Charts of the Week

Comparing Chinese bear markets and bouncebacks

China’s zero-Covid policy was tough on its equity market. As our chart shows, it was the worst bear market in recent memory, posting a maximum intra-year decline, or drawdown, of 46 percent from its peak that year.

However, steep declines by the MSCI China Index are not unusual. As the European sovereign debt crisis sideswiped markets around the world, the Chinese benchmark posted a maximum drawdown of 38 percent during 2011.

Amid US-China trade tensions during the Trump administration, the drawdown reached 33 percent. And in 2015, a period of market froth in China was followed by a 35 percent decline on recession concerns. 

For investors gauging whether history endorses a bet on China’s reopening, there was a modest rebound after the 2011, 2015 and 2018 episodes, averaging 18 percent over 6 months and 23 percent over a year and a half. The MSCI China Index is already 30 percent above its October trough.

‍‍A decade plus of Slowbalisation

This chart tracks our globalisation barometer – as measured by the sum of exports and imports as a percentage of GDP.

Our chart starts in 1970, at the tail end of what can be considered the postwar era of reconstruction, international cooperation, Keynesian economic approaches and fixed exchange rates. 

In about 1980, a trend towards economic liberalisation began. This second wave of globalisation, in green, was marked by growing access to cheap, deregulated labour in emerging markets and other innovations such as container shipping.

Since the financial crisis, globalisation looks more like “slowbalisation,” with the barometer in retreat. Tariffs are rising, environmental concerns are prompting consumers to seek locally produced goods, and countries are aiming to “reshore” industries at a time of heightened geopolitical tension. 

Carbon taxes may be the next blow to globalisation, making shipping more expensive.

‍‍Loose policy in Japan means central banks are adding liquidity again

Last month, we wrote about Japan’s yield control policies. The central bank is an outlier globally – the last of its peers to maintain negative interest rates. Japan had recently surprised markets by widening the range of acceptable government bond yields, prompting speculation that a greater policy shift could follow.

But the Bank of Japan vowed to double down and keep buying bonds to keep yields low. As our chart shows, these purchases were recently bigger than the Federal Reserve’s quantitative tightening program.

This means that on a global basis, central banks are once again adding liquidity to global financial markets. This likely contributed to the rally across equity and credit markets in January.‍

India is slowing down in our Nowcast

Our latest Nowcast takes a look at India, which is likely to surpass China’s population this year while also being buffeted by higher oil prices.  

Nowcast models aim to “predict” the present for the economy, given there is a lag before data becomes available, and keep investors ahead of the curve.

We used a variety of alternative high-frequency indicators to construct this regression model, including rainfall, coal stocks, power production and railway freight earnings. We combined these with more traditional data, such as unemployment, industrial production, and manufacturing PMI. All of these variables are leading indicators of GDP.

However, Macrobond users can change any of these input variables to create their own Nowcast.

Our model is predicting that India experienced a slowdown in the fourth quarter, with year-on-year growth of about 3.7 percent, below the average of the last couple of years.

Bond candlesticks show yields burning historically bright

It was one of the greatest ever routs for bonds in 2022 as inflation picked up and central bankers tightened monetary policy. Corporate bonds were no exception.

Now, with yields at attractive levels, many observers of the debt market are saying “bonds are back” as an interesting investment. Many corporate bond yields, in fact, are at a two-decade high.

This visualisation uses “candlesticks” to show what corporate bonds in different categories – European, American, high-yield or not – are yielding. Yields are compared to their much lower levels five years ago, their historic extremes, and percentile ranges in different eras.

Banks tighten loan standards and that has implications for high yield

While yields on the most speculative corporate debt are higher than five years ago, one indicator suggests there may be more substantial moves to come.

The chart tracks measures of alternative ways companies can borrow money: via bank loans or tapping the public debt markets.

The green line tracks a US high-yield index. The blue line measures the percentage of domestic banks tightening or loosening standards for commercial and industrial loans to small firms. 

Historically, they tend to correlate. But recently, there is a severe divergence, with more and more banks presenting companies with tougher loan conditions. Will higher yields in the world of higher-risk credit securities follow, as history suggests?

Women in the workforce and C suite from Norway to Egypt

One of the most remarkable economic megatrends has been the rise of women in the workforce. But this has evolved quite differently around the world.

This chart tracks a range of countries, charting the participation rate for women in the workforce (the x-axis) against the share of CEOs that are female (the y-axis). This attempts to measure how much a country has eliminated the “glass ceiling.” 

We can broadly split nations into three categories.

Egypt, India, the UAE and Saudi Arabia are notable for having both low female workforce participation and few female CEOs.

Norway, Singapore and France are notable for having both a high share of women in the workforce and a significantly greater proportion of female CEOs than other countries. (To be sure, even in Norway, men account for more than 85 percent of those top jobs.)

Most countries, including the US, cluster together in between those extremes: many women in the workforce, but not so many CEOs.

