tracked by Kastle Systems, a provider of office building security solutions. Based on daily security key card swipes at office buildings across the country, office use today is less than half of the pre-pandemic level.
Strikingly, there has been slight increase in office usage over the past year, which is well past the pandemic era, implying that we may have reached a new equilibrium in how American businesses utilize office space. Of the ten cities tracked by Kastle, the Austin metro area has the highest office usage at 60.6% of the pre-pandemic baseline while San Jose metro area has the lowest at 40.3%. A notable feature for both metros is that like the nationwide numbers, office usage is unchanged compared to 2023.
BOJ Outpaces Fed at Bond Buying
Today the Federal Reserve holds $4.45 trillion U.S. Treasuries on its balance sheet, a whopping 550% increase over the past 20-years. While this may sound like a stark increase, and it is, the Fed’s holdings of U.S. Treasuries have not kept up pace with the increase of U.S. Treasury debt outstanding which has surged more than sixfold during the same period. Of the $27 trillion of marketable U.S. Treasury debt outstanding, the Fed now holds nearly 17%, down from the 25% peak reached at the end of 2021, and surprisingly to most, in line with the pre-global financial crisis (GFC, 2002-2007 average) era.
This chart highlights the divergence of Fed and Bank of Japan (BOJ) policies as it relates to government debt purchases. Up until 10 years ago, the Fed held a larger share of government debt outstanding, but that flipped in July 2014.
What has been the cost of such extreme monetary policies and indirect monetization of government debt in Japan? Since peaking in 2011, the Japanese yen has depreciated over 50% vs. the USD. In gold terms, the value of yen is down 68% over the same period. Shockingly, inflation in Japan has averaged less than 1% over this period, indicative of the structural deflationary forces at play.
From Surge to Stability
This chart shows the number of consecutive months when the headline CPI YoY inflation rate has been 3.0% (rounded to the nearest 0.1%) or higher. The recent streak of over 3% ended in July, marking a 39-month battle with inflation. As the chart shows, the recent streak was the fourth longest in the U.S. since World War II. The U.S. has not seen a series of high inflation prints like this since the early 1990s. Amazingly, since the streak started in April 2021, CPI is up 18.2%.
In a more benign inflation regime, such as the one we experienced between October 1991 to March 2021, the average inflation rate was 2.2%, and bonds performed well as interest rates declined. This time might very well be no exception. If U.S. inflation continues to cool as expected in the coming months, this should give the Fed continued confidence to initiate its well-anticipated policy-rate cutting cycle. History suggests that the U.S. Treasury yield curve tends to steepen as front-end yields decline more than long-end yields, and Treasuries tend to perform well overall during policy-rate cutting cycles.
Chart packs
High-stakes election: Swing states hold the key
What the chart shows
This chart visualizes the betting odds for US presidential nominees across all 50 states on Polymarket, a decentralized information market platform where users can bet on the outcomes of future events. States are color-coded based on the likelihood of each party winning: dark blue indicates a “safe” Democrat lead, dark red indicates a “safe” Republican lead and shades in between represent varying degrees of lean towards either party.
Behind the data
This election cycle has been marked by extreme unpredictability, driven by extraordinary events such as the attempted assassination of Republican candidate Donald Trump and the last-minute decision by the Democratic Party to replace Joe Biden with Kamala Harris. These developments have disrupted traditional election forecasting models, leaving both parties scrambling to adjust their strategies.
The chart underscores the importance of key swing states—Arizona, Georgia, Michigan, Nevada, North Carolina, Pennsylvania and Wisconsin—in determining the outcome of the election. These battleground states are likely to see intense campaigning from both parties as they are crucial for either candidate to reach the required 270 electoral votes to win the presidency.
Toss-up states hold key to tight election
What the chart shows
This chart, based on betting odds from Polymarket, shows the projected number of electoral college votes, from a total of 538, that each party is expected to win in the upcoming election. A party must secure a majority of 270 votes to win the presidency. States are categorized by their likelihood of voting for either the Democratic (blue) or Republican (red) party. A “safe” state is where one party has at least a 90% probability advantage over the other. For example, Arkansas is considered a safe Republican state with a 98% chance of voting Republican versus a 2% chance of voting Democrat, resulting in a 96% spread. “Likely” states have a spread between 25% and 90%, “leaning” states have a spread between 10% and 25% and “toss-up” states have a spread of 10% or less.
Behind the data
The election is shaping up to be one of the tightest in recent history. With 36 electoral college votes currently classified as “toss-up”, these contested states could likely determine the outcome. With such a close race, there is mounting pressure on American institutions to ensure a fair and secure process, especially amid growing concerns about potential international interference and voter fraud. This environment also underscores the importance of each vote in these pivotal states, where even a small shift in voter turnout or preference could tip the scales.
