Charts of the Week

The level of GDP is what matters for commodities

By Roukaya Ibrahim, Strategist, BCA Research

This chart highlights that commodity prices are more sensitive to the level of GDP than the growth rate. 

The shaded regions refer to periods during which the G20 Composite Leading Indicator (CLI) is above 100. This indicator is designed to capture fluctuations in economic activity around its long-term potential level and provide a six-to-nine-month lead on business cycle turning points. A value above (below) 100 corresponds with expectations that the level of GDP will be above (below) its long-term trend. Meanwhile, a rising (falling) CLI implies that GDP growth is anticipated to accelerate above (decelerate below) long-term trend growth.

The chart reveals that energy and industrial metal prices typically rise on a year-over-year basis when the level of GDP is expected to be above its long-term trend, regardless of whether the CLI is rising or declining. This result is intuitive given that, ceteris paribus, an above-trend GDP level likely corresponds with an above-trend level of commodity consumption. 

Moreover, prices of these commodities generally decline during periods when the CLI is below 100, regardless of whether the CLI is rising or declining. This implies that commodity prices typically fall on a year-over-year basis when the level of GDP is expected to be below its long-term trend. Again, this result makes sense given that a below-trend level of GDP implies that the level of commodity consumption is also relatively weak. 

A reality check on China’s corporate profits

By Jing Sima, China Investment Strategist, BCA Research

After a two-and-a-half-month rally, Chinese stock prices are now aligning with the country’s subdued economic fundamentals.

Credit and money supply data remain downbeat despite recent measures to support the property market. The ongoing descend in money growth confirms that business activity remains weak, suggesting that corporate earnings will deteriorate over the next six months.

Without an improvement in corporate profits, Chinese stocks are unlikely to sustain rallies beyond two to three months.

How far is “far right” in Europe?

By Marko Papic, Chief Strategist, BCA Research

French politics has given global investors agita as they scramble to make sense of the trajectory of the country’s fiscal and geopolitical policy. Many still harken back to the Euro Area sovereign debt crisis when Euroskeptic policymakers – including Marine le Pen – roamed the continent, threatening to blow up the monetary union. However, this is a long gone era. The reason that Le Pen’s National Rally (RN) has found success is because her popularity is no longer capped by her Euroskepticism. Since the 2017 presidential election, Le Pen’s popularity has finally broken through the glass ceiling she imposed on herself by sticking to the maximalist anti-EU message. Much as with almost all of the anti-establishment parties on the continent, RN is today only “far” right on the issue of immigration. 

Misconception of Chinese household savings vs. consumption

By Jing Sima, China Investment Strategist, BCA Research

The belief that large bank savings by Chinese households will support consumption is misguided. Historically, changes in household bank deposits in China have shown little correlation with spending.

Unlike US consumers, Chinese households did not receive direct cash transfers from the government during and after the pandemic. The sharp rise in bank deposits since 2018 is due to asset reallocation rather than increased savings from household income. Although the total household bank deposits have more than doubled, most of this increase is in time deposits (savings accounts and CDs). Checking account balances have remained almost unchanged over the past decade.

To sum it up: even though Chinese households have accumulated more bank deposits in recent years, much of this is held in savings accounts by wealthier individuals, who have a low propensity to spend. Therefore, household savings are unlikely to drive significant growth in consumption.

Korea’s export recovery in perspective

By Arthur Budaghyan, Chief EM/China Strategist, BCA Research

Even though Korean exports have rebounded, most of this recovery has been due to semiconductor exports. After collapsing in early 2023, semiconductor overseas shipments have surged. Korea is producing high-value-added memory chips, and demand for these has surged in the past 12 months. 

Excluding semiconductor exports, exports have improved only marginally. This and other global trade data suggest that the global trade recovery has been primarily driven by surging demand for AI chips and improvement in US imports/domestic demand. Outside these, there has been a little recovery in global exports.

Why have EM stocks underperformed?

By Arthur Budaghyan, Chief EM/China Strategist, BCA Research

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There is a reason why global equity investors have been moving out of EM stocks for several years. EM and Emerging Asian EPS in US dollars have been flat for 13 years, with considerable cyclicality. Investors do not pay high multiples for profits that have not grown at all but have experienced considerable cyclical fluctuations.

By contrast, US EPS has been growing rapidly with reasonably low volatility. That is why equity investors have been abandoning EM and flocking to US stocks. Hence, for EM equities to enter a structural bull market, their EPS should grow reasonably fast with low volatility. For now, EM and EM Asia EPS are still contracting.

Underlying inflation is slowing

By Mathieu Savary, Chief European Investment Strategist, BCA Research

Despite recent hiccups in core and services CPI, the Eurozone’s underlying inflation remains consistent with rate cuts by the European Central Bank (ECB). Trimmed-mean CPI now seats below core CPI, while supercore CPI and PCCI are still well behaved. These observations suggest that the ECB will not be stopped in its track and will cut rates more this year.