Chinese tourists are slowly returning to Japan

China’s great reopening is expected to impact many other economies. (See the replay of our recent webinar on the topic for more.)

When we asked Macrobond users to share their 2023 outlooks, several were particularly interested in Thailand, a popular spot for Chinese tourists pre-pandemic. Tourism is so important to the southeast Asian nation that one observer was predicting a big year for the Thai baht.

This chart examines another popular destination for Chinese tourists: Japan. It breaks down Chinese travellers’ spending in their eastern neighbour by category, including hospitality and accommodation. 

It’s easy to spot the three years where China closed its borders to fight Covid. For more than 10 quarters between 2020 and 2022, the tourism spending was nil. Chinese travellers were travelling and spending again in the fourth quarter – but only just.

Fewer blizzards mean more Americans came to work

Here’s a potentially surprising side effect of climate change: fewer “snow days” keeping workers in wintry nations from their jobs. 

The chart tracks how many US workers were prevented from showing up to their jobs due to bad weather. It charts the historical mean over the course of the year. Unsurprisingly, January and February see the most absences.

But this year, just 280,000 workers were affected in January, well below the 450,000 average. 

The mild weather might also be a factor in the biggest surprise from that January jobs report: the labour market’s resilience after a year of monetary tightening. 

PMIs suggest emerging markets will grow while developed markets stumble

The Purchasing Managers’ Index (PMI) is a measure of whether economic contraction is likely, based on whether supply-chain managers are expecting growth to pick up or recede.

This chart shows the Composite PMIs (in blue) for various nations and groups of countries, as well as its subcomponents in manufacturing and services. A reading above 50 means expansion; below 50 means contraction. 

Pulling out some global trends, it emerging markets are expected to expand while developed markets contract. 

China’s reopening is in focus here, as well; expansion is predicted, barely. we can see that World Emerging Markets are expected to expand (PMI  Composite of 51.9 in January), whereas Developed Markets are expected to contract (48.4). Second, China is expected to expand (51.1) following the end of it strict zero Covid Policy. Third, at the extreme, we have India which is expected to have the most robust growth (57.5) and the US which is expected to have the lowest (46.8). The UK are not far from the US (48.5). Finally, this rebound will be mainly driven by the Services (65% are above 50) than the manufacturing (23%).

FTSE 100 peaks and troughs

It took four years, but Britain’s key stock index has started setting records again.

This chart visualises the FTSE 100 through various “eras,” book-ended by market peaks and crises. In retrospect, the 1990s were golden; the benchmark tripled between the “Black Monday” crash of 1987 and the peak of the dot-com bubble. Returns since then are unimpressive. 

The positive run recently might seem at odds with the drip-feed of doom-and-gloom UK news. However, many big multinationals in the FTSE 100 make most of their income abroad (and can benefit in headline terms when profits are converted back into devalued pounds). The FTSE 100 is probably set for more gains if global growth rebounds.

The divergence between the FTSE 100 and smaller companies more exposed to the domestic UK economy is stark. FactSet Market Aggregate data shows that profit estimates for larger companies are being raised by analysts, while being downgraded for small-caps – even as smaller equities remain more expensive on a price/earnings basis.

Capital is flowing into Chinese stocks

Last week, we examined how China’s great reopening was lifting metal prices and prompting the IMF to upgrade Chinese – and global – economic growth forecasts. 

The end of the zero-Covid policy is also encouraging international investors to take a punt on Chinese stocks.

This chart tracks net equity inflows into emerging market equities so far this year. Barely a month into 2023, flows to China are dwarfing the rest.

Recent Chinese economic data releases have been positive, with manufacturing and non-manufacturing indicators suggesting expansion over the next three to six months. 

Conflicting traffic signals for the US economy

US job figures this month showed hiring surged, suggesting the economy is more resilient than many expected. But is there reason to be wary of excess optimism? 

This chart is a visualisation of selected US economic barometers, showing where they stand relative to history in percentile terms.

Bright green areas highlight indicators signaling a low recession risk: financial conditions, consumer confidence and, indeed, employment. 

In fact, all three indicators have improved significantly when compared with six months earlier (the smaller, purple dots). Indeed, the IMF is still forecasting growth of 1.4% for the US this year.

Other indicators are in the red zone, i.e. suggestive of recession – and falling. These include the OECD’s leading indicator, business confidence, and the spread between 10-year and 2-year bond yields (a classic predictor of recession when negative).

Industrial production – moving from neutral to borderline red over the past six months – might be the tiebreaker.

The US job market refuses to roll over

Back to that surprise jobs number, which reflects how tight the US labour market has been despite a string of interest-rate increases.

This chart tracks the ratio of job openings to unemployed people over the past two decades. The latest figure is 1.9 jobs available for every unemployed person – barely below its recent peak. By comparison, even in the mid-2000s economic boom, there was less than one job available for every person searching for work.