Stocks surge early under Democrats, gain more over full term with Republicans
What the chart shows
This table examines the performance of the Dow Jones Industrial Average and S&P 500 index during each US president’s first year in office and across their full four-year term, starting with Rutherford B. Hayes (1877). The first column lists the presidents and their political affiliations while the second and third columns show the Compound Annual Growth Rate (CAGR) of both indexes during their first year and full term. The table also includes the mean and median CAGRs for each party, offering a comparative view of market performance under different administrations.
Behind the data
The data reveals a tendency for the stock market to perform better during the first year of a Democratic presidency, with a median return of 16.2% for the Dow Jones and 15.1% for the S&P 500. In contrast, Republican presidencies have a median first-year return of -0.6% for the Dow and 3.5% for the S&P 500. This trend remains over a full four-year term. Democratic presidencies show a higher median return of 9.1% for the Dow Jones and 5.8% for the S&P 500, whereas Republican presidencies see a median return of 5.3% and 4.7%, respectively. This suggests that the market may favor a Democratic leadership, both initially and over the full terms.
Sector performance shows how stocks react to presidential elections
What the chart shows
This chart illustrates the relative performance of various S&P 500 sectors compared to the benchmark index during US presidential election years. The years in which each sector underperformed the S&P 500 are shown on the left and those in which it overperformed are shown on the right, with the colors representing the political party of the sitting president during that year (blue for Democrat, red for Republican.) This visualization helps identify patterns in sector performance that may correlate with different political administrations.
Behind the data
Historically, the Energy, Consumer Discretionary, Financials, and Communication Services sectors have shown a tendency to consistently outperform the S&P 500 during election years. However, the most notable observation from this chart is the clear correlation between sector performance and the political affiliation of the elected president. The Consumer Discretionary and Communication Services sectors have shown strong outperformance in all years when a Democratic president was elected, while the Financials sector has reliably outperformed during elections that resulted in a Republican president. This pattern suggests that different sectors may react positively to the anticipated economic policies of each political party.
US dollar remains strongest since Reagan era but faces downward trend
What the chart shows
This chart breaks down the performance of the US Dollar Index (DXY)—which tracks the value of the USD against a basket of six major currencies—since the start of each presidential term. The X-axis represents the days since each president’s inauguration while the Y-axis shows the percentage change in the DXY.
Behind the data
As the chart shows, the current strength of the US dollar has only been surpassed once—during Ronald Reagan’s presidency, when emergency tax increases, heightened defense spending, and a Fed funds rate above 11% bolstered the dollar. Earlier this year, the dollar gained some strength amidst uncertainty in current Federal Reserve policy and the decline of the Japanese yen, but it is now on a downward trend.
Republican sweep leads betting odds for 2024 but split government remains a strong contender
What the chart shows
The balance of power in the US government is determined by the outcomes of the presidential, House and Senate elections. The chart above shows the current Polymarket betting odds for all eight possible combinations of these outcomes. A Democratic sweep indicates that Democrats win the presidency, Senate and House, while a Republican sweep means Republicans win all three. Red-shaded areas represent scenarios where Donald Trump wins the presidency, while blue-shaded areas represent scenarios where Kamala Harris is the victor.
Behind the data
Among all possible outcomes, a Republican sweep is currently the most likely, with about a 30% probability. A Democratic sweep is also relatively likely, with odds of around 24%. Together, this suggests that in more than 50% of scenarios, one party is expected to control all three branches of government. The balance of power is crucial because a sweep enables a party to more easily pass its legislative agenda. However, with a nearly 46% chance of a split balance of power, we could see significant gridlock in the American government.
Spike in Misery Index reflects post-pandemic economic struggles
What the chart shows
The Misery Index is a measure of economic distress, calculated by adding the seasonally adjusted unemployment rate to the inflation rate. This chart tracks the Misery Index from 1950 to 2024, highlighting its levels during each US presidency from Truman to Biden. Each president’s term is color-coded, with red for Republicans and blue for Democrats. The grey line represents the unemployment rate over time while the red line shows the Misery Index. The area between the two indicates the portion of economic distress attributable to inflation.
Behind the data
Before the pandemic, Americans were experiencing an almost historically low misery index; the country was near full employment and inflation rates were close to the 2% target. However, at the start of the pandemic during Trump’s presidency, the index surged to 15 before easing slightly to 12.5 under Biden. From a historical perspective, the US saw spikes in both inflation and unemployment during much of the 1970s and 80s, as well as in 1991 and 2011.
Jobs revisions underline Fed’s September rate cut
What the chart shows
The chart displays the annual revisions of US nonfarm payrolls through April-March cycles from 1980 to 2024, highlighting the negative revision average, revision’s 5th percentile, and percentage point errors.
Behind the data
The US nonfarm payrolls were {{nofollow}}revised downward by 818,000 jobs over the 12 months through March 2024, a 0.5% reduction from the original total figures.