How much more though? Inflation is not really the constraints on the ECB today. Growth is. The European credit impulse is picking up from depressed levels, real wage growth is above 2%, and global trade has regained some vigor. Consequently, the ECB risks boosting growth too much if it starts easing policy aggressively. This would generate inflationary pressures down the road. As a result, the ECB will move in line with the pricing of the €STR curve and it will cut rates twice more in 2024.

Biden's odds plummet as Trump takes lead in presidential race

What the chart shows:

This chart from PredictIt illustrates the fluctuating odds of various candidates winning the 2024 presidential election, based on betting market data. As of July 5, 2024, Donald Trump leads at 58 cents per share with approximately a 58% chance, while Joe Biden's odds have dropped to 23%.

Behind the data:

This significant shift in Biden's odds coincided with the first presidential debate on June 27 in Atlanta, Georgia. The debate performance sparked concerns among both Democrats and Republicans about Biden's fitness for a second term, particularly due to his age (he would be 86 by the end of his potential second term.) This has led to increased speculation about alternative Democratic candidates, with California Governor Gavin Newsom and Vice President Kamala Harris seeing their odds rise to 22% and 6%, respectively. The coming weeks will reveal whether Biden's debate performance has a lasting impact on his re-election prospects. 

US job market faces pressure as downward revisions signal potential slowdown 

‍What the chart shows:

This chart shows the revisions to US nonfarm payrolls (NFP) from 2021 to the present, highlighting the differences between initial release estimates and the latest adjustments. The green areas indicate periods where revised data showed higher job additions than initially reported, while the red areas show periods where job additions were revised downward. The dotted line represents the non-recessionary average of 157,000 new hires per month.

Behind the data:

Despite monetary policy restrictions, the US job market has shown resilience, reflected in the better-than-expected NFPs in several months over the past quarters and years. NFPs have also consistently exceeded the non-recessionary average since early 2021. However, since 2023, there has been a downward revision trend (red areas) with only occasional upgrades (green areas), a contrast to the more frequent positive adjustments seen in 2022. The upcoming {{nofollow}}release for June (scheduled for 5 July) will be closely watched, with expectations of a slowdown to approximately 180,000–190,000 job additions.

Elevated US debt burden poses risks to future economic stability

What the chart shows:

This chart displays the US debt ceiling and the current debt levels from 1995 to the present. The blue line represents the total public debt subject to the limit, while the red and green areas show the periods when the debt was above and below the statutory limit, respectively. The grey bars indicate US recession periods.

Behind the data:

The US debt ceiling, a limit set by Congress on the amount of federal debt, has been a critical issue. The debt limit of $31.4 trillion has been suspended from June 2023 to January 2025, when Congress must raise it or risk a default on its debt, following the November 2024 presidential election. The {{nofollow}}suspension aims to prevent a catastrophic default that could freeze financial markets, potentially wiping out trillions of dollars in household wealth and negatively impacting economic activity and employment conditions. Recently, the IMF warned of the {{nofollow}}adverse consequences of high debt levels, such as higher fiscal financing costs and rollover risks. 

Record yield curve inversion continues without a recession

What the chart shows

The top section illustrates the spread between 10-year and 2-year Treasury yields since the 1970s, with periods of inversion (where the 2-year yield is higher than the 10-year yield) highlighted in red. The bottom section quantifies the number of consecutive trading days the yield curve has remained inverted, which is often considered a predictor of economic downturns. 

Behind the data

Historically, an inversion between the 2-year and 10-year Treasury yields has been viewed as a warning sign of an economic downturn. However, this time, it appears to be an exception – for now. As the chart shows, July 2024 marks the 24^th consecutive month of yield curve inversion without a recession, the longest streak on record. This is comparable to the 1970s when the US faced high inflationary risks and thus high policy interest rates. Similarly, the current period has seen a prolonged inverted yield curve, though there are hopes for avoiding a recession. 

As monetary policy enters an easing cycle, the 2-year bond yield—more closely tied to the Federal Funds rate—could be more vulnerable to downward pressure than the 10-year bond yield. This could result in a reduced yield curve inversion or even a return to a normal upward-sloping shape for the US Treasury yield curve. Economic conditions that normalize over time would also contribute to this shift.

S&P 500 seasonality suggests stronger returns at start of July 

What the chart shows

This chart depicts the seasonality of the S&P 500 index since 1928 by comparing the performance of the first (left dashboard) and last 10 (right dashboard) trading sessions of each month. It shows the average return, median return and the percentage of time the index was up during these periods. The chart also includes the standard deviation of returns to indicate the volatility and the distribution of returns within specified ranges. 

