Charts of the Week

Even amid financial stress, banks are leading earnings growth in Europe

It might be counterintuitive in a year that has seen a series of US bank failures and the demise of 166-year-old Credit Suisse – but banks are driving earnings-per-share growth in the basket of large-cap European stocks tracked by Macrobond and FactSet.

As the sectoral breakdown in our chart shows, aggregate EPS is up 12.5 percent. Industrials are the second-biggest contributor to that gain after financial stocks. Energy is the largest negative contributor. 

The end of the zero-interest rate era means banks are making more spread on their core lending business. ING of the Netherlands became the latest big European bank to beat profit forecasts this week. 

And as Bloomberg News recently wrote, smaller European banks have been more tightly regulated; larger banks have mostly been cutting their US exposure; and European banks don’t face the same level of deposit competition from money-market funds as US banks do. So far, Credit Suisse is seen as an idiosyncratic one-off.

‍A dashboard for the 60/40 portfolio (versus going all-in on stocks)

Traditionally, financial advisers recommended that investors with a moderate risk threshold put 60 percent of their money in equities, with the rest in bonds. Over the long haul, most academic research agrees that stocks outperform bonds, but a healthy slice of fixed income was recommended to provide downside protection and income.

Post-2008, this so-called “balanced” portfolio would have done well; tech stocks surged, and bonds benefited from ultra-low interest rates. But in 2022, 60/40 had one of its worst years ever.

Our dashboard explores how different blends of equities and fixed income would have performed since 2020, including last year’s annus horribilis. For stocks, we chose the S&P 500; for bonds, we chose the US 10-year Treasury.

Damage from last year’s bond rout means that to have generated any kind of absolute return over the past 3 ½ years, investors would need to have been at least 40 percent invested in stocks. A 60-40 portfolio would have made an average of just 3.5 percent per year, roughly in line with inflation.

If we’ve seen our last rate hike, history suggests upside for equities

The Fed recently hiked rates to a 16-year high. Well-known bond fund manager Jeffrey Gundlach decreed this week that “the Fed will not raise rates again.” 

If Gundlach is right, history suggests that stocks have upside from here. 

As our chart shows, the S&P 500 has risen an average of 12.2 percent in the 12 months that follow an end to a tightening cycle. The 25-75 percentile range includes cycles where the benchmark rose from about 12 percent to almost 30 percent. 

This updates a previous chart, in December, to overlay the stock benchmark’s performance over the past year, assuming that this month’s rate increase was indeed the peak. 

‍Federal Reserve rates tend to peak rather than plateau

This chart tracks the mean and median Fed funds rate in the days before and after final rate hikes in historic tightening cycles. 

When the Federal Reserve stops tightening monetary policy, stocks tend to rise. 

This might seem obvious. But part of this performance might be due to the historic tendency of the Fed to start cutting rates soon after it stops hiking them, as the chart shows. 

Put another way: the Fed generally doesn’t hold rates at a high “plateau” for long. Is this time different? One camp in the inflation debate has long believed that the Fed is more likely to “pause – not pivot” to quick rate cuts.

‍Foreigners steer clear of Turkish debt

Turkey’s voters go to the polls on May 14. Recent surveys suggest that after two decades in power, President Recep Tayyip Erdogan may be headed to defeat.

Reuters recently characterised the choice as “Erdogan's vision of a heavily-managed economy and its repeated bouts of crisis against a return to liberal orthodoxy under opposition challenger Kemal Kilicdaroglu.”

Indeed, Erdogan’s unconventional economic policies have dissuaded foreign investors, as our chart shows. Just 1 percent of Turkey’s government bonds are held by foreign investors – the lowest proportion in more than 15 years. Just five years ago, that figure was closer to 20 percent. 

Foreign investors began divesting in 2018 after Erdogan began publicly pressuring the central bank not to raise interest rates to control inflation. The lira has tumbled almost 60 percent over the past two years, reaching record lows against the dollar.

The internationalisation of China’s renminbi

Two weeks ago, we explored the “de-dollarisation” debate. Returning to this theme, we measure the progress China has made in promoting international use of its currency.

This chart tracks use of the CIPS (the Cross-border Interbank Payment System). The value of receipts and payments in renminbi (or yuan) terms has been gradually rising; transactions using CIPS have surpassed 1 million per quarter.