This marks the largest downward revision since 2009, far exceeding the average negative revision of 243,000 and even surpassing the 95%-confidence Value-at-Risk (VaR) estimate of 602,000. It underscores growing concerns about the strength of the US labor market.
However, the negative revision was not significantly above {{nofollow}}Bloomberg’s estimate of 730,000 and less severe than the upper-bound prediction of 1m.
As Federal Reserve (Fed) Chair Powell will deliver his crucial speech at the {{nofollow}}Jackson Hole Symposium, the jobs revision will play a role in determining rate cuts looking ahead, broadly anticipated to begin in September.
Persistent cyclical core PCE poses risks to Fed’s easing cycle
What the chart shows
The chart illustrates the decomposition of US core PCE inflation into {{nofollow}}cyclical-acyclical and {{nofollow}}demand-supply components. It also compares these to pre-COVID averages for cyclical and demand-driven contributions.
Behind the data
US core PCE inflation is one of the Fed’s inflation gauges in considering monetary policy implementations, while the central bank is facing moderation in inflation and jobs and is poised to enter an easing cycle. The cyclical and demand-driven parts may associate more with the Fed than other considerations. This is because cyclical inflation reflects overall economic conditions instead of industry specifications, while {{nofollow}}the Fed controls demand rather than supply.
Recently, compared to pre-COVID norms, the US core PCE inflation has remained in excess in cyclical aspects despite normalization in demand-driven factors. So, there still exist inflationary risks.
US GDP growth surpasses expectations despite weak leading indicators
What the chart shows
The chart compares the year-over-year growth of US real GDP with that of the {{nofollow}}Leading Economic Index (LEI). It also illustrates LEI averages during recession periods and at the start of recessions and GDP-LEI z-score differentials.
Behind the data
US GDP growth for Q2 2024 {{nofollow}}exceeded expectations, led by {{nofollow}}strong private consumption and inventory accumulation. With the upcoming second estimate on August 29, the LEI—which includes economic and financial components such as new manufacturing orders, consumer expectations for business conditions, and the S&P 500—typically serves as an indicator of economic activity and potential recessions.
However, recent years have revealed discrepancies between GDP and the LEI, with the LEI contracting despite solid GDP growth. Although the LEI has recently risen above recessionary norms, it remains below levels typically observed at the start of recessions.
Amid the potential for avoiding a recession, the alignment between macroeconomic and sentiment indicators remains debatable.
Sectoral sentiment in the Eurozone reflects mixed economic outlook
What the chart shows
The chart presents the recent z-scores and distributional statistics of the Euro area’s {{nofollow}}economic sentiment composite, covering five sectors from the EU Business and Consumer Surveys.
Behind the data
Aside from the economic {{nofollow}}stagnation for over a year, the eurozone's economic sentiment has remained relatively low, hovering around the 25th percentile. By sector, sentiment in industry, services, and among consumers is also pessimistic, with industry sentiment worsening, while consumer sentiment has improved over the past 12 months. Additionally, retail and construction sentiment has declined over the past year, with retail near the median and construction moderately above it.
With mixed sentiments across economic sectors and a low composite level, the euro area seems struggling to turn optimistic.
Changing correlations highlight varied investment dynamics
What the chart shows
This chart examines the relationship between the average monthly total returns of the S&P 500 and 10-year Treasury notes over various time periods. It illustrates how the correlation between US stocks and bonds varies based on the time horizon, ranging from one year to 50 years, with values between these points interpolated linearly.
Behind the data
In the short term, such as one year or less, the returns of stocks and bonds are positively correlated, meaning they tend to move in the same direction. However, as the lookback period extends, this correlation decreases, indicating a weakening relationship.
Beyond a 10- to 30-year lookback horizon, the correlation between the two assets turns negative, providing investors with opportunities for diversification. After that, it gradually returns to positive figures. This pattern suggests that the relationship between the monthly returns of stocks and bonds varies significantly depending on the time frame considered, underscoring the importance of considering different time horizons when analyzing the interaction between these two key asset classes.
Consumer discretionary and IT sectors lead, while energy and materials lag
What the chart shows
The chart depicts sustainable growth rates (SGRs) across S&P 500 sectors, representing the maximum rate of growth a company can achieve using internal revenue without external borrowing.
It is calculated as the return on equity (ROE) times the retention ratio, which is the proportion of earnings retained in the business as retained earnings.
Behind the data
SGRs across S&P 500 sectors reveal a contrast: the consumer discretionary sector is currently achieving an all-time high SGR, indicating long-term growth potential without the need for external financing. The information technology sector also shows above-average performance, countering concerns about lost momentum, particularly for companies like Nvidia. In contrast, sectors like energy and materials are showing much weaker SGRs compared to last year, signaling a more challenging outlook for these industries.