This ratio is an important barometer. It could presage long-lasting wage inflation, and, therefore, higher interest rates for longer, even with a weak economy. On Feb. 7, Federal Reserve Chairman Jerome Powell said employment trends suggest the fight against inflation could last “quite a bit of time.” 

Emerging market interest rates diverge

As the Fed hiked interest rates over the past year, emerging markets had to choose whether to follow suit. Their central bankers have taken divergent paths, based on specific economic conditions.

This chart tracks emerging markets by inflation rate (the dots, measured on the left-hand scale) and deviation from their 10-year real interest rate average (the bars). Green and orange dots reflect lower- and higher-than usual inflation, respectively. 

Five countries have higher-than-usual real rates: Brazil, Mexico, Saudi Arabia, Chile and India. (Mexico recently surprised markets with a greater-than-expected hike to control inflation, outpacing the Fed.)

Ten countries have a lower interest rate than their 10-year average: China, Colombia, Peru, Indonesia, South Africa, Vietnam, Malaysia, the Philippines, Thailand and Poland (whose central bank has left rates unchanged for five straight meetings, despite elevated inflation).

With the Fed widely expected to slow the pace of tightening, that means more flexibility for emerging market central bankers, and possibly stronger economic growth for their nations.

Visualising national exposure to the energy crisis in Europe

As we wrote at the start of this year, the EU dodged a energy-shortage bullet. It sourced LNG supply and benefited from an unusually warm winter, meaning gas stocks stayed high even after the Russians shut Nord Stream and the pipeline was later sabotaged.

But it’s worth examining the region’s structural exposure to Russian gas before the war in Ukraine. Dependence differed widely. 

This visualisation – which annualises 2021 figures – shows how much given nations used gas as a percentage of total energy use (the x-axis) and the percentage of Russian supply in gas imports (y-axis). The bubble size reflects GDP.

As ever, Germany stood out, receiving a greater share of its gas from Russia than all but Finland, Latvia and Bulgaria. The Dutch were by far the most exposed to gas prices in general, but imported relatively little from the Russians. (They are now in the midst of a debate on when to close Europe’s largest gas field.)

The chart shows the challenge of weaning Europe off Russian supply following decades where gas was considered a cheap, abundant, dependable and relatively clean alternative to coal. 

A Saudi foreign trade dashboard

Saudi Arabia’s trade breakdown is, perhaps, predictable. It exports petroleum, and imports a wide range of everything else, as our chart shows. 

While the desert kingdom’s leadership has moved to diversify the economy, change is coming slowly. In most categories, the nation is importing more (as measured by value) than it did a year earlier.

However, the value of petroleum products exported has surged 70 percent from a year earlier. As China reopens its economy, that trend could continue.

Over the longer term, a transition to greener economic models that would require less Saudi crude remains a risk – as our dashboard illustrates.

A history of debt ceiling drama

The “debt ceiling” fight dominates US news headlines, as we discussed last week. But does it really affect the stock market? There is evidence that it does.

In theory, if Republicans and Democrats cannot agree on raising the debt limit, the US would be unable to borrow, and thus unable to make some of its payments owed to people and companies. 

This chart examines the performance of a basket of industries deemed sensitive to such a scenario: pharma, biotech and life sciences, healthcare equipment and services, commercial and professional services, and capital goods. 

We tracked the debt-ceiling dramas of 2015, 2013, 2021 and 2011 – the year the clash led S&P to impose its first-ever downgrade of the US credit rating. 

There is a distinct pattern: the “black swan” possibility of a US debt default is seemingly enough to cause our basket to underperform versus the S&P 500 in the ten weeks before the debt-limit deadline. In the weeks after the deadline, there has tended to be a relief rally.

Our European inflation heatmap is finally turning green

We’re revisiting our inflation heatmap for Europe, which breaks down the momentum for price increases month-on-month by country. 

Dark red means the highest inflation; dark green the lowest. The most recent values are on the left side of the heatmap – showing a wave of disinflation is washing across Europe.

That’s in stark contrast to the sea of red when we ran this heatmap in June. Sharp monetary tightening has finally started to tame inflation after it hit record highs. 

The 0.4 percent month-on-month drop for the eurozone in January represents a third consecutive decline.

The Chinese reopening effect

China is reopening, and the International Monetary Fund is adjusting its global growth estimates accordingly.

The chart plots nations based on the IMF’s estimates for real GDP growth this year and the degree of its most recent estimate revision. Put another way. one axis shows whether a country is in recession or expansion; the other shows whether things have improved or deteriorated since the last IMF assessment in October.

China is making the biggest move on the chart, dragging the world economy with it, as it reverses the zero-Covid policy; the IMF’s estimate for world GDP growth was revised upwards to 2.9 percent for 2023.

The UK also stands out; as trade frictions from Brexit and higher interest rates bite, it’s now projected to be the only G7 economy in recession.