China introduced CIPS in 2015 after Russia was sanctioned by the US and EU following its annexation of Crimea, complicating the use of the dollar in Russian oil exports. CIPS can be viewed as an alternative to the SWIFT platform, the messaging system that banks use to transfer funds across borders. (Major Russian banks are banned from SWIFT.) 

Our second panel tracks the Renminbi Globalisation Index. The RGI, compiled by Standard Chartered, measures the overall growth in offshore yuan use. (Its methodology can be accessed here.) After declining in the first two years after CIPS was created, the RGI has steadily moved higher since 2018.

‍Brazil’s debt burden to grow as Lula targets scrapping a spending cap

Brazilian President Luiz Inacio Lula da Silva defeated the conservative incumbent, Jair Bolsonaro, last year. Lula pledged to revoke the nation’s public spending cap, aiming to bolster spending on infrastructure and social benefits. 

A congressional vote is expected soon on the cap, which Lula’s critics consider a pillar of fiscal credibility.

As our chart shows, the IMF projects that Latin America’s largest economy will see its ratio of public debt to gross domestic product gradually creep higher, approaching 100 percent by 2028. 

By contrast, debt-to-GDP ratios are set to be broadly stable for Colombia, Mexico, Chile and Peru – and this measure of indebtedness had been falling sharply for Brazil during 2020-2022, despite the pandemic.

‍Betting on bullion paid off for Japanese and British gold bugs

This table shows the performance of gold since 2000. In most years, and in most currencies, bullion prices were either stable or rose. (As the bright red bar shows, 2013 was the big outlier; economies were recovering from the financial crisis, and the Fed was withdrawing stimulus. Money flowed out of gold funds.) 

Given that gold is priced in dollars, returns from investing in the metal can vary significantly depending on your home currency. As British and Japanese investors saw the pound and yen sink against the dollar, gold returned 13 percent in GBP and 15 percent in JPY – versus a flat performance in dollar terms in 2022. 

The post-FAANG mega-caps are driving the US stock rally

The biggest stocks are leading this year’s stock rally.

Our visualisation breaks down the year-to-date gain by the S&P 500, showing how the 10 biggest names by market value are overwhelmingly responsible for the rally – especially since March, when bank failures dented confidence in much of the rest of the equity space.

Most of these names are in Big Tech, evoking the “FAANG” surge that drove the 2010s. (That’s Facebook, Amazon, Apple, Netflix and Google – before a few name changes made that acronym obsolete.)

Today, the top 10 are Apple, Microsoft, Amazon, Nvidia, Alphabet (counting both stock classes as a single company), Berkshire Hathaway, Meta, UnitedHealth, ExxonMobil and Tesla. ‍

The great global growth surprise of 2023

One of the positive surprises for 2023 is how resilient global growth has been, despite a record monetary tightening cycle. (China’s reopening likely has something to do with it.)

This chart uses measures of the purchasing managers index (PMI), which surveys executives about prevailing trends in their industry, to track the outlook in nations around the world. Readings below 50 indicate contraction. 

It seemed that we were headed towards a broad recession in the second half of last year. But PMI is back above 50 for most economies. 

Inflation in Gulf nations has been no big deal – and sometimes nonexistent

There’s a place in the world where inflation has not been particularly rampant over the past year: the oil-producing nations of the Gulf Cooperation Council (GCC).

As our chart shows, annualised inflation is running at about 3.3 percent for the GCC as a whole, much slower than the rate in the US and eurozone. The year-on-year comparisons are enlightening, as well. While Saudi inflation has picked up, Oman and Kuwait have experienced disinflation since January 2022; Bahrain is in outright deflation.

Five of the six GCC economies peg their currencies to the dollar, which can help keep inflation in check. Governments have also tended to use their oil wealth to proactively manage food and energy prices using subsidies.

Interestingly, booming Dubai, whose role as a global hub makes its economy quite different from the rest of the region, is experiencing the steepest pickup in inflation.

‍What’s in the news? Measuring perceptions of trade, war and pandemic

Economic Policy Uncertainty (EPU) is an academic group that uses newspaper archives to create indices relating to policy challenges ranging from budgets to geopolitics. 

Effectively, by tracking headlines, EPU shows us the issue, or “dominant uncertainty,” that was top of mind at a given moment for the media, and, by extension, for the policy-making class.

We’ve previously charted their overall geopolitical risk index. This time, our chart examines EPU’s subindexes for the US, highlighting the issue that had the greatest risk perception over 20 years.