Behind the data

Focusing on the first 10 sessions of the month, July stands out with the strongest historical returns with a mean of 1.55% and a median of 2.07%. More so, across the first 10 trading sessions of the S&P 500 in July since 1928, returns have been positive 72% of times.

Looking at the last 10 sessions of the month, December stands out with a mean of 0.99% and a median of 1.15%. Returns have also been positive on 75% of occasions.

US dollar defies expectations with strong gains in 2024 

What the chart shows

This chart shows the contributions of various currencies to the changes in the US Dollar Index (DXY) since the start of 2024. Each color represents a different currency, with the height of each segment indicating its contribution to the overall index's performance. 

Behind the data

2024 began with consensus expectations of a weaker US Dollar due to stretched valuations. However, nearly halfway through the year, the dollar index (DXY) has gained around 4.4% year-to-date, raising questions about whether the consensus has changed.

The case for a weaker dollar in 2024 was based on deteriorating fiscal and trade deficits and a narrowing interest rate differential with other major economies. As the year unfolded, resilient growth and slower progress on inflation in the US pushed back rate cut expectations.

Meanwhile, other major central banks embarked on monetary policy easing ahead of the Fed. Consequently, as shown in the chart, the greenback gained broadly against all the currencies in the DXY. While long-term fundamentals still indicate that the dollar is richly valued, higher-for-longer rates in the near term could continue to support a stronger-for-longer dollar.

Crypto market declines despite Bitcoin ETF boost 

What the chart shows 

The chart displays the recent drawdown dynamics of the 16 biggest cryptocurrencies by market capitalization, indicating the percentage decline from their previous peak values. We can see significant declines across the various cryptocurrencies, with some experiencing drawdowns of over 80%.

Behind the data

During the spring, the crypto market experienced euphoria after the U.S. Securities and Exchange Commission approved the first 11 Bitcoin spot ETFs in January 2024. Following this approval, many cryptocurrencies soared significantly. However, once Bitcoin entered a stable period, many of its peer coins declined.

Recently, there have been drastic drawdowns in meme-inspired coins such as Dogecoin and Shiba Inu, as well as in some notable projects like Cardano, Avalanche and Ripple, all of which have dropped by around 80% from their peaks. Polkadot's situation is particularly concerning, as it approaches an all-time low despite its technical promise and robust development community.

On the other hand, the relative stability of Bitcoin and Tether during this period reaffirms their positions as more reliable assets within the cryptocurrency ecosystem. Toncoin's rise to an all-time high amidst this turbulence is intriguing and suggests that investors are still seeking new opportunities with perceived strong potential.

US unemployment rate breaks historic low streak

What the chart shows

This chart shows the US unemployment rate and the number of consecutive months it has remained below 4%. In the top pane, the red line shows periods when the unemployment rate is below 4%; the blue line represents the rate at above 4%. 

The bottom pane represents the number of consecutive months the unemployment rate has remained below 4%.  We can see that the most recent streak has just ended, marking the longest such streak since 1970. The only other time the rate stayed below 4% for a longer period was in the 1950s. 

Behind the data

Throughout history, there has been a trend that once the unemployment rate breaks a long streak below 4%, a recession follows. This was true in 1949, 1953, 1957, 1970, 2001 and 2020. We have also seen that once the jobless rate rises above 4%, it often spikes much higher (see 1953 and 1970). Given that ‘maximum employment’ is one of the Fed’s two mandates, we can expect the central bank to be watching this statistic closely. 

China may need substantial RRR cuts to stimulate financing

What the chart shows

The scatter plot illustrates the relationship between China’s reserve requirement ratio (RRR) for large banks and the growth of total social financing (TSF) since 2014. The chart includes not only actual observations but also fitted values along with their standard deviation bands derived from a simple regression of the TSF on the RRR.

Behind the data

The Chinese economy faces significant challenges. The property market’s recovery has been sluggish, as evidenced by increasing clearance times, despite authorities implementing policies {{nofollow}}to bolster the market. Meanwhile, credit activity is contracting and may require substantial support. One potential tool is reducing the RRR. Our analysis suggests that for the TSF to grow by approximately 10% compared to last year, large banks’ RRR might need to be cut by around 150bps, or over 100bps more than the current rate. Although additional RRR cuts have not yet occurred in Q2 2024, the People’s Bank of China (PBoC) has previously indicated {{nofollow}}room for further easing. There remains hope for increased credit activity in China.

Market volatility clusters around major events 

What the chart shows

The blue line represents the price return of the S&P 500 over time on a logarithmic scale, with data starting from 2000. The green dots mark the top 40 best-performing days of the index, measured by daily percentage return. Conversely, the red dots indicate the top 40 worst-performing days.