Foreign outflows reflect persistent pessimism towards Chinese equities
What the chart shows
The chart visualizes the CSI 300 index and net foreign equity flows, derived from the Shanghai and Shenzhen Hong Kong Stock Connect, with data on both Northbound and Southbound flows.
Behind the data
Net negative cumulative equity flows from overseas could reflect pessimistic sentiment and exert downward pressure on Chinese stock performance. This trend is evident in 2021-23, where cumulative net flows were negative, and the stock index closed lower than at the beginning of the year. Meanwhile, other factors, such as the 2018 trade war and the country's first-in, first-out approach to COVID in 2020, may have also had impacts in earlier years.
Additionally, 2024 has been a challenging year for Chinese economic expectations and equity performance. Amid existing economic challenges, exchanges in China have {{nofollow}}stopped reporting certain sentiment data, including flows, underpinning {{nofollow}}reduced availability of economic indicators.
Market braces for Fed rate cuts amid sharp decline in US job growth
What the chart shows
This chart shows the market expectations for the Federal Funds Rate (FFR) – the interest rate banks charge each other for overnight loans – and how they have evolved from the start of July and the start of August until today. We can see that market expectations for the FFR by the end of this year have notably declined, from just over 4% at the start of July to about 3.3% at the start of August and today.
Behind the data
A sharp slowdown in the US jobs market has triggered global stock market volatility and fueled speculation that the Federal Reserve (Fed) might cut interest rates before its next scheduled meeting in September. While some analysts anticipate a half-percentage-point rate cut at the September meeting, they believe an emergency inter-meeting rate cut is unlikely, as it could exacerbate market uncertainty and panic.
Later stages of unemployment-inflation trade-offs
What the chart shows
This chart depicts the US Beveridge Curve, which typically shows an inverse relationship between the unemployment rate and the job openings rate, and the Phillips Curve, which illustrates the relationship between unemployment and inflation – where lower unemployment is associated with higher inflation and vice versa. It compares pre- and post-COVID conditions using scatter plots and regression analyses.
Behind the data
Before the COVID pandemic, but after the Global Financial Crisis, the US Beveridge and Phillips curves were {{nofollow}}relatively flat in a low-interest-rate environment. Following the pandemic, these curves {{nofollow}}steepened, reflecting a tight labor market with a higher job openings rate compared to pre-pandemic levels, while inflation shifted upward and stayed above the 2% target.
If these steeper relationships persist, the job openings rate and inflation could continue to normalize downward, with a gradual rise in the jobless rate that remains moderate. However, in the later stages of an economic slowdown, there may be non-linear changes, potentially leading to a scenario where the job openings and inflation decrease more slowly while the unemployment rate rises more sharply.
US core inflation exceeds developed markets
What the chart shows
The chart compares US core inflation with the median and percentile ranges of developed market (DM) peers, and US-peer inflation differential.
Behind the data
Following the COVID crisis – likely due to more substantial fiscal and monetary measures – US core inflation rose faster than DM peers, widening the inflation gap beyond historical norms. However, since 2023, this inflation differential has begun to normalize.
Recently, both US and DM-peer core inflation have remained above the 2% standard, with the US exceeding DM peers moderately. Given the relatively higher core inflation, the Fed might not adopt a more dovish stance compared to its peers.
Chinese new loans at multi-year lows
What the chart shows
This chart illustrates the seasonality of China’s newly increased loans, comparing 2024 loan levels to those in 2020-2023, as well as to pre-COVID norms from 2010-2019. It highlights how loan issuance stacks up with a baseline set at January's levels (Jan=100).
Behind the data
New yuan loans by Chinese commercial banks in July were {{nofollow}}lower than anticipated, reaching a multi-year low. In 2024, loan issuance has remained relatively subdued compared to recent years and pre-COVID standards, highlighting ongoing economic challenges in China, particularly in areas such as consumer spending and real estate. This may prompt the People’s Bank of China (PBoC) to provide additional monetary support to stimulate credit activity.
Looking ahead, as global monetary policies become more accommodative, the PBoC may find it more favorable to ease its policy further.
USDJPY falls below key average amid yen carry trade unwinding
What the chart shows
This chart compares USDJPY deviations from its one-year moving average with net JPY futures positions – held by non-commercial traders (top panel) or leveraged funds (bottom panel) – from January 2021 to the present.
Behind the data
Since 2021, as markets began pricing in the Fed’s tightening cycle amid the Bank of Japan’s (BoJ) ultra-accommodative stance, speculative positions of net JPY shorts – whether held by non-commercial traders or leveraged funds – have steadily accumulated. During this period, USDJPY has deviated to the upside from its one-year moving average for most of the time.
However, following a {{nofollow}}pessimistic US labor report for July, expectations for more significant Fed rate cuts have weighed on the US-Japan interest rate differentials, leading to pressure on the carry trade unwinding and weaking of the yen.