National security was top of mind in 2003, during the US invasion of Iraq, and again in the first half of 2022 as Russia invaded Ukraine. Europe’s sovereign-debt crisis rears its head in 2011-12. As the Trump and Biden administrations grappled with pandemic support and stimulus, “entitlement programs” are prominent in 2020-21.

Interestingly, Donald Trump’s 2018-19 trade war with China provoked a higher risk perception than any other issue tracked by EPU.

‍‍‍More Americans struggle with credit card debt again – relatively speaking

As interest rates go up and the economy slows, figures from the New York Fed show us that more Americans – especially younger ones – are struggling with debt burdens. 

This chart tracks the percentage of credit-card balances transitioning into “serious delinquency.” This figure jumped by 2.5 percentage points for the 18-29 age bracket in 2022.

However, a longer-term perspective shows that credit-card struggles are only just returning to their pre-Covid levels – after extraordinary levels of subsidy to consumers and businesses through the pandemic. 

Monetary tightening and falling unemployment

Intuitively, one might expect to see unemployment shoot up when policy makers stamp on the monetary brakes. But as our chart shows, that confuses the cause-and-effect relationship in real time. 

History shows that tightening cycles usually progress as an economy gathers pace and sometimes overheats. I.e.: the labour market strengthens, unemployment falls, the Fed hikes. In 1980, 1995 and 2007, the unemployment rate stopped falling or crept higher only as the Fed came to the end of a round of tightening.

The present cycle stands out; with the Fed hiking rapidly during a time of post-pandemic labour shortages, US unemployment did not have that much lower to go.

Sell in May and go away? Only in Europe

A hoary stock-market cliché effectively advises investors to take the summer off. The theory goes that limited liquidity and slow news flow means there will be fewer bids for equities until most market participants return to their desks.

Using the Macrobond Investment strategy function, we examined the returns since 1990 for a hypothetical investor that exited the markets between May and October each year. We applied this test to the S&P 500 and the Euro Stoxx 50. 

“Sell in May and go away” allegedly dates to the old-time London markets. If this strategy ever paid off on Wall Street, our chart suggests that it hasn’t since at least 1990. But in the EU, taking more time off isn’t just a cultural tradition; it can be profitable too.‍

Assessing country-by-country recession in the EU

This table measures quarter-on-quarter economic growth for the 27 nations in the European Union. Green means expansion; red means contraction. And a standard definition of recession is two consecutive quarters of negative growth.

As first-quarter 2023 figures trickle in, Lithuania has entered recession, joining Finland, Estonia and Hungary. Interestingly, some nations have already rebounded from recessions in 2022, such as the Czech Republic and Latvia.

Will more nations start flashing red as the ECB continues to tighten monetary policy? Christine Lagarde, who raised rates yesterday, signaled that there may be "more ground to cover" to control inflation.

Hedge funds are taking a strongly negative view on Treasuries

This chart tracks bets by hedge funds with regards to 10-year Treasuries, as reported to the Commodity Futures Trading Commission. They have steadily built up a record net short position, even after 2022 was a historically catastrophic year for bonds and 10-year yields have stayed below last year’s peak (as the second panel shows).

As investors debate prospects for a Federal Reserve “pivot,” rate cuts and recession, some hedge funds may be staking out an unambiguous view: Treasury yields will stay high. 

As Bloomberg News recently noted, the short position may be also related to so-called basis trades, when hedge funds buy cash Treasuries and short the underlying futures. 

Saudi Arabia’s more diversified economy

Saudi Arabia recorded the highest GDP growth among G-20 nations in 2022. Surging oil prices in the wake of Russia’s invasion of Ukraine obviously helped, but by at least one metric, the nation has made progress diversifying its economy over the years. 

Our chart breaks down the contributions to the year-on-year GDP growth rate in current prices by different sectors. 

The blue bars represent net exports. This is where the positive effect of higher oil prices can be seen. But the strong performance of the orange bars in recent quarters is also notable. This includes private consumption and private investment. 

With growth expected to slow in 2023 as crude prices stabilise at lower levels, these non-oil activities are expected to support the economy. 

‍Global currency reserves and the de-dollarisation debate

The “de-dollarisation” debate is in the news.

“Why can’t we do trade based on our own currencies?” Brazilian President Lula da Silva recently remarked. China has been promoting the use of the renminbi in settling cross-border trade. Some nations view US sanctions against nations like Russia as “weaponising” the dollar, given the global reserve currency is so crucial for paying oil import bills. 