It’s also notable that emerging markets as a whole are expected to outpace their developed peers, whose growth rate the IMF projects at an anemic 1.2 percent.

The Russian demographic pyramid

As Russia reportedly considers adding hundreds of thousands of men to the 300,000 mobilised to fight in Ukraine, it’s worth examining the demographic challenge the nation already faces.

This chart breaks down the Russian population by age and sex. The lingering effects of the post-Soviet transition are readily visible: fertility rates – which remain among the lowest in the world – plunged in the 1990s, as seen by the dearth of people in their 20s today. 

And the nation has long experienced high mortality rates from preventable causes, i.e. alcoholism: the male half of the pyramid shrinks rapidly after age 60. The nation is suffering a historic population decline.

Will the Ukraine war have a similar effect on future demographic pyramids? Between combat deaths, emigration to avoid conscription, and delays to family formation, it seems likely, depending on how long the war lasts. 

A renewal of positive growth surprises in Europe

There has finally been a run of good news for European economies and markets. This week, eurozone GDP beat analysts’ estimates, and the International Monetary Fund said Europe had adapted to higher energy costs more quickly than expected. (Those energy costs also turned out to be less catastrophic than feared last summer.)

This chart is a “surprise clock” for the euro zone using data from Citigroup; economic surprises are on the x axis, and inflation surprises on the y axis. A surprise is defined as the divergence between published data and expectations.

The more unwelcome surprises – higher-than-expected inflation – have been steadily trending down for the past 12 months. (Analysts had constantly underestimated inflation in recent years.) 

But with economic growth surprises turning around strongly recently, we are in a bit of a sweet spot for investors as inflation recedes to more standard levels.

Slowing US trend growth since the 1990s

The decade of Bill Clinton’s presidency and dot-com IPOs was a much healthier era for the US economy.

This chart measures “trend growth,” defined as the long-term, non-inflationary increase in GDP caused by an increase in a country's productive capacity. The trend rate of economic growth is the average sustainable rate of economic growth over time. 

This chart breaks down trend growth into four contributing components: labour quality, labour quantity, capital and “Total Factor Productivity” growth – the difference between output growth and growth of all factor inputs, usually labour and capital.

It’s notable that “labour quantity” has been much weaker since 1999. This is linked to demographic change, with fewer prime-age adults working and slower population growth.

Thinking about where rates will be in 2025

This week, the Federal Reserve, European Central Bank and Bank of England all raised their key interest rate. We’re well into a tightening cycle globally, notable for central banks hiking in sync. 

But markets are expecting Europe and the US to be in very different places come 2025.

As our chart shows, for the ECB, the market anticipates that rates in two years’ time will be back where they were earlier this week. However, the US is expected to have a significantly lower key rate than it does today.

For the UK and EU, rates will have to stay higher for longer to restrain sticky inflation. Or so says the market.

For the US, this suggests that inflation will be more easily conquered – or that the Federal Reserve will be fighting a recession. Perhaps both.

Nasdaq has its best start to a year in decades

It’s like a trip back to the golden era of the FAANG. Meta, the former Facebook, just posted its biggest intraday stock jump in a decade. Amazon is at a three-month high. 

The recent performance of tech stocks has pushed the Nasdaq 100 index to its best January in at least 20 years, as our chart shows. This followed a 33 percent decline in 2022. Dead-cat bounce, or a lasting sentiment shift?

Tech layoffs have been in the news, as we wrote last month, but the sector has tended to trade in tandem with perceptions of Federal Reserve policy. As Chairman Powell raised rates, tech stocks were trading at an interestingly low valuation by the end of 2022. This week, Powell said that the “disinflation process has started,” and a less hawkish Fed is being priced in.

Stepping toward a higher US debt ceiling

It’s that time in the US political process again: Republicans and Democrats are tussling over the debt ceiling.

Total public debt has increased to USD31.38 trillion, approaching the statutory debt limit of USD31.4 billion, as our chart shows. 

If this ceiling is not raised and extraordinary measures are exhausted, the U.S. government is legally unable to borrow money to pay its financial obligations – requiring, in theory, a debt-payment default. 

This is, of course, highly improbable, and the debt limit is very likely to be increased again, adding a new “step” to our chart. 

But this theoretical prospect led to S&P’s first-ever downgrade of the US credit rating in 2011 – during a previous debt-ceiling showdown between the GOP and the Obama administration. 

Reawakening demand for metals in China

This chart shows recent price trends for industrial metals. They are broadly benefiting from China’s reopening. 

Zinc, copper, nickel and aluminium are all up at least 12 percent over the past three months. 

Brazil trade surplus is set to shrink

Santos is the busiest container port in Latin America, most famous for exporting coffee, sugar and soy across the world. (It’s also known for the football legend Pele, and his funeral took place in the city last month.)