While there remains {{nofollow}}some room for further unwinding of cumulative JPY short positions (indicated by the negative green and purple areas in the chart), USDJPY has recently flipped below its one-year moving average. This may suggest a potential shift in market dynamics.
Biden outshines Trump in energy sector gains despite market perceptions
What the chart shows
This chart displays S&P 500 sector performance during the tenures of Presidents Trump and Biden, measuring from their respective election dates to the end of July in their fourth year in office.
Behind the data
Trump’s presidential campaigns have been perceived as more stock-friendly, with policies such as ‘{{nofollow}}Drill, baby, drill’ and {{nofollow}}less restrictive banking regulations. However, as the chart shows, the energy and financial sectors actually performed significantly better under Biden than under Trump.
Performance differences in other sectors are less pronounced, suggesting that factors beyond political and administrative policies – such as monetary policy, economic cycles, inflation shifts and global geopolitics – play a crucial role.
The stark contrast in energy sector performance could be attributed to {{nofollow}}factors like increased oil and natural gas production, driven by post-pandemic recovery and Russia’s invasion of Ukraine, as well as Trump’s mixed stance on clean energy.
Looking ahead, stock and sector performance may continue to be influenced by these broader forces, and selective attention to policies will be essential.
Sahm rule triggered but S&P 500 remains resilient
What the chart shows
This chart illustrates the historical performance of the S&P 500 around the triggers of the {{nofollow}}Sahm Rule. The US recession indicator is triggered when the unemployment rate's three-month moving average rises above its low over the previous 12 months.
Behind the data
Data released last Friday showed the US unemployment rate rising to 4.3%, with nonfarm payrolls increasing by only 114,000 in July – both significantly {{nofollow}}worse than expected. This breached the Sahm Rule and amplified recessionary fears, negatively impacting risky assets like the S&P 500.
Historically, the S&P 500 on average tends to bottom after such a trigger.
The median performance indicates some downside risk over the following six months, but the interquartile and percentile ranges suggest a relatively positive performance over the subsequent year. So, while the market may face turbulence at first, recovery and growth are likely in the longer term.
Although empirical data tends to show an upward bias post-trigger, caution is advised due to less downward pre-trigger adjustment than usual.
Consumer cyclicals and technology poised to benefit from Fed rate cuts
What the chart shows
This chart shows the average performance of US sectors relative to the broad equity market over 12 months after the Federal Reserve (Fed) initiated rate cuts. The areas in red indicate sectors performing worse than the benchmark while green areas indicate sectors that are performing better.
Behind the data
Six months after the Fed initiates rate cuts, pro-cyclical sectors like consumer cyclicals and consumer services stand out. Over a 12-month horizon, consumer cyclicals, technology, consumer non-cyclicals, and healthcare sectors become prominent, driven by increased consumer spending, business investment, and attractive dividend yields due to lower interest rates.
On the contrary, utilities and finance typically underperformed the benchmark over the subsequent year.
Political policies could also significantly influence the upcoming monetary easing cycle beyond mere cyclicality.
Bitcoin and gold boost portfolio performance
What the chart shows
This dashboard simulates the returns of a classic US 60/40 portfolio, but with additional assets incorporated in increments of 10% or 20% -- reducing the original proportions of US stocks and bonds accordingly. For example, adding 10% gold to the portfolio changes the composition to 54% stocks, 36% bonds and 10% gold.
Behind the data
Recent recession fears have led the traditional 60/40 portfolio, composed of 60% S&P 500 stocks and 40% US 10-year government bonds, to outperform. Among the 11 additional assets we analyzed, only Bitcoin, gold and ESG-focused equities have shown potential to enhance returns. Conversely, incorporating other assets such as European or emerging market equities, US cash or high-yield bonds may dilute the portfolio’s overall returns.
Improved manufacturing employment and rising prices complicate Fed decision-making
What the chart shows
This chart compares the Federal Reserve Bank of Philadelphia’s regional manufacturing survey results for employment with prices received over the past 20 years. It uses scatter plots and regression analysis to illustrate the relationships between current and future outlooks.
Behind the data
Manufacturing hires improved over the past six months, shifting from a period of recovery to optimism for both current and future outlooks in July.
Meanwhile, prices received for manufacturing goods – indicative of goods inflation – have shown growth in both current and future indices. These improvements in employment and prices complicate the Fed’s decision-making process, as they must balance economic growth with inflationary pressures. Consistency with long-term trends further underscores the complexities the Fed faces in formulating monetary policy.
European optimism poll reveals stark divide
What the chart shows
This chart visualizes the results of the European Commission’s semi-annual poll, which surveys EU citizens on whether they feel optimistic or pessimistic about the future of the European Union (EU). The data is sorted by the combined shares of respondents who feel either very optimistic or fairly optimistic, ranking the most EU-optimistic countries at the top and the most EU-pessimistic ones at the bottom.