By at least one measure, reliance on the dollar has been steadily declining: its share of global foreign-exchange reserves held by central banks. As our chart of IMF data shows, the dollar remains by far the main currency of choice, but its share has dropped to 58 percent from 70 percent over the past 20 years. 

Holdings of Chinese yuan have been increasing from a tiny base, and now stand at 3 percent.

The euro’s share grew in the 2000s before retreating; it’s back at about 20 percent. The “other” category, including Australian, Canadian, South Korean and Scandinavian currencies, is also gradually inching higher. IMF economists posit that these currencies are considered to be “safe” but offer higher returns than the greenback.

‍The dollar share of SWIFT transactions remains stubbornly high

Dollar reserves might be falling at central banks, but the greenback’s share of international transactions has barely budged. 

The Society for Worldwide Interbank Financial Telecommunication (SWIFT) is the messaging network that executes worldwide payments for banks. This chart tracks different currencies’ share of global SWIFT payments over time. 

The dollar accounts for 40 percent of the value of transactions, about the same as a decade ago. The euro and pound have seen their proportions shrink. Starting from a low base, China’s renminbi grabbed an increasing share in the mid-2010s, but that trend has leveled off.

A high-profile recent impasse shows how sticky the greenback is – even for nations hostile to the US. Russia has long counted on India as a key market for its military equipment, but New Delhi risks running afoul of US sanctions if it pays Moscow in dollars. The Russians are refusing to pay in rupees, citing depreciation against the ruble.

‍European banks face TLTRO repayments at a stressful moment

For European banks, a pandemic-era rescue bill is coming due at a time that might prove inconvenient.

As our chart shows, analysts surveyed by the ECB expect lenders to start stepping up repayment of the central bank’s program of targeted longer-term refinancing operations (TLTRO). Final repayments are due in December 2024. 

TLTROs were launched to support lending in the aftermath of the debt crisis in 2014. After their revival in 2020 – charted in the second panel – they became the ECB’s largest-ever infusion of liquidity. 

TLTROs offered longer-term loans to banks at a favourable cost, and helped banks exceed liquidity requirements, but the most attractive terms of the program ended in June 2022. 

As our chart shows, after further ECB changes in October, voluntary repayments initially accelerated, but then flatlined. The most recent ECB survey was in February, and systemic stress has worsened since then amid high-profile bank failures. 

Banks must balance preserving their liquidity, tapping more expensive sources of funding and repaying their central bank.

‍European CPI scenarios and the base effect

With at least one more rate increase expected from the ECB, stubbornly high inflation remains in focus. New figures are expected next week.

This chart shows different scenarios for year-on-year growth in the core consumer price index for the eurozone, which excludes food and energy prices. While headline CPI has started to slow, core CPI is still accelerating in many regions.

One phenomenon worth watching is the base effect. This refers to volatility in the CPI 12 months earlier (the base month) when making a year-on-year comparison of inflation rates. Put another way, month-by-month price trends are important, but it’s worth being mindful of an outsized surge or drop a year earlier. And we are more than a year into the era of elevated inflation.

As our chart indicates, even steady core CPI growth of 0.25 percent month-over-month will mean a long-term slowdown in the year-over-year figures. And looking closely, even a 1 percent increase for April will result in a falling year-on-year trend – due to the base effect a year earlier.  

The unleashed Chinese consumer is splashing out on jewelry and cars

The Chinese consumer is spending again. Last week, we charted the services rebound after the nation reopened its economy. This week, we show how sales of goods in different sectors have rallied from locked-down doldrums.  

In March, China reported 10.6 percent year-on-year growth in retail sales of consumer goods. Jewelry stands out, surging 37 percent. Automobiles and clothing both jumped over 10 percent. 

A few categories are still stagnating, with home décor and household appliances in negative territory. This may well be related to the struggling real estate market. 

Economic and inflation surprises are bullish for China and hawkish for Britain

With the release of every economic data point, markets compare the figure to analysts’ expectations and react accordingly.

Citigroup maintains an economic and inflation surprise index, which we have charted to show how various nations are faring.

There are four quadrants. The “stagflation surprise” quadrant of higher-than-expected inflation and disappointing growth includes New Zealand and Sweden, whose woes we examined last month. 