Behind the data

Days of high volatility, both upward and downward, tend to cluster around major global events. For example, 39 of the 80 most volatile days occurred between 2008 and 2009, at the peak of the global financial crisis. Another cluster of volatility occurred around the COVID-19 pandemic shocks. This seems to confirm what we’ve always sensed: that significant market swings often continue over a period of time following major events. 

Global real estate crisis leaves REITs struggling 

What the chart shows

This visualization shows the annual performance rankings of real estate investment trusts (REITs) in 10 selected countries over the past eight years. 

Behind the data

With the rise of the Magnificent 7 (the group of seven leading tech companies known for their strong performance), alternative investments like REITs have faded into the background. A real estate crisis is looming in many parts of the world and REITs have not provided sufficient returns since last year. 

As our ranking shows, only Australia’s real estate sector has not experienced losses in 2024 so far. The most severe situations are in Canada, China and Italy, which are all struggling with ongoing real estate crises.

Shift in IT sector: Market capitalization of semiconductors exceeds that of software

What the chart shows:

The chart compares market capitalization of 3 subsectors of S&P 500 Index: hardware, software and semiconductors.

Behind the data:

The rapid development of AI-related technologies over the past two years has led to a sharp surge in demand for semiconductors, significantly increasing the size of the entire industry. In December 2023, the market capitalization of semiconductor manufacturing companies in the S&P 500 index exceeded that of hardware companies. By May 2024, the skyrocketing value of Nvidia allowed the semiconductor sector to surpass the entire software industry, which has traditionally been the largest subsector in the S&P 500 IT Index.

Although recent fluctuations in Nvidia's stock prices have had a significant impact on the semiconductor industry, it still remains substantially larger than the software sector.

Pure growth stocks lead market gains amid strong US manufacturing

What the chart shows

The chart illustrates the S&P 500’s year-to-date performance by style and strategy—equal weighting, pure growth, pure value, high beta and low volatility—compared to the US S&P Global Purchasing Managers’ Indices (PMI).

Behind the data

The figure indicates that the S&P 500 index has predominantly been influenced by {{nofollow}}pure growth, driven by factors such as sales growth, the ratio of earnings change to price, and momentum. This growth trend aligns with AI narratives, exemplified by {{nofollow}}Nvidia’s recent upbeat sales growth, where Nvidia stands out as one of the S&P 500’s significant contributors. 

In contrast, other styles and strategies have performed less favorably. Interestingly, {{nofollow}}high beta performance has lagged behind pure growth. This discrepancy may be attributed to shifts in calculated beta coefficients over the past year, affecting the classification of certain equities as high beta.

Moreover, the S&P 500 index, its pure growth component, and overall stock performance this year seem relatively aligned with the US S&P Global PMI, as they rally when the PMI rises or is in expansion. Therefore, PMI anticipations might be helpful in this regard as well.

ESG funds see renewed investor interest 

What the chart shows

The chart uses data from EPFR to compare the total number of ESG funds versus net flows, i.e., the difference between the amount of money being invested in and withdrawn from these funds. It provides insights into the growth trajectory of ESG funds on a global scale since 2014.

Behind the data

At the beginning of 2019, there were around 300 operating ESG funds. By January 2024, this number surged to over 1,800, highlighting substantial and rapid growth in the availability of investment options dedicated to ESG principles. This reflects the increased investor interest in sustainable and socially responsible investing in the wake of the pandemic.

However, the net flows tell a more nuanced story. The peak of ESG-oriented investing occurred around January 2021, after which asset owners and portfolio managers began withdrawing assets from ESG funds, possibly due to economic uncertainty and growing scrutiny over the actual impact of green investments.

Recently, there has been a new spike in net flows. Could this signal a revival in ESG? 

US air travel busier than ever

What the chart shows

The US {{nofollow}}Transportation Security Administration (TSA) tracks the number of travelers scanning their boarding pass with a TSA agent each day. This chart depicts the checkpoint numbers from 2019 to 2024, represented as a seven-day moving average. The figures for 2023 (red) were closely aligned with the pre-pandemic levels of 2019 (green). We can see that 2024 (burgundy) has so far surpassed both years.

Behind the data

The growth in US airport passenger traffic this year suggests a continued recovery in business travel, which in turn should boost demand for hotels and the hospitality sector in general. 

In fact, on 24 May, the TSA revealed it had screened more than 2.95 million airline passengers, setting a record for a single day. Moreover, five of the 10 busiest travel days on record have occurred since May 16 this year.

US manufacturing shows mixed signals as large firms shrink and smaller firms grow

What the chart shows

This chart compares the performance of the US Purchasing Managers’ Indices (PMI) from both the Institute for Supply Management (ISM) and S&P Global since the global financial crisis, highlighting the gap between the two indices as well as average and standard deviation bands. The chart also shows their individual components—new orders, production or output, employment, supplier deliveries, inventories—with different weightings. 