Behind the data
Only 65% of EU citizens feel optimistic about the Union's future, with the highest optimism – 80% – in Denmark and Ireland. Nordic and Eastern European countries such as Lithuania, Poland and Romania also show higher optimism. In contrast, "old Europe," particularly France and Germany, display significant skepticism. Greece's low optimism is not surprising due to its history with the EU, marked by high inflation, economic hardships and significant public debt. But the concerns in France and Germany are more troubling, indicating deeper issues within these major economies.
Weak retail sales highlight China’s tough economic recovery
What the chart shows
This heatmap shows year-over-year growth in China’s retail sales across various categories, as indicated by the figures in each row. The blue-shaded tiles indicate high retail sales growth as compared to previous observations over the last three years for that category, and vice versa for the red-shaded tiles.
Behind the data
The data highlights the volatility in consumer behavior and its impact on China’s economic recovery, which faces significant hurdles amid the government’s 5% GDP growth target. Despite good progress in late 2023, Chinese consumers seem to have spent less in the first half of 2024. Recent retail sales reports were {{nofollow}}weaker than expected, resulting in a more pessimistic outlook in the heatmap and an overall growth of only 2% in June.
Inflation eases in Venezuela but economic challenges persist
What the chart shows
This chart tracks Venezuela’s inflation rate over the past 35 years, segmented by the presidential terms of Hugo Chávez and Nicolás Maduro and using a logarithmic scale for clarity. It highlights the dramatic shift in the country’s economic stability between the two presidencies.
Behind the data
Venezuela’s {{nofollow}}recent presidential elections have faced allegations of fraud, intensifying social unrest. Despite Maduro’s self-declared victory, international observers, including the European Commission and the US, criticized the election’s integrity. The previous 2018 election was also deemed flawed and led to significant unrest. Recent results have again triggered widespread protests, with many citizens alleging electoral fraud.
The economic instability under the current regime is linked to severe inflation, currency devaluation and widespread poverty. Inflation, which was below 40% during Chávez’s tenure from the late 1990s to 2013, skyrocketed under Maduro, peaking at over 344,000% in early 2019. While inflation has since eased to around 50%, the ongoing economic challenges suggest a long road to recovery for Venezuela.
JPY undervaluation presents contrarian opportunities
What the chart shows:
The chart displays USDJPY and its fair valuations derived from 10-year yield differentials and purchasing power parity (PPP). Using 3-year and 20-year rolling regressions reflects shorter- and longer-term aspects of capital flows and inflation dynamics, respectively. Additionally, it provides USDJPY scenarios based on 2.5-3.5% 10-year US-Japan bond yield differentials and visualizes USDJPY’s long-run subsequent returns compared to PPP fair valuation deviations.
Behind the data:
The {{nofollow}}BoJ tightened its monetary policy, raising the policy rate to 0.25% and reducing bond purchases. The {{nofollow}}Fed held rates steady but {{nofollow}}signaled a possible cut in September. These narrowed the 10-year US-Japan bond yield gap to around 3%. Given scenarios of 2.5-3.5% 10-year yield differentials, USDJPY is estimated to be around 129-146.
The PPP model shows JPY undervaluation against the USD above +2 standard deviations, indicating potential for long-term reversion.
However, overestimated core inflation and {{nofollow}}slowing real wages in Japan may challenge BoJ’s hawkish stance, suggesting USDJPY overvaluation—even reverting—might persist.
Is the US economy peaking amid tech-driven optimism?
What the chart shows:
The chart displays the US Sentix Economic Index, the US Investors Intelligence Investment Index, and the S&P 500. The upper pane illustrates the economic and investment sentiment indices in terms of z-scores using monthly data from July 2002 to the present, compared to the year-over-year growth of the S&P 500. In the lower pane, the US economic-investment z-score differentials are displayed with ±1 and ±2 standard deviation (s.d.) bands.
Behind the data:
When US economic sentiment lags investment sentiment significantly (below –1 s.d.), it suggests pessimistic macro and investment cycles, as seen during the Global Financial Crisis, the euro area sovereign debt crisis, and the COVID pandemic.
Currently, the macro-investment sentiment gap is negative but not beyond –1 s.d. while the cycle remains an uptrend, primarily led by technological advancements and AI prospects. However, the upcycle shows signs of peaking, and the increasing economic-investment discrepancy might be cautionary.
Tech sector dominates global fund inflows
What the chart shows:
The chart uses data from EPFR to illustrate the sectoral breakdown of global net fund flows aggregated since the beginning of the year.