Given the gloomy news flow in the UK, Britons might be surprised to learn that they are experiencing the greatest “hawkish surprise.” The worst inflation in the group is combined with GDP figures that were recently revised upward.

China is in the sweet spot. Growth is surging after the country’s great reopening, while it appears that slack in the labour market has kept inflation in check.

There are no “dovish surprises” of weak growth and tumbling inflation to be seen yet, even though economists forecasting a central bank “pivot” certainly expect nations to start moving into that quadrant.

US small businesses are worried about access to credit

This chart tracks a survey of sentiment from the National Federation of Independent Business (NFIB). After an unprecedented tightening cycle and last month’s sudden bank failures, US small businesses are concerned about a credit crunch.

The top panel charts small businesses’ near-term expectations about credit conditions, as measured by the NFIB. We’ve inverted the Y axis, so a higher reading represents greater negativity.

Pushing this survey data forward by a year shows its power as a leading indicator when compared with three decades of US bankruptcy filings. With small businesses expecting tighter credit, this correlation suggests business failures may pick up from the multi-decade low that has lingered post-pandemic.

The second panel indicates further cause for concern: the NFIB survey shows that respondents remain heavily pessimistic about the six-month outlook for business conditions.

‍Visualising the recent history of oil prices

In the wake of the surprise production cut by OPEC+, and a price spike that now appears to have been short-lived, what constitutes a "normal" oil price?

Our chart analyses inflation-adjusted Brent crude prices per barrel over the past 15 years. It’s also a period that has seen active moves by Saudi Arabia and its OPEC partners to shift the price environment for various geopolitical, revenue and market-share goals. (Analysts have described 2014-16 and 2020 as periods where OPEC waged “price wars” against US shale producers and Russia, respectively. More recent Saudi production cuts have stirred tension with the Biden administration.)

This visualisation shows how prices have tended to cluster around two levels – roughly USD 70 and USD 140. For about 40 percent of the trading days in the past 15 years, oil was priced between USD 60 and USD 90; at the time of writing, the price was about USD 80.

Are we headed to that higher cluster? Our previous visualisation on whether OPEC+ nations are running deficits might be one to refresh for insights.

‍A services boom in China

Several months after China’s great reopening, the world’s second-biggest economy is outperforming analysts’ expectations. Real GDP grew at a year-on-year pace of 4.5 percent in the first quarter, indicating that the nation’s 5 percent annual target is within reach. 

We have previously analysed the effect of loosened Covid-19 restrictions in China using “soft” data like international flights and box-office revenue. This chart shows how reopening has translated into hard numbers. 

Services, the orange part of the bars in the chart, accounted for almost 70 percent of quarterly growth, driven by consumer spending. 

‍‍Copper stockpiles are depleting

China’s great reopening is also making its presence felt in the metals market. Citing the rebound in Chinese demand, trading giant Trafigura recently forecast record-breaking copper prices this year.

This chart compares the London Metal Exchange’s data on copper inventories in 2023 to the month-on-month trends in the most recent calendar years – showing just how low stockpiles are, and hence why surprisingly strong Chinese demand is having such an effect. In fact, LME copper stockpiles are at their lowest since 2005.

Another factor that has constrained supplies of the metal is unrest in Peru, a major producer. Local miners had been left with surging inventory, unable to move it to seaports.

‍Housing drives euro zone disinflation amid stubbornly pricey food

Stubbornly high inflation in the UK recently surprised markets, but peak inflation seems to be firmly in the rearview mirror for the eurozone – even if the ECB’s 2 percent target still seems far away. 

In March, the bloc’s consumer price index rose 6. 9 percent year-on-year; that’s down from the record 10.6 percent pace in October.

This chart breaks down contributions to this trend. A slowdown in housing costs was the biggest factor, accounting for a 3.3 percentage point decline from the October peak. Transport costs are also on the way down. Food, meanwhile, is still getting more expensive.

‍US rent increases break from the trend

The US rental market is showing signs of weakness. We’re seeing a broad slowdown across the nation, rather than sharp adjustments in select markets.

This top panel in this chart tracks the share of the nation’s metro areas that are experiencing month-on-month rent hikes. A year ago, almost 90 percent of cities were reporting increasing rents.

That number has been gradually deflating and now stands at 60 percent – breaking from the pre-pandemic trend line. 

The breadth of rent increases can also be considered a leading indicator for trends in nationwide owner's equivalent rent (OER), which we see in the second panel. 

