Charts of the Week

June 10, 2022

Central bank tightening, UK income squeeze and forecasting South Korean inflation with Indicio

This week’s charts cover Central bank tightening, Central bank tightening vs US economic activity, US GDP vs GDI, UK inflation vs wage growth, South Korea exports, South Korea inflation, South Korea inflation forecast using Indicio, Global equity and bond returns and US bonds vs equities.

Julius Probst PhD, with contributions from Arnaud Lieugaut, Patrick Malm and Karl-Philip Nilsson

<span id="Central-bank-tightening">Central bank tightening</span>

We start the week with a chart that shows how central banks globally are reacting to soaring inflation. 

It shows the change in the policy rate with the change in the inflation rate since the beginning of the year. As you can see, most central banks have started raising key lending rates as consumer prices climbed. The European Central Bank, Bank of Japan and Swiss National Bank are the notable exceptions so far – though the ECB may start some timid rate hikes this summer. 

Macrobond users, access the chart here

<span id="Central-bank-tightening-vs-US-economic-activity">Central bank tightening vs US economic activity</span>

The next chart is one we have shared before but is worth tracking over time. It shows the negative correlation between US economic activity and global central bank tightening. As you can see, our central bank decision index – we created this by calculating the next balance of policy hikes against cuts from 115 central banks – indicates we can expect a major slowdown throughout the next year. 

Macrobond users, access the chart here

<span id="US-GDP-vs-GDI">US GDP vs GDI</span>

GDP can be measured in different ways: by expenditure, production, or income. The first takes in all expenditures within an economy: consumption, investment, government spending, and net exports. 

GDI (Gross Domestic Income) measures all income within an economy: the sum of all wages, profits, and taxes – minus subsidies. 

Since any expenditure is somebody else’s income, GDP and GDI should in theory be equal. However, because of statistical discrepancies, there can sometimes be sizeable differences between the two series. 

That disparity has now widened to a record – with annualised Q1 GDP falling by -1.5% as GDP rose by 2%. It appears that while GDP is signalling a slowdown of US economic activity, GDI (and other indicators such as recent labour market figures) are sending a different message. This means we may see some large upward revisions of US GDP, as the gap between the two series will have to narrow. 

Macrobond users, access the chart here

<span id="UK-inflation-vs-wage-growth">UK inflation vs wage growth</span>  

The UK is facing the biggest income squeeze in a generation. The chart below shows how inflation has outpaced nominal wage growth in the last several years. UK real wages fell for almost five years following the global financial crisis – and are falling again as inflation surges towards 10%. 

Tip: You can apply the change region function to this chart.

Macrobond users, access the chart here

<span id="South-Korean-exports">South Korean exports</span>

As one of the world’s biggest exporters, South Korean exports are often seen as an indicator of global demand. Yet, despite a slowing global economy, South Korean exports recently picked up again, alongside imports. 

The country’s trade balance, on the other hand, has deteriorated as the global commodity price shock inflates the cost of imports. 

Macrobond users, access the chart here

<span id="South-Korea-inflation">South Korea inflation</span>

The following heatmap shows the consumer items in South Korea hardest hit by inflation. As you can see, the cost of food, utilities, and transport have surged the most due to rising global food and energy prices.

Macrobond users, access the chart here

<span id="South-Korea-inflation-forecast-using-Indicio">South Korea inflation forecast – using Indicio</span> 

Let’s look at what’s in store for inflation in South Korea over the next 12 months. 

Using the Indicio platform – now available to Macrobond customers with a Data+ licence – we show you how our new partnership with Indicio can help you build highly accurate forecasts quickly and painlessly.

First, we choose eight explanatory variables for forecasting inflation: 

  • Real GDP
  • M2
  • Stock price index
  • Foreign trade
  • Import prices
  • Oil price
  • Unemployment rate
  • Nominal effective exchange rate

Indicio automatically tests and ranks the ones that are most useful in forecasting South Korea’s CPI. As the screenshot below shows, real GDP, M2, the Korean Stock Exchange and foreign trade balance come up as the most relevant indicators.

Graphical user interface, websiteDescription automatically generated

Indicio also allows you to easily create conditional forecasts. 

For our purposes, let’s assume a significantly higher oil price for the next 12 months – reaching USD130 per barrel before slowly declining. The green dotted line in the screenshot below shows how this scenario would play out compared with a standard forecast based on the multivariate models (solid white line.) 

ChartDescription automatically generated

Finally, Indicio shows the average forecast for South Korean CPI. Notice that Indicio has created a weighted average based on three univariate and five multivariate models. 

The black line displays the weighted average forecast based on the most accurate models and it shows that CPI is expected to remain above 4% until the end of the year before falling to about 3% by April 2023. 

Meanwhile, the dotted green line, based on the conditional forecast of higher oil prices, shows that CPI would remain closer to 6% -- thus remaining almost one percentage point higher until the end of the year before falling back to 4% in April. 

ChartDescription automatically generated

You can also use Indicio for scenario analysis, adding events such as oil price shocks, monetary policy hikes etc. to see how they would affect your forecast. You can upload all Macrobond data to Indicio via our API. 

Find out more about forecasting with Indicio. You can also request a demo

<span id="Global-equity-and-bond-returns">Global equity and bond returns</span> 

The following chart can only be accessed with a subscription to ICE BofA data.

Now let’s look at the markets. 

The following scatterplot shows the relationship between annual returns for global bonds and equities since the mid-1990s. The correlation tends to be positive except during times of large macroeconomic downturns, such as those in 2001 and 2008, when equities fall but bonds rally on the back of rising interest rates.

This year is a notable outlier. Global equities are down, but so too are bonds – no thanks to high inflation rates that have led interest rates to spike. 

Macrobond users, access the chart here

<span id="US-equities-vs-bonds">US equities vs bonds</span>

Lastly, we have replicated the analysis above for the US bond market but using our core database this time. 

As you can see, the analysis for the US is quite similar to the global one. This is not very surprising given that the US accounts for more than 45% of the global equity market and the global financial conditions are highly influenced by US monetary policy. 

Macrobond users, access the chart here

All written and electronic communication from Macrobond Financial AB is for information or marketing purposes and does not qualify as substantive research.

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