Behind the data:
The AI-driven rally, particularly around the "Magnificent 7," has significantly impacted global fund flows, with the technology sector receiving around 10 billion USD by the end of July. Conversely, other sectors saw significant outflows, collectively losing almost 25 billion USD. This trend highlights the concentrated investor interest in tech amid broader market adjustments, reflecting a substantial shift in investor focus towards technology and telecommunications.
Record divergence between S&P 500 market-cap and equal weight indices
What the chart shows:
The chart illustrates the one-month rolling return correlation between the S&P 500 market-cap weighted index and the {{nofollow}}S&P 500 equal weight index from the 1990s.
Behind the data:
Previously, we have shown the S&P 500 index diverging significantly from its equal-weight index. Specifically, their ratio—market-cap relative to equal weighting—has been surpassing +2 standard deviations but has not yet exceeded +3 standard deviations, as it did during the dot-com period.
Their dynamic return correlation provides comparable results. It is noticeably low during both the dot-com and COVID-19 eras but high during periods of tranquility. However, in early July 2024, the recent correlation revealed an even more remarkable observation as it tumbled to a record low of about zero.
Such a historically non-existent correlation may not be overlooked amid AI-motivated markets that underpin large-cap concentrations, as opposed to the diversifications reflected in the equal-weight index.
Early summer volatility spike raises market caution
What the chart shows:
This chart compares the VIX throughout the calendar year, with the blue line representing 2024, the green line showing the historical mean, and the purple line depicting the historical mean excluding extreme years (2008 and 2020).
Behind the data:
Historically, volatility tends to increase at the end of summer. This year, VIX spiked significantly in July due to upcoming Federal Reserve meetings, Democratic delegate votes, and earnings reports. Although rate cuts and political confirmations might ease investor concerns, the early and sharp rise in VIX above 20 indicates heightened market caution. Market confidence may be bolstered by anticipated rate cuts and political clarity, but current volatility signals cautious investor sentiment.
Tech fuels recovery in China’s exports
What the chart shows:
The chart shows China’s export growth contributions by category, smoothed using a three-month moving average, highlighting machinery and equipment, basic metals, transport equipment, etc.
Behind the data:
{{nofollow}}China's exports have been recovering, driven by global manufacturing improvements, front-loaded orders, and low-base effects. Key contributors include tech-related products like phone sets, automatic data processing machines, and electronic circuits.
As {{nofollow}}China leads in high-tech and AI sectors, its export trends remain critical global economic indicators. The recovery indicates China's growing influence in global trade, particularly in high-tech industries, which may shape future economic dynamics.
Surge in Chinese copper exports amid high inventories
What the chart shows:
This chart looks at Chinese copper inventories (blue line) and copper exports (green line).
Behind the data:
Throughout 2024, Chinese copper inventories rose while exports increased significantly due to limited domestic demand. This trend reflects broader commodity market dynamics where sluggish domestic consumption drives producers to seek higher international prices, despite potential trade tensions. The surge in exports amidst high inventories suggests strategic shifts in response to domestic economic conditions and global demand pressures.
Six rate cuts predicted over the next year
What the chart shows
This chart illustrates implied Fed funds futures probabilities based on CME Group futures pricing. The far-left column marks the day of the FOMC rate decision. The second column shows the implied Fed funds rate on that date. For example, on November 7, 2024, the market expects the Fed Funds rate to be 5.05%. The subsequent columns depict the probabilities of what the Fed funds rate will be at the following FOMC meetings. For instance, the next meeting (July 31, 2024) sees a 93.8% chance that the policy rate will remain the same and a 6.2% chance of a single 25bp cut.
Behind the data
Fed Funds futures have been moving swiftly. The market now predicts a 90% chance of a 25bp cut during the September FOMC meeting. Additionally, the market is leaning towards there being three 25bp rate cuts by the end of 2024 and three more by July next year, a sharp contrast to the one rate cut expected a few weeks ago. This shift is driven by {{nofollow}}cooling inflation and a {{nofollow}}slowing labor market despite a {{nofollow}}solid GDP report. Upcoming PCE, CPI, and payroll releases will be crucial in determining the extent of rate cuts over the next few months.
Central banks repriced towards dovishness
What the chart shows
This chart depicts the magnitudes of futures-implied policy rate cuts for 2024 and 2025 for selected major central banks amid an early accommodative cycle and their recent and upcoming monetary policy meetings (Fed: August 1, ECB: July 18, BoE: August 1, BoC: July 24).
Behind the data
Developed markets, particularly the US, have made progress in disinflation. Consequently, futures markets have been repricing central banks towards dovishness, implying relatively larger rate-cut repricing. Concurrently, Fed policymakers have signaled that the Fed is moving {{nofollow}}closer to rate cuts. However, due to persistent underlying inflation risks, it is anticipated that {{nofollow}}reductions in the major central banks’ policy interest rates will be gradual. Recent futures pricing (as of July 25, 2024) implies total rate cuts this year for the Fed, ECB, BoE, and BoC to be approximately 70, 85, 57, and 109 bps, respectively. For 2025, futures indicate approximately 97, 75, 81, and 83 bps, respectively. Meanwhile, the ECB and BoC have already lowered their reference rates by 25 and 50 bps this year, respectively.