OER is used by the Bureau of Labor Statistics as a component of overall CPI. It measures rental markets by asking property owners to estimate the income they think they could get from a tenant.

‍Turkish gas production begins amid expensive foreign dependency

Turkish President Recep Tayyip Erdogan is facing a tight race for re-election on May 14. He could be hoping that a historic Black Sea gas discovery, which starts delivery this month, will give him more economic wiggle room.

As our chart shows, Turkey is heavily dependent on imported energy – especially natural gas from Russia. Prices for those gas shipments were surging even before the energy price shock that followed Russia’s invasion of Ukraine.

With inflation running above 50 percent, the Sakarya project might help Erdogan fulfil his promise to cut consumers’ gas bills. It could also provide some relief for a key economic vulnerability: Turkey’s current-account deficit, which recently hit a record.

Stock picking when PMI contracts

With an end to Fed rate hikes not quite in sight, stock investors might be turning their thoughts to a sectoral rotation. 

One leading indicator pointing towards recession is the Institute for Supply Management’s purchasing managers index (PMI), which surveys manufacturing executives. Readings below 50 indicate economic activity is contracting, and the PMI figure for March worsened to 46.3. That’s the fifth straight month of contraction. 

We measured 40 years of PMI “regimes,” tracking how different sectors in the S&P 500 performed when the indicator was expanding, slowing, contracting or rebounding.

Health care stocks were the clear winners during times of contraction; real estate and energy fared worst. It’s notable that tech stocks were among the best performers in any environment, including the “rebound” scenario investors might be hoping for.

Emerging market debt burdens revisited

‍Last year, we discussed how the stronger dollar was problematic for emerging markets’ funding needs. 

Global interest rates have kept on climbing since then. We have updated and enhanced an August 2022 chart of the biggest emerging-market nations that tracks their interest payments as a share of GDP (x axis), revenue (y axis) and reserves (bubble size). In all cases, that proportion is rising. The arrows show the direction of travel since 2019.

Some of these nations are facing their biggest bills for servicing foreign debts in a quarter of a century. India’s burden is the highest as measured by its share of government revenue; Brazil’s interest payments account for the biggest share of GDP, at 7 percent.

‍Strategic Petroleum Reserve remains drained as OPEC cuts back

President Biden might be wishing that he refilled the US Strategic Petroleum Reserve (SPR) earlier this year. Since OPEC’s surprise production cut in early April, prices have climbed to a five-month high.

After Russia invaded Ukraine a year ago, the president ordered the SPR’s largest-ever sale, aiming to make trips to the gasoline pump less painful for American drivers. 

The SPR fell to its lowest level since the 1980s – and has stayed outside its post-1990 range for all of 2023 so far, as our chart shows. 

The Biden administration still plans to refill the SPR when it’s “advantageous to taxpayers,” Energy Secretary Jennifer Granholm said this week. It’s unclear when that will be. US international benchmarks are above USD 80 a barrel, compared with about USD 70 a month ago – a price where the administration had reportedly aimed to gas up.

‍13 years of ebbing IMF optimism

The International Monetary Fund recently sounded the alarm about the prospects for global growth, citing risks to the financial system. What might be surprising is that the institution has steadily whittled down its outlook ever since the global financial crisis.

Our chart displays IMF global GDP growth forecasts since 2008 as grey lines starting from the date they were released. The trajectories usually called for an increase from the then-current level.

The IMF predicts global economic expansion at an average rate of about 3 percent over the next five years. That’s well below the average 3.8 percent over the past two decades, and the weakest projection for medium-term growth since 1990.

While decades of globalisation have pulled hundreds of millions of people out of poverty, increasing economic fragmentation, geopolitical tensions and higher borrowing costs are clouding the outlook.

A unique case of European hyper deflation in Norway

Most recent macroeconomic narratives consider whether inflation is slowing or not. In Norway, one measure of prices is showing not just outright deflation, but the steepest decline ever.

The producer price index (PPI) is a measure of the average change in prices that an economy’s domestic producers receive for their output. It’s often considered a leading indicator for consumer price inflation.

Norwegian PPI fell an unprecedented 21.9 percent year-on-year in March. Of course, there’s a catch: Norway’s energy-oriented economy. Norwegian gas became crucial for Europe’s energy needs after Russia invaded Ukraine and flows from the Nord Stream pipeline ground to a halt. Gas prices soared, but LNG boats and a warm winter came to the rescue. Prices are down more than 80 percent from their August peak.

