US yields, commodity disinflation and an exchange rate model for the Japanese yen

This week’s charts cover nominal US 10-year yield, real US 10-year yield, business confidence and earnings revisions, commodity price disinflation, commodities drawdowns, cotton prices, Chinese exports vs US inventories, yen exchange rate fair value model, Germany temperatures, impact of Roe v Wade ruling on US Congress and webinar: Indicio masterclass.

By 
Julius Probst PhD, with contributions from Arnaud Lieugaut, Patrick Malm and Karl-Philip Nilsson
on 
July 1, 2022

<span id="Nominal-US-yields">Nominal US yields</span>

As inflation spurs central banks to raise interest rates, it is interesting to see how high we can still go compared to previous decades. 

Our first chart shows the evolution of US 10-year yields with decennial averages. The nominal rate peaked in the early 1980s when the Federal Reserve kicked off a series of sharp rate hikes to bring down ultra-high inflation. Since then, a prolonged period of disinflation has led yields to decline continuously – from more than 10% in the 1980s to just over to 2% following the 2008 financial crisis.

You can use the change region function on the first three charts in this chart pack.

Macrobond users, access the chart here

<span id="Real-US-yields">Real US yields</span> 

Inflation-adjusted yields also fluctuated wildly over the same period – spiking at almost 10% in the 1980s before slipping to a low of -2.4% in the last couple of years. Empirical and theoretical studies have attributed the decline in real rates to a range of factors including adverse demographics, low productivity growth, falling price of investment goods and rising inequality and monopolisation, as noted by former US Treasury Secretary Larry Summers in his secular stagnation hypothesis. 

Macrobond users, access the chart here

<span id="Business-confidence-and-earnings-revisions">Business confidence and earnings revisions</span>

Business confidence takes a hit when earnings are revised down. This next chart shows the extent of that correlation. Given the current plunge in expected earnings – towards levels last seen at the start of the pandemic – we can expect a huge drop in business confidence in coming months. 

The following chart can only be accessed with premium data from Macrobond FactSet Equity Factor Aggregates. 

Macrobond users, access the chart here

<span id="Commodity-price-disinflation">Commodity price disinflation</span>

After surging to near historic highs at the start of the year, commodity prices have finally settled as demand weakens amid a global and Chinese economic slowdown. This chart shows the trajectory of commodity prices this year against previous years. 

Macrobond users, access the chart here

<span id="Commodities-drawdowns">Commodities drawdowns</span> 

The next chart shows drawdowns across commodity classes. Industrial metals and agricultural products have fallen by the most from this year’s peak while energy has fallen by the least. Given the decline in overall commodity prices, we can expect some disinflationary pressures on prices in the months ahead.

Macrobond users, access the chart here

<span id="Cotton-prices">Cotton prices</span> 

Commodity prices are volatile and prone to overshooting. The correction for cotton has been particularly striking, with the price dropping by more than 20% over the last couple of weeks. 

Macrobond users, access the chart here

<span id="Chinese-exports-vs-US-inventories">Chinese exports vs US inventories</span>

US manufacturers rely heavily on China for materials and the following chart displays that interdependence. It compares US factory inventories and Chinese exports five months earlier. Inventories often serve as a good indicator of the business cycle, with more goods in stock during periods of economic growth.

The following chart shows that Chinese exports have been declining. In line with that, US inventories will most likely fall if the US economy starts to contract.

Macrobond users, access the chart here

<span id="Yen-exchange-rate:-fair-value-model">Yen exchange rate: fair value model</span>

The following graph shows the value of adding high-frequency indicators to financial variables when modelling exchange rates. 

We created a fair-value model for the nominal broad Japanese exchange rate using the following variables:

  • The Citi Surprise Index 
  • Terms of Trade Index for Japan 
  • The global Citi Macro risk index 
  • The spread between 2-year and 10-year yields for Japanese government bonds
  • The OECD weekly economic tracker

The OECD economic tracker uses Google trends data to estimate economic activity at a much higher frequency than traditional macro indicators. This indicator significantly improves the fit of our model, thus showing how high frequency indicators can be a useful addition to forecasting macroeconomic time series like exchange rates.

Our model tracks the Japanese exchange rate fairly well over time, including most of the recent depreciation. As of right now, the Yen is slightly undervalued compared to our fair value exchange rate model.

You can use the change region function on the chart below.

Macrobond users, access the chart here

<span id="Germany-temperatures">Germany temperatures</span>

Here’s a graph that proves global warming is real. It shows average temperatures in Germany throughout the year dating back to 1881 – with temperatures this year rising far above historical averages. 

Macrobond users, access the chart here

<span id="Impact-of-Roe-v-Wade-ruling-on-US-Congress">Impact of Roe v Wade ruling on US Congress</span>

Finally, let’s take the temperature of the US political landscape. 

Democrats have been given a boost following the Republican-heavy Supreme Court’s controversial decision to overturn Roe v. Wade. States now have the right to ban abortions. 

Data from online betting market PredictIt show the odds of Democrats dominating the Senate have increased from about 25 cents to 34 cents on the dollar. Their odds of controlling the House of Representatives have also improved marginally, though they remain slim. 

Macrobond users, access the chart here

<span id="Webinar:-Indicio-masterclass">Webinar: Indicio masterclass</span> 

And on the subject of predictions, Macrobond and Indicio have teamed up to deliver a complete forecasting solution that combines our comprehensive database (almost 300 million time series) with Indicio’s world-class data science technology to help you identify and plan for market trend shifts earlier.

Join us for a 30-minute educational webinar to learn how you can use Macrobond and Indicio to build a wide range of sophisticated and statistically robust forecasts in just minutes - no coding required. 

Register for one of the sessions below:

7 July – 8am BST/ 9am CEST/ 11am GST/ 3pm HKT/ 5pm AEST

Register here

or

7 July – 2pm BST/ 3pm CEST/ 10am EDT/ 8am CDT

Register here

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