The ebb and flow of shipments from Santos reflect trends in the global economy – and Brazil’s trade surplus (or deficit).

This chart shows how container flows at Santos are closely correlated with moves to the trade balance, 10 months in the future. Over the short term, we should expect a shrinking surplus in line with the weakening global economy. As the key Chinese market reopens after unwinding zero-Covid, there is scope for Brazil’s trade balance to improve in the medium term.

The evolution of emissions by country

The following charts show how the composition of the world’s carbon emitters has changed over the past 20 years. It’s no surprise to see that China’s industrialisation has been a game-changer; as the US, Japanese and European share shrinks on a relative basis, Asia’s biggest economy now accounts for almost a third of global emissions, more than doubling its proportion since 2003. 

India’s contribution is also of note, rising to 7 percent of global emissions from 4 percent. Overall carbon emissions have increased to 37 billion tonnes from 27 billion tonnes 20 years earlier. 

These trends highlight the importance of US-China climate talks, which resumed late last year. US climate envoy John Kerry said in Davos last week that he was hopeful about a breakthrough.

Dollar Index weakness amid speculation about a less hawkish Fed

King Dollar was one of the main themes of 2022; the Federal Reserve’s rate hikes sent the global reserve currency surging against almost all peers. 

The Dollar Index (DXY) measures the greenback against the currencies of major US trading partners. As the chart below shows, we have had a reversal this year amid increasing bets that the Fed will be less hawkish than some feared. Service and manufacturing PMI indicators are predicting recession. 

There are two notable trends in this chart: 1) before the pandemic, swings in the Dollar Index were not nearly as extreme. And 2) the Japanese yen has been a much bigger factor in the last 12 months than it was previously, when DXY reflected more of a dollar-euro dynamic. (Read guest blogger Harry Ishihara’s recent comments on the Japanese reticence to change course on monetary policy.)

‍The stock market rotates after tech selloff last year

The narrative for equity markets is also changing with perceptions of the Fed’s path this year. Indeed, markets are anticipating the next rate hike will be 25 basis points, rather than a half percentage point. Sectoral trends in the equity market are also consistent with an economy that will not deteriorate as much as some feared.

This dashboard breaks down the market by sector. Interestingly, as we head into a potential recession, traditionally defensive stocks – consumer staples, healthcare and utilities – are underperforming. 

Meanwhile, the pain has stopped, or at least paused, in the world of tech. Communication Services and Information Technology are atop the dashboard – as measured by not just recent performance, but the Relative Strength Index (RSI) and stock momentum relative to the previous 50 days. 

‍A measure of US analyst downgrades is at the highest in 30 years

To be sure, many warning signs for US markets remain. This chart tracks analyst downgrades – often an excellent leading indicator for stock-market underperformance. 

In particular, the chart measures the relative number of earnings-per-share downgrades for US equities versus global equities over the previous 100 days. 

This reflects the fact that leading macroeconomic indicators degraded more quickly in the US than elsewhere.

‍The persistent discount for Russian crude

As Russia persists with its war in Ukraine, so do the sanctions on Russian crude. 

This chart shows the price divergence between the key western European (Brent) and Russian (Urals) crude-oil benchmarks. Starting almost a year ago, when the war began, Russian oil became about $30 a barrel cheaper as the Brent price spiked. (This spread, which has stayed relatively consistent, is tracked in the bottom section of the chart and is near its widest since the start of the conflict.)  

In September, the G7 nations imposed an effective cap of $60 a barrel on the Urals price. 

In December, as the EU banned imports of Russian oil, we showed how Russia turned to India and China to find buyers for all that discounted crude.

‍‍Projecting terminal interest rates

When will central banks stop hiking rates? It’s fair to say that over the past year, that’s been the overarching question in macroeconomics. 

We have revisited this theme several times: in our recap for 2022, we showed how markets no longer expected the Bank of England to out-hike the Federal Reserve, as they did for several months in the second half of the year. (This moment can be seen where the lines on the chart below cross, in about November)

Rather than project the future interest rate curve, this chart purely shows what the market was anticipating the peak policy rate would be over time. After steady increases in tandem over most of 2022, the lines have flattened as concern about inflation eases.

Notably, as recently as a year ago, the terminal rate was seen as zero for the ECB.

‍Time traveling with pivot expectations

Here is a different visualisation of this theme. Rather than tracking how high futures markets expect the peak (or “terminal rate”) to be for various central banks, this chart tracks when markets believe the Fed, ECB and BoE will stop hiking.

Markets have consistently expected the Fed to be the first to stop hiking for most of the past year, but it was still a different world in July: markets expected the Fed would have reached its terminal rate already by now, a full year ahead of the ECB. Meanwhile, expectations that the UK’s central bank would still be hiking in 2024 have faded.

Despite what futures markets are showing, it is notable how many observers remain sceptical that the Fed will be ready to “pivot” in May, as this chart suggests.