If we exclude energy, Norway looks a lot more like the rest of the developed world – with PPI rising more than 11 percent. 

‍‍‍Spain might be an optimistic leading indicator for European inflation

At least one economy in Europe is showing a pronounced drop in consumer prices: Spain. CPI growth has retreated to 3.3 percent after peaking above 10 percent last autumn.

That’s optimistic for the rest of the EU because the Iberian nation has been an interesting leading indicator over the past three years, as our chart shows. 

The Spanish CPI line tracks the EU line quite closely when it’s pushed forward three months. That could be because Spain moved more quickly to apply and phase out consumer subsidies during the pandemic. 

To be sure, Spanish “core” inflation – which strips out food and that plunging natural-gas price – remains fodder for inflation hawks, standing at 7.5 percent.

‍Keeping an eye out for another credit crunch in Europe

As concerns about a recession mount, it’s worth watching bank lending to companies in Europe. With securitisation playing a much smaller role than it does in the US, bank loans are a key conduit of credit – and monetary policy – to the real economy. 

Our chart tracks the three-month cumulative lending flow to non-financial corporations. The ECB’s rapid rate hikes have pushed this indicator into negative territory: i.e., credit is being cut back. 

The historic precedents are ominous. Bank loans shrank during the 2008-09 global financial crisis, and this indicator stayed in negative territory for years after the European debt crisis. (The shaded areas indicate recessions.) 

The quite different trend during the pandemic recession is notable. As the economy ground to a halt with little warning, companies rushed to tap their credit facilities as authorities offered historic levels of support to the financial system.

‍Stocks at the midway point for presidential cycles

As President Biden signals that he plans to run for re-election, it’s worth revisiting history to assess how the S&P 500 typically behaves in the second half of a presidential term.

The S&P 500 is barely higher since Biden took office, but it roughly tracked the historic trend of a mid-term lull last year. History would suggest a rebound is overdue. 

But with stress in the financial system, recession worries lingering and the Fed still tightening, the president might have to hope the bulls make a return in 2024.

Demographics and pensions in Spain

Countries are looking for ways to shore up creaking retirement systems after years of expensive promises. Riots in France are in the news after President Macron’s plan to lift the retirement age to 64 from 62. But similarly contentious changes are underway in neighbouring Spain – where the retirement age has been 65 for some time. Younger people and higher earners will pay more.

Our chart compares the population pyramid today (the blue line) with the UN projection for 2050 (the red line) As the “bulge” shifts upward, there will be just 1.7 working-age Spaniards instead of 3 for every retiree.

Spaniards have a life expectancy of 83. The nation’s “baby boom” also differs from other Western countries. Though its civil war ended in 1939 and the nation was neutral in WWII, the birth rate only began to climb in the late 1950s, and that wave of Spaniards is just beginning to retire.

OPEC cuts amid budget pressure in oil producing nations

Oil prices have whipsawed this year. The Brent crude benchmark slid from about USD 85 to below USD 75 in the first two weeks of March on concern that banking turmoil and recession fears would dent demand.

But Brent snapped back above USD 80 after Saudi Arabia and its OPEC+ partners announced unexpected production cuts. 

Looking at some of the national budgets for countries that produce oil, however, perhaps the move shouldn’t have been a surprise. Oil prices have been on a downward trend since the Brent price topped USD 120 a barrel last summer, and some countries could use more fiscal room. 

Our visualisation graphs the current and 10-year average Brent prices against the “fiscal breakeven” price needed for various countries to start posting budget surpluses. It also charts the “external breakeven” oil price at which a nation’s current-account balance is zero, i.e. It covers its import bill. 

OPEC and OPEC+ members on the wrong side of the orange budget line in our chart include Algeria, Bahrain, Iran and Kazakhstan.

‍Modelling the future of non-farm payrolls

As the Fed continues its quest for a soft landing, economists are keeping their eyes on the labour market.

We’ve created a vector autoregression model to predict non-farm payrolls (NFP) over the next year. (Macrobond users who click through to the chart in our application will be able to see the endogenous variables and lags, and be able to refine the model further.)

As our chart shows, the model is predicting slower payroll growth, based on inputs such as job openings and personal consumption expenditures (PCE).

(The “residuals” pane reflects the difference between the observed values and the predicted values in a model; as the 2020 pandemic spike shows, forecasting becomes more difficult during times of turbulence.)