Behind the data

Broadly speaking, the ISM and S&P Global manufacturing PMIs and their components appear relatively aligned over time. However, upon closer examination, discrepancies emerge. The {{nofollow}}US ISM Manufacturing PMI in May remained in contraction, albeit with a smaller magnitude than in 2023, primarily due to declining new orders. Yet, its employment and production components showed slight expansion. In contrast, the {{nofollow}}US S&P Global Manufacturing PMI in May continued to grow, driven by all components, especially output and employment.

When {{nofollow}}comparing ISM and S&P Global PMIs, it’s noteworthy that the ISM survey focuses more on public, larger and multinational firms, while the S&P Global survey covers private, smaller and domestically-oriented companies more comprehensively. As a result, the ISM index’s contraction and the S&P Global index’s expansion lately may reflect broader expectations of a more robust US economy relative to major global peers. Empirical evidence also suggests that the ISM-S&P Global PMI gap is already quite low at the current level of around -1 standard deviation.

US commodity prices surge as cocoa hits record highs

What the chart shows

We have developed a comprehensive commodities heatmap for the US based on the HWWI Commodity Price Index, which tracks year-over-year percentage changes in a basket of 31 raw materials categorized into three major groups: energy, food and industrials. The blue shaded areas represent price decreases and yellow to red shades indicating price increases.

This heatmap, available for 44 developed and emerging markets (mostly OECD member economies), provides valuable insights into global commodity trends. It is integrated with Macrobond’s “Change region” function, which allows users to easily explore the same visual representation for any country of interest.

Behind the data

The US commodities market appears to be heating up again, with prices rising by more than 10% compared to the same period last year. Among industrial commodities, non-ferrous metals rose by more than 13% and rubber by more than 25%. In the food category, cereals are decreasing, even though rice prices are rising globally amid weather issues and India’s export curbs. The most obvious outlier is cocoa. Prices have soared primarily due to adverse weather conditions in major cocoa-producing regions such as West Africa, which have disrupted supply. Additionally, political instability and labor strikes in these areas have further constrained production.

German inflation accelerates across most federal states

What the chart shows

The visualization depicts Germany's annual inflation rate, both as a national average and broken down by federal state. The data is ranked according to May’s figures and includes a visual comparison with the previous month’s data. This highlights the variations in inflation rates across different regions, offering a clear perspective on how inflation trends have changed from April to May.

Behind the data

The data reveals significant variation in inflation rates across Germany's federal states. Saxony and Saarland have the highest inflation rates while Berlin and Hesse show the lowest. This disparity highlights regional differences in economic conditions and cost pressures. Additionally, the comparison of inflation rates between May and April 2024 indicates that most states have seen an increase in inflation, suggesting a broader upward trend in prices.  

Global markets show diverging risk-adjusted returns

What the chart shows

The chart compares Sharpe ratios (SRs), or risk-adjusted returns, across major developed-market (DM) and emerging-market (EM) stock indices: the latest one-year and three-year rolling SRs using all available data. Each box plot represents the distribution of SRs for an index, including the median, mean, interquartile range and 10th-90th percentile range. 

Behind the data

The data indicates significant variation in risk-adjusted returns across different markets. On the optimistic side, considering one-year rolling SRs for short-term perspectives, the SRs for Nikkei 225, Nifty 50, TAIEX, and S&P 500 continued to markedly top their long-run central values while softening from extreme highs one year ago. Looking at three-year rolling SRs for longer-term viewpoints, most remained above long-run norms, with the S&P 500 SR closer to its historical standard levels. On the pessimistic side, CSI 300 SRs—either one-year or three-year rolling—appeared relatively well below its central statistics. Meanwhile, Ibovespa’s one-year or three-year rolling SRs declined noticeably over the past year.

Emerging markets show varied correlation with S&P 500

What the chart shows

The chart shows the five-year rolling weekly return correlations between MSCI Emerging Market Indices by country and the S&P 500, as of the most recent data, six months ago, and one year ago. It also illustrates the long-run correlations with a 15-year lookback period.

Behind the data

The S&P 500 is one of the most predominant stock indices in the global equity market, influenced by the world’s largest corporations, AI prospects, the Fed's stance, and market expectations. It is worth exploring the degree to which this market is correlated with emerging markets (EMs) that may be {{nofollow}}prone to global spillovers.

The South Korean, South African, Brazilian and Indian stock markets appear more associated with the S&P 500 than their EM peers. These markets exhibit their latest five-year rolling weekly return correlations of above 0.6, which are higher than six and twelve months ago and surpass their long-run averages. Meanwhile, Mexico's equity market, among the aforementioned markets, retains a higher long-term correlation with the S&P 500 than its EM peers, although it has been lower over the past year.