‍‍Bah Humbug for more Christmas shoppers

It appears that the cost-of-living crisis – and perhaps concerns about a worsening economy in 2023 – prompted US consumers to hold back last Christmas, as they did the year before.

This chart tracks how December spending compared to its November equivalent over the course of recent decades. There have been surprisingly few Christmas splurges lately. 

While this chart tracks US retail sales, we have noticed disappointing figures in other countries as well.

‍Visualisation of urbanisation

The United Nations calls urbanisation one of four “demographic mega-trends,” along with population growth, aging and international migration. As a nation’s people move to cities, education, income and longevity generally improve.

The visualisation below charts wealth against the urbanisation rate for some of the world’s biggest economies. Population is indicated by the size of the bubble.

We wrote last week about India overtaking China as the most populous country. As this chart shows, India is still far behind China on urbanisation; it is the most notably rural country on the chart.

‍UK public borrowing creeps higher

British deficit spending is creeping back into pandemic-era territory, as our chart shows. (The peak months for the Covid-19 furlough spending and business-support programs are shown in the shaded area on our chart; January is notable as the month when the UK posts a surplus from tax receipts.) 

Public sector borrowing last month was GBP27.4 billion, the highest December figure since monthly records began in January 1993. 

This reflects two main macro themes of 2022: surging interest rates and the energy crisis. The UK spent more to help households with their utility bills, while interest payments to service the national debt soared. 

The rising rate environment is a key factor behind why markets reacted so strongly to former Prime Minister Liz Truss’ scrapped plan to borrow even more. 

India is poised to overtake China as the most populous country

According to United Nations figures released this week, India is probably going to overtake China by population this year.

As our charts show, both nations are currently estimated to have populations of 1.43 billion people. But the trend lines are quite different – as is the demographic breakdown shown in the two charts.

India’s death rate has fallen, life expectancy is rising, incomes have increased, and the birth rate remains high. That means the population is young: more than half of Indians are under the age of 40. The population isn’t projected to start declining (under the UN’s fertility assumptions) until the 2060s.

By contrast, China’s population is aging and has started to decline – a legacy of the one-child policy between 1980 and 2015.

Scepticism about yield curve control in Japan

The Bank of Japan is the last of its peers to maintain negative interest rates. It brought in yield curve control (YCC) in 2016; as the central bank owned half the nation’s bond market, the effectiveness of further quantitative easing was limited. YCC allowed the BoJ to control the shape of the yield curve, keeping short and medium rates close to the 0 percent target, without depressing long-term yields excessively. 

Late last year, Japan surprised markets by widening the acceptable range, as the shaded area of our chart shows, to 0.5 percent. This stirred speculation that a greater policy shift could follow, given the tightening cycle being executed by its global peers.

The YCC was in the news again this week. Amid calls to abandon the policy and restore bond-market liquidity, the Bank of Japan vowed to double down and keep buying bonds, as it had throughout 2022’s inflation-driven fixed-income selloff. The yen declined. 

As our chart shows, 10-year swap rates have started to diverge significantly from the 10-year yield, indicating that the market is questioning the sustainability of this strategy.

Cracks in the US labour market

With US tech industry layoffs in the news, our chart breaks down trends in the nation’s labour market by sector during December. 

To be sure, unemployment remains near a record low. But Fed Chair Jerome Powell is watching closely as he seeks to cool the economy. 

Indeed, as Silicon Valley scales back overly optimistic growth forecasts and some pandemic-era business models were in fact not the “new normal,” technology shed the most workers among industries last month, according to data from Challenger, Gray & Christmas.  

In the No. 2 and 3 spots are financial-services companies and insurers, paring their workforce amid speculation that higher interest rates will result in recession. Health care and energy posted the biggest job gains.  

Nowcasting Germany

Nowcast models aim to “predict” the present, given there is a lag before data becomes available, and keep investors ahead of the curve. Last week, we examined the US and presented the community with a template to examine real-time GDP. 

Now, we turn our attention to Europe’s biggest economy. This Nowcast uses a regression model based on weekly and monthly German data that have been shown to be leading indicators for headline GDP, with a significant correlation – as the chart shows.

These indicators include a truck toll mileage index, the Bundesbank’s weekly activity index, and the well-known IFO business climate survey, among others.

Macrobond users can change any of these input variables to create their own Nowcast. 

Amid Germany’s disproportionate exposure to both China’s slowdown and higher energy and food prices in 2022, our template Nowcasts that the economy shrank 1.15 percent in the fourth quarter. 

‍A scenario for shrinking US inflation that stays above the Fed’s target

This chart aims to forecast US price increases in 2023 using a selection of leading indicators to predict three components of inflation. 

For housing, we used data from Zillow, the real-estate marketplace. For food and beverages, we selected fertiliser prices as a leading indicator. And to forecast the consumer price index (CPI) excluding food and housing, we selected the Atlanta Fed’s business uncertainty survey on employment growth.  