The resilient US labour market has meant recent NFP figures surprised on the upside. Economists therefore expect the Fed to leave the possibility of a rate hike on the table as long as inflation persists and labour markets can accommodate a hike.

Anticipating US jobless claims by tracking layoffs

Another argument for a slowing labour market is the current wave of US layoffs, ranging from Big Tech to Walmart and head-office jobs at McDonald’s.

This chart aims to measure layoffs on a national basis by summing up state-level worker adjustment and retraining notices (WARN), which require firms to provide early warning in case of events like plant closings. 

Every state has different peculiarities, and not all of them report WARN notices, so the sample charted uses 39 of the 50 states. 

As the chart shows, WARN notices are increasing significantly; the year-on-year rate of change level is comparable to that seen in 2001 and 2008-09s. Those were periods where initial jobless claims also rose, as the charts show; as laid-off staff begin claiming unemployment benefits, history is likely to repeat itself. 

Watching for commercial real estate distress at small US banks

The health of US banks remains in the news after the SVB rescue. Last week, we examined how deposits are flowing out of both larger and smaller institutions. 

This week’s charts look at their loan books over two decades, showing how commercial real estate could be the next issue.

Fed figures show that commercial banks’ total loans almost tripled since 2004, reaching USD 11 trillion. But the distribution between institutions has remained roughly stable: large banks account for 60 percent of the loans. (Large banks are defined as the top 25 by assets.)

The second panel focuses only on commercial real estate (CRE) loans. Smaller banks have 70 percent of this asset class after years of taking an ever-greater share versus their larger counterparts. With more observers warning about stress in the commercial real-estate market, smaller banks could suffer disproportionately.

‍The BRICS surpass the GDP of non US developed nations

Two decades ago, former Goldman Sachs economist and emerging-market bull Jim O’Neill coined the BRIC acronym (Brazil, Russia, India and China). The concept was later expanded to include South Africa to become the BRICS. 

Another acronym predates the BRICS: the G7, or Group of Seven, a political forum for the biggest industrialised democracies: the US, UK, Germany, France, Italy, Japan and Canada. 

O’Neill posited that the BRICS were so big and dynamic that they would converge with western income levels and grab an ever-greater share of the world economy while the G7’s share shrank.

Our chart shows how O’Neill’s prediction is gradually coming true – at least if you exclude the US.

(This takes an expansive view of the G7, including the entire European Union economy since the group's summits include EU representatives.)

The IMF estimates that the BRICS share of global GDP surpassed that of the G7-ex-US in 2022. That trend is expected to continue.

The timing is interesting; China, the biggest BRIC economy, notably outperformed western GDP growth in the early stages of the pandemic. 

‍Components of German inflation are shifting around

We have dedicated several charts to European inflation in recent weeks. In February, there was evidence of a broad disinflationary trend across the region, though inflation remained elevated in absolute terms.

Last week’s German CPI figures demonstrate the dilemma facing analysts and central bankers. Price increases were more than analysts expected, even though the inflation rate slowed from 8.7 percent to 7.4 percent year-over-year. 

The statistics office has not yet released a breakdown of inflation contributions by sector: housing, food, etcetera. But we can aggregate regional CPI figures to get an early sense of what’s driving the slowdown in inflation. 

As our chart shows, food prices are climbing at an ever-increasing rate. That’s been offset by slowing inflation for transportation and housing. 

Walking on eggshells for Easter

As we head into the Easter weekend, consider the tensions around the humble egg. (The ones laid by hens, not the chocolate version.) This grocery staple has been notable for post-pandemic price surges and shortages in several nations, particularly the UK. 

In the US, eggs cost almost double the price of a year ago, according to the Bureau of Labor Statistics. Opponents of President Biden have specifically cited the egg market as they critique his inflation policy. Some observers have accused egg suppliers of collusion.

Our chart tracks volatility, rather than price. It indicates how there is something else going on besides the general inflation and disruptions to agriculture in the wake of Russia’s war on Ukraine.

That something is avian flu. In 2014-15, the US experienced the largest outbreak of that disease in recorded history. 

That’s when the chart becomes steadily more volatile, as poultry farmers culled and then rebuilt their flocks – only to have an even worse bird flu outbreak occur in 2022-23, following another outbreak in 2020. We have shaded the outbreaks on the chart.

Lent might be coming to an end, but until prices fall, some shoppers are likely to keep avoiding eggs.