Charts of the Week

Economic indicators from China show mixed signals

China’s key economic activity gauges, including the manufacturing Purchasing Managers Indexes (PMI) (both {{nofollow}}official and {{nofollow}}Caixin), expanded ahead of expectations in March. A complementary high-frequency indicator worth considering is road congestion in major cities such as Shanghai, Beijing, Shenzhen, and Guangzhou.

India’s economic resilience highlighted by robust manufacturing and power demand

The Indian economy has experienced high growth, as reflected in its {{nofollow}}manufacturing PMI, which reached a 16-year high in March. Another vital indicator, electricity demand, especially during evening peak hours, correlates strongly with GDP growth. In 2024, electricity demand across India has surged, approaching the upper bounds of historical fluctuations across the country, underscoring the economy's continuing strength. This pattern confirms the resilience and expanding capacity of the Indian economy, aligning with broader economic growth trends.

U.S. tech stocks bolstered by AI prospects

US mega-cap tech stocks have demonstrated strong performance, driven by optimistic Artificial Intelligence-related prospects and overall economic resilience. A closer examination of the earnings revisions of these tech giants relative to broader large-cap equities shows that, since 2020, whenever US tech titans' earnings revisions outpace those of larger equities (using z-scores, seen as the green color in the chart), the Nasdaq 100 tends to outperform the S&P 500 and vice versa.

Currently, earnings revisions for these top tech companies are better than broader large large-caps, suggesting that the strength in US big tech stocks is likely to continue.

Sectoral shifts in U.S. REITs highlight economic transformation

The US REITs industry has experienced significant shifts since the pandemic, with the office sector seeing a marked decline due to ongoing challenges in persuading employees to return to physical office spaces. The telecommunications sector also shrank. Conversely, the industrials and self-storage sectors have grown, signaling a rebound in these areas of the economy following the pandemic.

The data center sector has also grown considerably, likely driven by the surge in demand for AI-related technologies. These trends reflect broader economic shifts towards digital and storage solutions post-pandemic.

Examining long-term market trends amidst economic stability

This analysis of US stock markets since 1935 highlights the cyclical patterns of bull and bear markets within the context of longer-term secular trends. It shows that a cyclical bear market often follows around seven years after the onset of a secular bull market.

As the US economy remains robust, current trends suggest that it could be heading for a new cyclical bear market if economic growth cannot maintain its current pace. Understanding these long-term patterns is helpful to inform investment strategies and economic forecasting.

Global inflation dynamics: A shift from hyperinflation to deflation

In recent years, the focus on inflation has shifted from high inflation rates to stabilizing inflation at acceptable levels. This analysis contrasts the extremes of hyperinflation, where rates exceed 10 per cent, with deflation scenarios in which inflation rates are negative. While hyperinflation has become less prevalent, from affecting nearly half of global economies to just 15 per cent, deflation is on the rise, with six per cent of countries seeing reductions in consumer prices compared to a year ago.

These trends are critical for understanding the global economic landscape and the varying fiscal challenges countries face.

Inflation pressures delay Fed rate cuts

This chart examines the projected rate cuts by the Federal Reserve for 2024. Initially, the Fed anticipated three cuts in December, while market expectations suggested a more aggressive six cuts throughout the year.

However, with the latest U.S. consumer price data showing a continued increase in March, particularly in gasoline and rental housing, financial markets are now adjusting their expectations. The likelihood of rate cuts is being pushed back, with a delay until at least September now anticipated.

Both the Fed and market participants will continue to closely scrutinize economic and inflation data to gauge the timing and necessity of rate adjustments.

Beneish M-Score highlights risks in emerging markets

The Beneish M-Score is a mathematical model that employs various financial ratios to identify companies likely to have manipulated their earnings. Created by Professor M. Beneish in 1999, it serves as a prevalent tool for detecting fraud. A score above -1.78 indicates potential manipulation of a company's financial statements.

Macrobond/Factset Equity Factor Aggregates (EFA) offers the Beneish M-Score for over 100 countries. In today's demonstration, we focus on a chart that highlights 18 emerging markets. Our analysis shows that two countries, Argentina and Turkey, have recently exceeded the critical threshold, suggesting potential manipulation in their financial reporting. Both countries are currently grappling with severe economic challenges, which may be influencing these findings.