In contrast, the Egyptian and Qatari stock markets show much lower correlations with the S&P 500, with five-year rolling return correlations below 0.3 – close to their long-term values. Over the past six and 12 months, the relationship with US equities has softened for Egypt while it has strengthened for Qatar.

Falling birth rates and aging populations pose risks to global economies

What the chart shows

This chart shows the expected change in fertility rates (the average number of births per woman) for various regions and countries since 1960. The red dots depict the rate in 1960, while the blue dots represent World Bank forecasts for 2024. 

We can see a significant decline globally, from 4.7 to 2.3, with countries such as Iran, Brazil and South Korea experiencing the biggest decrease. Many of these countries now have a total fertility rate (TFR) of less than 2.1, the replacement level for maintaining a stable population in most developed countries. (Nearly half of the global population lives in countries where the TFR is already below 2.1, according to {{nofollow}}data from the UN.)

Behind the data

Global population growth is becoming more concentrated, with more than half of the projected increase between 2022 and 2050 expected to come from just eight countries: the Democratic Republic of the Congo [DRC], Egypt, Ethiopia, India, Nigeria, Pakistan, the Philippines and the United Republic of Tanzania, according to the UN. 

With people living longer as birth rates decline, the implications are profound. Countries with declining fertility rates must adapt their retirement systems, healthcare and labour markets to support an aging population, while countries experiencing higher population growth need sustainable development, education investment and infrastructure to support young populations and drive economic growth.

Covid-19 and economic shifts challenge inflation predictions 

What the chart shows

This chart compares the US Core Personal Consumption Expenditures (PCE) inflation rate (which excludes food and energy prices) with market expectations as projected by the Survey of Professional Forecasters from the {{nofollow}}Federal Reserve Bank of Philadelphia.

We can see that Core PCE rose significantly from mid-2020, peaking in early 2022, before declining towards 2024. We can also see how markets initially underestimated the rise in inflation during 2021 and 2022 before converging closer to the actual trend as new data became available.  

Behind the data

Since the start of the Covid-19 pandemic in Q1 2020, America's top economists frequently predicted that the year-on-year rate of Core PCE inflation would fall (the dotted lines), only to see inflation rise before a smaller-than-expected decrease (or rise some more). There has been a long-running tendency for observers to declare premature deaths for the current inflationary cycle. After the worst of the pandemic, Core PCE has steadily diminished to 2.8% in the year to Q1 2024, but still surpasses forecasters' expectations.

The key takeaway from this is that markets have been slow to embrace the notion of higher-for-longer inflation. Forecasting inflation is challenging in normal times and even more difficult when structural mega forces, cyclical forces and pandemic distortions are at play. This chart underscores the challenges in predicting inflation trends and the importance of continuously updating forecasts as new economic data emerges.

US bond returns improve amid high yields 

What the chart shows

This chart categorizes the annual total returns of the US 10-year government bond from 1962 to 2024, taking into account capital gains or losses as well as coupons. The years are organized based on the percentage change in bond returns – from less than -20% to over 30%. Each block represents a specific year within these return ranges, illustrating the variability and trends in bond performance over time

Behind the data

We can see that over the last 62 years, the US 10-year government bond has experienced a wide range of total returns. Exceptional total returns exceeding 30% in the early 1980s were driven by high interest rates and their notable declines, while inflationary pressures and rising interest rates marked a period of negative returns in 2022. 

As of 2024, total return has fallen to the -5 to 0% range, weighed down by relatively higher bond yields influenced by inflationary risks and the Fed’s rate-cut pushbacks. However, these higher yields also provide larger cash flows that can offer some support to bond investors.

Credit spreads remain tight while lending conditions peak in US and euro area

What the chart shows

The chart shows option-adjusted spreads (OAS) for investment grade (IG) and high yield (HY) credit, providing a measure of credit spreads over government bond yields, in the US and euro area from 2003 to present. It tracks the OAS long-run medians, interquartile ranges and 10^th-90^th percentiles. It also compares these spreads to the lending conditions for larger and smaller firms as reported by the Federal Reserve and the European Central Bank (ECB).

Behind the data

In both the US and euro area, credit OASs remain broadly tight, close to the lower bounds of their interquartile ranges, albeit restrictive lending criteria. In the US, which relies more on {{nofollow}}capital market-based financing than the eurozone, credit spreads have shown resilience through monetary tightening. 

Conversely, in the eurozone, which depends more on traditional bank financing, the IG OAS has been less tight relative to its percentile bands, likely due to more pessimistic economic conditions earlier on. However, it has {{nofollow}}tightened over time as economic outlooks have improved.

Meanwhile, bank lending standards in both economies seem to have peaked and are levelling off towards a potential monetary easing cycle, which is more evident for the ECB than the Fed. However, they are still tighter than usual due to prolonged monetary restrictions. These could ultimately reduce adverse pressure on credit spreads and activity.