These indicators lead the specified component by 5 to 13 months. 

Based on these historic correlations, and similar trends for the three components, our model predicts inflation will moderate – posting a 4.2 percent year-on-year increase in May 2023. This would be consistent with a recession and weaker oil prices. 

Will this result in a Fed pivot? It’s worth noting that this model shows inflation will still be well above the Fed’s 2 percent target.

‍China increases public investment to support growth

China reported that fourth-quarter GDP increased by 2.9 percent, one of the slower prints in recent quarters. Generally, the nation’s economy was hampered by the lockdowns stemming from the zero-Covid policy in 2022, as well as a property slump. 

Our first chart tracks GDP growth and its components: final consumption exposure, investment and net exports. 

The second chart shows how China has increased public investment during this slowdown to support growth; by contrast, private-sector investment in fixed assets has slowed and was nearly unchanged year-on-year in the fourth quarter.

Watch for these trends to evolve as the zero-Covid policy is relaxed. Observers will be watching whether a domestic growth rebound mitigates headwinds from a US recession.

‍US ISM clock is clearly in the contraction zone

This chart shows a “clock” tracking a year and a half of data from the US Institute of Supply Management (ISM). It presents both the ISM Manufacturing (x axis) and Non-Manufacturing (y axis) indices -- particularly key leading indicators for the US economy over the last 18 months. 

Readings below 50 for either index indicate that a contraction is expected over the next three to six months; readings above 50 indicate that expansion is expected. 

We track both the main indexes and the “new orders” subcomponent, considered the most forward-looking indicator. 

All readings are below 50 – a recessionary signal.

‍Historic trends show US home supply is in line with moderating prices

This scatter chart tracks the historically negative correlation between the supply and price of US homes. The historic average for these two variables is roughly at the centre of the diagonal line.

As one might expect, prices increased in recent years as new supply was constrained in a context of strong growth and low interest rates. 

However, the last six months – as tracked by the dashed line in purple – show how the Fed’s rate hikes are having an effect. (Back in November, we examined the impact on US homebuilding.)

Home prices have moderated sharply, despite a limited supply of homes, and we are more or less back in line with historic trends.

‍The surprisingly modest US stock valuation discount versus peers

This candlestick chart highlights equity valuations across selected markets, using a premium database from FactSet that aggregates companies. (This methodology could be easily used to analyse different equity sectors and investment styles instead.)

For the US, UK, Germany, Switzerland and aggregate measures of the developed and emerging markets, we track price-earnings (PE) ratios against historic median values and percentile ranges since 1999. 

The chart shows the US is trading at only a modest valuation discount, despite growing expectations of a recession. On the other extreme, Germany trades at a significant discount; we have previously discussed the outsized impact of China’s zero-Covid policy and the energy crisis on the European country’s export-driven economy.

‍The British food inflation season lasted all year in 2022

Our final chart measures the seasonality of food inflation in the UK since 2015. Usually, British inflation is in fact not particularly seasonal; the main trend of note is that prices seem to increase in the run-up to Christmas. 

The great exception is 2022: the year of post-pandemic supply chain disruptions, exacerbated by the UK’s departure from the EU’s customs union not long before – and the dislocation to global agricultural and fertiliser markets that followed Russia’s invasion of Ukraine.

Prices for food and non-alcoholic drinks increased for 15 consecutive months, and posted a year-on-year increase of 16.8 percent in 2022 – the biggest annual increase since 1977.

As Britain’s cost-of-living crisis persists, hitting the poorest households worst of all, there was little relief to be had at the grocery store at the end of 2022. 

The most down days for equities since the 1970s

“Worst since 2008” is an oft-used descriptor in the financial world. It might not surprise the reader to learn that, indeed, in 2022 the S&P 500 posted its steepest decline (19.4 percent) since the year of the global financial crisis. 

If we measure the bear market by the number of down days, we have a stronger superlative, as our chart shows. 

As markets digested surging inflation, a tighter tightening cycle than expected, and Russia’s war on Ukraine, the benchmark US stock index had 143 negative trading days in 2022. That’s the most since 1974 – and matches the Great Depression year of 1931.

The World Bank is more pessimistic

The World Bank cut its global economic growth forecast this week and is expecting a more stagnant 2023 as countries tighten monetary policy. As our table shows, the international institution now foresees GDP will increase just 1.7 percent, down from the 3 percent pace it projected in July. (It’s also not ruling out an outright recession.)

The World Bank became only mildly more pessimistic for 2024, perhaps indicating faith in central bankers’ attempt to engineer a soft landing. 

Nowcasting US GDP with Macrobond

Understanding what’s happening in the economy in real time is important. Nowcast models aim to “predict” the present, given there is a lag before data becomes available, and keep investors ahead of the curve. 

Macrobond provides customers with well-known Nowcasts from institutions such as the OECD and the Atlanta Fed. But why not construct your own? 