Moreover, Egypt and Hungary have recently exceeded the upper edge of their interdecile range (10-90 percentiles). While they have not crossed the >-1.78 threshold, this may be a worrying upward trend.

Brent oil prices reach new highs due to geopolitical tensions and production cuts

The Brent spot price has surged to its highest level since last October, driven by three pivotal events: escalating tensions in the Middle East, Ukrainian drone attacks on Russian refineries, and the anticipation that OPEC will maintain its production cuts.

These geopolitical factors have propelled Brent oil futures to multi-year highs, as illustrated by the red line on the chart. Remarkably, current futures prices have exceeded those observed during the early 2022 price surge.

This upward trajectory in Brent oil prices is concerning for global markets, signaling potential increases in fuel costs for consumers this spring and summer.

Commodities remain low compared to the S&P 500 despite Brent price surge

Despite the recent surge in the Brent spot price, commodities remain historically low compared to the S&P 500. This analysis highlights the ratio between the S&P GSCI Commodity Index and the S&P 500. Three distinct peaks stand out, indicating periods when commodities were relatively expensive compared to the S&P 500: during the 1973/74 oil crisis, the 1990 Gulf War, and the 2008 global financial crisis.

Currently, the scenario is inverted, with commodities being relatively cheap compared to the S&P 500. An examination of deviations from the historical average reveals that such conditions were previously observed only before 1973, during the tech bubble, and now. This period also marks the longest stretch below the one standard deviation band. Unlike past instances, the ratio is now at an all-time low.

March CPI data shows persistent inflation, influencing Fed's rate decisions

US inflation appears to be stabilizing around 3%, but recent data suggest persistent pressures. This analysis delves into the CPI basket and the price movements of its individual components. Roughly 38% of the items have maintained their price levels or experienced a decrease compared to the previous year.

However, 36% of the items have seen an annual inflation rate exceeding 3%. With consumer prices increasing more than expected in March, financial markets now anticipate that the Federal Reserve might delay interest rate cuts until September. The mix of ongoing high inflation and a robust job market could influence the Fed's monetary policy decisions in the coming months.

US labor market shows strength amid tight conditions and rising jobless claims

The US labor market has demonstrated resilience, as evidenced by recent nonfarm payroll figures exceeding expectations despite slight increases in the unemployment rate. However, this 3.5–4% unemployment rate range is among the lowest recorded in recent decades. The labor market remains tight, with job vacancies outnumbering unemployed individuals.

Still, the impact of previous monetary tightening is anticipated to unfold over time, potentially affecting economic activity and employment adversely. To gauge job market health across states, we've created an indicator based on the ratio of states with increasing or decreasing continuing jobless claims. Historically, when all states have experienced rising jobless claims (tracked by a 12-month moving average), the unemployment rate has escalated, often signaling a recession. Currently, the indicator suggests that higher jobless claims across states have not reached 100%, having declined from above 95%. This may underscore the US labor market's resilience.

Monetary policy and inflation trends

This chart highlights the interplay between global monetary policy and inflation trends. Global monetary breadth refers to the share of economies with higher, unchanged or lower policy rates compared to the previous month.

As inflation moderates globally, while remaining elevated, monetary tightening has been subdued, reflecting central banks' cautious approach to navigating economic recovery since the pandemic. At the same time, there has been a noticeable shift towards monetary easing, signaling a potential transition to a more accommodative policy stance.

This pivot may be due to several factors, including the need to support economic growth against the backdrop of global uncertainty and the stabilization of inflation rates closer to targets. Most central banks are currently maintaining policy rates, taking a wait-and-see approach to balance growth and inflation risks.

Services inflation outpacing goods

This comparison of goods vs. services inflation across 20 countries highlights several marked shifts arising from the pandemic. If a cell is highlighted in color, it indicates that in that month, country goods inflation was higher than that of services.

At first, a surge in goods prices reflected supply chain disruptions and a shift towards home-based consumption. However, this trend, from around the beginning of 2021 to mid-2023, was not uniform. Countries facing economic challenges such as Germany and Japan remained in this phase longer than others including the US and Ireland, which exited relatively early.

With the reopening of economies, there has been a reversion to the pre-pandemic norm, in which services inflation outpaced that of goods. Demand for services has resumed, likely due to increased consumer mobility and the rebalancing of spending towards travel, dining and leisure activities. Meanwhile, the stabilization in goods prices suggests an easing of supply chain pressures.