US stocks streak to new highs as global markets rally

What the chart shows

The chart shows the performance of the S&P 500 over time, highlighting periods without a 2% drop over consecutive days. The upper pane shows the price return of the index (navy line) alongside instances of new all-time highs (purple columns.) The lower pane displays the number of consecutive days without a 2% drop, emphasizing the current streak compared to historical patterns. We can see that up until at least June 13, 2024, the S&P had not experienced a 2% drop in 322 days, the longest streak since 2017-2018. It's also noteworthy that the S&P 500 has set 24 new all-time highs in 2024 after two years without one.‍

Behind the data

From New York to London to Tokyo, the world's major equity markets are experiencing all-time highs. Among the world's 20 largest stock markets, 14 have soared to records recently, driven by several factors including $6 trillion sitting in money market funds. Looming interest rate cuts, healthy economies and strong corporate earnings are sustaining the rally. Even when global stocks pulled back in April, dip buyers consistently showed up, a sign of market confidence.

Tech stocks drive upward trend in equity indexes amid AI boom

What the chart shows

The chart shows the 12-month forward price-to-earnings (P/E) ratios for different sectors within the MSCI World Index over the past 10 years. The upper pane displays the forward ratios for each sector, while the lower pane shows them excluding each respective sector. This highlights the impact of each sector’s valuation on the overall index. 

Behind the data

Mainly driven by plausible global recession avoidance and AI narratives, equity indices—especially in technology—have trended upward over the past year. Consequently, valuation measures like P/E ratios have risen significantly, particularly for the Information Technology (IT) and Communication Services sectors, compared to their historical percentiles (upper pane). 

Higher tech P/E valuations have become even more pronounced when excluding industry by industry, recently surpassing the 75th percentile (see the lower pane across sectors except IT). However, the latest forward P/E ratio excluding IT remains reasonable and below the long-term average (see the lower pane). Given these factors, broad-equity investments may still be viable, with potential for further soft-landing scenarios and ongoing market optimism.

Global debt and interest rates reveal fiscal challenge

What the chart shows 

The chart presents a comparative analysis of cross-country government debt to GDP against 10-year government bond yields and their volatilities. It includes data for both advanced economies and emerging and developing economies, with each country's position depicted by a bubble. The size of the bubbles indicates the bond yield volatilities, measured on a daily, annualized basis, with a 3-year look-back period.

Behind the data

Government debt has been higher relative to economic output across advanced economies and emerging and developing economies. Meanwhile, we may have been shifting to a world of higher interest rates—in both nominal and real terms—and higher inflation compared to pre-pandemic periods. This is due to certain structural issues, such as deglobalization, supply chain relocations and {{nofollow}}sizeable government spending.

In this chart, Japan stands out. Its debt exceeds 250% of economic activity but manages to maintain low interest rates and low volatility thanks to the Bank of Japan’s (BoJ) yield curve control (YCC). 

The US and European countries follow, with their debt levels exceeding 100% of GDP, accompanied by elevated levels and greater volatilities of nominal interest rates. Among developing countries, Egypt is notable for having larger debt and higher long-term interest rates.

Moreover, economic growth outlooks could resume potential trends more closely, which have been relatively lower over time across countries. Accordingly, this government debt data suggests that long-run {{nofollow}}fiscal risks, in terms of sustainability, are among the macroeconomic challenges that policymakers and investment professionals continue to face.

Immigration into UK slows despite surging non-EU inflows 

What the chart shows

This chart illustrates net long-term immigration to the UK from 2011 to 2024 as a rolling 12-month estimate, broken down into three categories: Non-EU, EU and British. While immigration slowed in 2023, inflows continue to be significantly higher than historical averages. Most immigrants (+797,000) came from non-EU countries, while net migration was negative from EU countries (-75,000) and British nationals (-37,000). 

Behind the data

As the UK prepares for the polls on 4 July, immigration remains a key socio-economic issue. Official data released on 23 May indicated that net immigration to the UK slowed to 685,000 in 2023, with work replacing study as the primary motivation for immigrants. 

Additionally, these estimates have been revised upwards from previous figures. The peak net migration for Q4 2022 was adjusted to 764,000, and the net inflows for Q2 2023 were revised up by 68,000 to 740,000. This upward revision highlights the sustained high levels of immigration the UK is experiencing, driven mainly by non-EU nationals seeking employment opportunities in the country. As immigration continues to shape the socio-economic landscape, it will undoubtedly influence voter sentiment in the upcoming elections.

Chinese cities face property glut amid sluggish recovery

What the chart shows

This chart provides a detailed view of the real estate clearance time in China, segmented into Tier-1 (economic powerhouses such as Beijing, Shanghai, Guangzhou and Shenzhen) and Tier-2 cities. Clearance time is a critical metric in the real estate market as it indicates the number of months required to sell the current inventory of properties. 