PMI on the rebound?
What the chart shows:
This chart presents the Purchasing Managers' Indices (PMIs) for the past three years, with green boxes indicating expansion and red boxes indicating contraction. It reveals that emerging markets initially contracted early in the cycle but have since rebounded, whereas developed markets have only recently begun to recover from their contraction phase.
Behind the data:
During the central banks' hiking cycle, it is crucial for policymakers and the market to consider the spillover effects of efforts to combat inflation. The impact of these interest rate hikes extends beyond immediate financial adjustments, influencing various sectors of the economy. PMI numbers indicate that these hikes have created significant challenges for both the economy and companies. Increased borrowing costs and tightened financial conditions have slowed down business activities, reduced consumer spending, and strained corporate profitability. This underscores the importance of balancing inflation control with potential negative consequences on economic growth and stability.
Divergent DXY on different presidential election winners
What the chart shows
This chart shows the movements of the USD Index around three months before and after the latest two US elections in 2016 and 2020, in which Trump and Biden won the presidential elections, respectively.
Behind the Data:
The data points to a stronger USD when Trump won in 2016, but a weaker USD after Biden won in 2020, likely due to their differing policies.
{{nofollow}}Under Trump, tax cuts that enhanced fiscal deficits and imposed tariffs that kept trade and global geopolitical tensions elevated positively influenced the USD Index.
Under Biden, massive fiscal expenses that weighed on fiscal deficits and less intensity in global supply chain and trade reshoring and deglobalization helped put downward pressure on the USD.
For the upcoming election later this year, similar policy implications under Trump, currently the favorite, and Biden's successor Harris might yield comparable outcomes for the USD Index.
Strong year for US equities
What the chart shows
This chart displays the number of trading days per year that the market has reached an all-time high. The blue bars represent the total for the entire year, while the green dots indicate historical values up to the current day of the year. Remarkably, this year has already seen the S&P 500 close at an all-time high for 38 days, a feat achieved only four times previously: in 1964, 1995, 1998, and 2021.
Behind the data
Despite the market's reduced expectations early this year for interest rate cuts in 2024 and the eventful buildup to the upcoming US presidential election, the stock market has shown remarkable strength. It continues to demonstrate resilience and robust performance, suggesting sustained investor confidence and optimism even in the face of potential economic and political uncertainties. This strong market performance highlights the market's capacity to navigate and thrive amidst various challenges, reinforcing its role as a critical driver of economic activity and growth.
Nvidia’s volatility
What the chart shows
The chart illustrates the daily growth of the Magnificent 7 companies using a "beads on a string" format. Each bubble represents the daily growth for a single trading day, calculated as the percentage difference between the opening and closing values. Blue circles indicate days with growth, while red circles indicate days with negative growth.
Behind the data
As Nvidia emerged as a leader of the entire US stock market in 2024 amidst an AI-driven rally, its line depicting daily growth stands out as a notable outlier, showing significant growth on many trading days. Similarly, Alphabet, the parent company of Google, has experienced substantial fluctuations reflecting its volatile market performance throughout the year. Elon Musk’s Tesla started the year relatively stable, with its daily growth line indicating consistent performance initially. However, it has recently tumbled, showing a series of red circles highlighting a period of negative growth. In contrast, Microsoft, Apple, and Amazon are almost invisible on the chart, indicating their daily growth has been relatively minimal and less volatile compared to their peers, suggesting they have been lagging other tech giants in terms of market performance in 2024. Meta's performance, though not as volatile as Nvidia and Alphabet, shows a mixed trend with both positive and negative growth days reflecting the company's varying market response.
2024 and 2023 were the hottest years on record
What the chart shows
NOAA calculated the average temperature of the 20th century from 1901 to 2000, then subtracted the average temperature in each year from this century-long average. This gives us temperature anomalies, indicating how far each year has deviated from the 20th-century mean. Each year is then categorized by how much cooler or hotter it was compared to the average. For example, in 2001, temperatures were 0.6 to 0.7 degrees Celsius hotter than the 1901-2000 average.
Behind the data
The world is hotter than it has ever been before. Both 2023 and 2024 are breaking record temperature anomalies. In 2023, temperatures were 1.38 degrees Celsius hotter than the 20th-century average. Thus far, 2024 is 1.22 degrees Celsius hotter than the 20th-century average. Despite many countries' efforts to cut global greenhouse gas emissions, average global temperatures continue to rise. If the world hopes to limit global warming to the 1.5 degrees Celsius goal set in the 2015 Paris Agreement, immediate and more aggressive actions are needed.