The following chart was generated from a template we constructed. It gathers time series ranging from industrial production and the labour market to business surveys and financial data. It uses built-in principal component analysis (PCA), together with a vector auto regression (VAR), to estimate real-time GDP. 

Macrobond users can change any of these input variables to create their own Nowcast.

(At the moment, our template is Nowcasting a growth slowdown for the US that stops short of a contraction.)

Growing and shrinking slices of the Eurozone inflation pie

Macrobond now offers pie charts (requires version 1.26). We have applied this functionality to analyse trends for various components of inflation in the eurozone.

Inflation remains elevated overall, posting a 9.2 percent year-on-year gain in December, though that was lower than expected and marked a slowdown for a second consecutive month.

This pie chart is a visualisation of hot and cold categories that make up the Harmonised Index of Consumer Prices (HICP). Prices for some line items in a household budget are rising ever more rapidly, while other spending categories are leveling off. (Here’s a link to a recent heatmap of inflation hotspots, as organised by sector.)

More than 46 percent of HICP components are posting price increases that are below 5 percent and decreasing (the green – and largest – part of the pie), bolstering the argument that inflation is tapering and might result in a less hawkish ECB. But the red tier – components where inflation is above 5 percent and increasing – is almost as large.

Warm winter and preparation help Europe avoid a natural gas crisis

Amid concern that Russia would weaponise gas supplies to Europe, the EU set targets for member states to fill their storage capacity to at least 80 percent by November. (Last year, we published a chart showing how Russian gas shipments were dwindling). Member states turned to the LNG market; some observers were fearful that shortages and rationing could result.

As a result of the EU’s caution and what has turned out to be an unusually warm European winter, gas storage is still above that target level in a month normally known for peak energy demand. As the first chart shows, storage levels were about 83 percent in December, higher than they were at the same point in both 2021-22 and the generally chillier 2020-21.

The second chart, tracking weekly changes to the storage levels over those winters, shows that for part of December 2022, gas storage levels actually increased.

German trade balance remains under pressure on expensive energy

This chart of Germany’s trade balance shows the importance of expensive energy imports to the world’s no. 3 exporting nation. 

The trade balance weakened in October but remained in positive territory. Key German export markets were hit by inflation and supply-chain issues. 

China was still implementing zero-Covid, disrupting trade with another key partner. As the strictness of that policy is unwound, Germany’s non-energy trade balance has potential to improve, but it still faces the possibility of a US-led global recession.

The trade deficit in energy is slowly shrinking, but remains strongly negative as the nation replaces Russian gas with pricier LNG.

Hiring is a vicious circle in the tight US labour market

The post-pandemic US labour market has stayed robust in the face of a historic tightening cycle, with an unemployment rate of just 3.5 percent as of December. 

The following “circle” tracks employers’ search for workers – and how different the trend has been since 2021. It uses CEO surveys from the Conference Board to plot quarterly data points.

The X axis shows the percentage of CEOs that think they will expand their workforce more than 3 percent. The Y axis shows the percentage who feel it is difficult to attract qualified people. 

Both figures soared compared with the pre-2021 period, but have roughly returned to historic averages recently. The resilience of the labour market will be tested in 2023.

Historic bear markets were tougher than this one

As we showed in our first chart, last year was tough for US stocks. But compared with past slumps, the S&P 500’s decline is not especially punishing – yet. Will a US recession make this bear market more historic? 

The chart below graphs the last 60 years of bear markets in terms of both depth and time. Stock markets that peaked in 1956, 1966 and 1980 fell more than 20 percent thereafter, exceeding the 19.4 percent drop in the current bear market. 

After the peak of 1968, the S&P 500 posted a decline of more than 30 percent, as it did after the 1987 and 2020 crashes. The bear markets beginning in 1973 and 2000 approached 50 percent. 

Unsurprisingly, the most extreme move was during the global financial crisis: the S&P 500 fell more than 50 percent during the 15-month bear market that started in 2007.

130 years of history also suggest a recession is not priced in to US stocks

Many observers expect a recession this year as leading indicators in manufacturing and services flash red. Both CEO and small-business confidence are near record lows. But is a recession priced into the stock market?

A historic valuation barometer that may shed some light is the Shiller price-earnings ratio, which can be measured back to 1893. Our chart graphs this historic ratio against a smoothed-out, 12-year moving average. 

One might expect a discount versus the long-term average if we were going into recession. But the latest figure shows a P/E ratio of 28 – a small valuation premium relative to the 12-year average.

Home transactions plunge as Fed hikes stamp on the brakes

As expected, the Fed’s rapid tightening is having a strong effect on the US housing market. (We considered this from multiple angles in October.) 

The effect on transaction volumes has been particularly notable.

This chart tracks home sales in different Fed tightening cycles. Transactions have taken just six months to drop 30 percent – more quickly than in any other cycle over the past 50 years.