Behind the data

The clearance time in Tier-1 cities has fluctuated significantly over the years, and since 2022, it has risen steadily, suggesting a slowdown in property sales possibly due to economic uncertainties and stricter regulatory measures.

By comparison, Tier-2 cities generally have longer clearance times, reflecting less dynamic market conditions. The trend in these cities has been more stable, with gradual increases over time. However, like their Tier-1 counterparts, Tier-2 cities have also experienced an increase in clearance times since 2022. This slowdown across both types of cities highlights a sluggish market recovery in the wake of the pandemic, which is also evident in the decline of property transaction values relative to GDP.

Stocks and bonds move in sync as inflation uncertainty looms

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What the chart shows

This chart illustrates the relationship between stock market performance, bond market volatility and inflation uncertainty. It overlays the MOVE Index (a measure of bond market volatility), the S&P 500 Index, and the Economic Policy Uncertainty (EPU) Index, highlighting recent trends and correlations.

Behind the data

US Treasury yields serve as the benchmark for all borrowing rates, including those for corporate debt and consumer credit cards. A {{nofollow}}relaxed bond market is essential for economic activity and the overall health of all markets.

Since late 2021, US stocks—by means of diversification in particular, as represented by the {{nofollow}}S&P 500 Equal Weight Index—have been relatively aligned with overall US Treasury implied volatility, as measured by the {{nofollow}}MOVE Index. Additionally, further softening in bond volatility observed since last year may favour stock market strength (see upper pane).

The alignment between the S&P 500 Equal Weight Index and the MOVE Index underscores the influence of bond market conditions on stock performance. Lower bond volatility typically results in lower borrowing costs, providing a supportive environment for corporate investment and consumer spending, which in turn can bolster stock prices.

However, there remains a possibility that inflation uncertainty persists. This is proxied in the chart by the Inflation Equity Market Volatility (EMV) Indicator, which shows approximately a 0.7 five-year rolling correlation with the MOVE Index (see lower pane). The persistent correlation between the MOVE Index and the EMV Indicator highlights the intricate relationship between bond market volatility and inflation uncertainty. Amid resilient growth, US stock performance could face challenges due to this lingering uncertainty.

High yield bond spreads narrow as demand surges amid economic optimism

What the chart shows

The chart displays the frequency distribution of the ICE BofA US High Yield Index Option-Adjusted Spread (OAS) across various spread ranges from 1997 to the present. The X-axis represents different spread ranges in basis points, while the Y-axis shows the number of days the spreads traded within each range. The current spread range of 300-350 basis points, highlighted in red, indicates that high yield spreads are at a relatively narrow range compared to historical data.

Behind the data

Given the high short-term yields, many income-seeking investors have recently turned to cash. However, high yield (HY) bonds have also gained appeal, offering yields close to 8% amidst inflation and steady economic growth. This has led to a resurgence in HY demand after two years of significant outflows.

On the supply side, HY bond issuance has also increased after hitting a decade low in 2022. Nevertheless, the dominant pressure comes from demand, resulting in an approximate 10bps compression of spreads year-to-date to around 325bps. This compression reflects the robust appetite for high yield.

The frequency distribution chart suggests that spreads are priced for a perfect economic soft landing. Since 1997, spreads have been tighter by only about 7% of the time, indicating that the current market conditions are seen as relatively favorable.

Bearish yen bets rise to 17-year high 

What the chart shows

This chart illustrates the net positions of leveraged funds and asset managers in yen futures contracts. We can see that the net number of contracts held short by these entities are currently at their highest level in 17 years, surpassing 140,000 contracts.

Behind the data

This bearish sentiment towards the yen can be attributed to several factors. Firstly, the Bank of Japan (BoJ) has maintained an accommodative monetary policy stance, signaling that it will keep financial conditions easy. Despite the recent rate increase, the BoJ has indicated that this does not herald an aggressive hiking cycle, unlike the tightening observed in the US, UK, and Europe. This dovish outlook has contributed to sustained weakness in the yen as investors anticipate continued low-interest rates in Japan.

Secondly, the robust performance of the US economy has led investors to scale back their expectations for interest-rate cuts by the Federal Reserve. As a result, even though Japan has moved its rates away from negative territory, they remain significantly lower than those in the US. This disparity in interest rates has further fueled the bearish bets against the yen.

However, the high level of short positions also sets the stage for a potential short squeeze. If the BoJ decides to intervene aggressively in support of the yen, it could trigger a rapid unwinding of these bearish bets. Such a scenario would not only impact the currency markets but also affect corporate Japan. Many of the country's largest exporters and multinational companies have benefited from the weak yen, which has boosted their earnings. A sudden strengthening of the yen could reverse these gains, turning an earnings uplift into an earnings drag.