Charts of the Week

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.

"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.