The Sahm rule and US recession risk

The Sahm rule, which focuses on the three-month moving average of the US unemployment rate, underlines the possibility of an upcoming recession. The rule identifies signals related to the start of a recession, when the three-month moving average of the unemployment rate rises by 0.5 percentage points or more relative to its low during the previous 12 months. The proportion of states triggering the Sahm rule is currently over 50 per cent, significantly higher than the historical benchmark of 31 per cent associated with recessions. The concentration of layoffs in sectors such as technology, finance and services amplifies concerns about an economic downturn, reflecting sector-specific vulnerabilities.

Yet, with most states continuing to experience larger unemployment claims, also seen in the worsening breadth of US Sahm's rule across states, let’s not be overly optimistic.

India’s forward price to earnings and long-term returns

India's equity market, buoyed by expectations of robust economic growth and supportive policy measures, has witnessed {{nofollow}}soaring valuations, particularly reflected in the forward P/E ratio reaching historic highs. The inverse relationship between the forward P/E ratio and long-term equity returns suggests that investors should be cautious, however, as higher valuations may herald lower future returns. Despite this, the MSCI India Index's profitability, with a projected annualized return of more than five per cent over the next decade at a forward P/E of around 22x – albeit lower than historical norms – indicates sustained investor confidence.

UK utility bill payment failures

Tracking debit card transactions is a well-known method for gathering alternative data that can provide valuable insights into consumer finances. The UK's {{nofollow}}Office for National Statistics (ONS), in collaboration with Pay.UK and Vocalink, has taken this a step further by presenting data on failed debit card transactions in the UK relating to utility bill payments. The analysis reveals that consumers are under increasing financial stress. Failed electricity bill payments have quadrupled since 2020 to 1.2 per cent of the total, in contrast to water bill payments, where the level of failures has remained stable. This points to the disproportionate impact of rising energy costs on household finances.

Latin American GDP per capita vs. US

The economic trajectory of Latin American countries relative to the US over the last four decades indicates a general trend of stagnation or decline in GDP per capita, with traditional economic powerhouses such as Mexico, Brazil and Argentina witnessing significant setbacks. Guyana is an exception, spurred by major offshore oil discoveries expected to transform it into the world's largest per capita oil producer. In 1980, Guyana’s per capita GDP was less than 20 per cent of that of the US, whereas by the end of 2024, the International Monetary Fund forecasts that Guyana will be nearly at level pegging with the US. This transformation of fortunes underscores the impact of natural resource wealth on economic development and highlights the divergent fortunes of different countries in Latin America.

Brazil continues to cut rates

The Central Bank of Brazil's reduction of policy rates for the sixth consecutive time last week represents a calculated response to a stable inflation landscape.

The 50 basis points cut, aiming to achieve a three per cent inflation target within a +/- 1.5 percentage point range, forms part of a proactive strategy to insulate the economy against global economic shocks.

Factors such as commodity prices, domestic demand and exchange rate movements have been carefully balanced to maintain inflation within the target range, illustrating the central bank's commitment to fostering economic stability and growth.

China sees subdued inflationary pressures

China's subdued inflationary pressures, driven by deflation in sectors such as food, beverages, tobacco, transport and communications, reflect the complex interplay of domestic and international factors.

The country's economic slowdown, impacted by softer consumer demand, challenges in the real estate sector and slower retail sales growth, has contributed to this deflationary trend.

While inflation rose in February, the Lunar New Year, with its volatile food and travelling prices, may have only a {{nofollow}}temporary impact; factory activity remained subdued. The People's Bank of China faces monetary policy challenges, with limited room for easing due to the yuan's depreciation. However, the global shift toward lower interest rates may provide some scope for accommodative policies.

India’s food and beverages boost inflation

India's consumer inflation remains above the four per cent {{nofollow}}target yet within the two to six per cent range, highlighting the significant impact of supply-side constraints and changing consumption patterns. Inflationary pressures mostly stem from food and non-alcoholic beverages, with other categories generally having softened over time.

Seasonal variations, crop yield fluctuations and supply chain disruptions have a major impact on food prices. The Reserve Bank of India's cautious stance, maintaining the policy rate at 6.5 per cent, reflects concerns over these inflationary pressures and demonstrates the central bank's focus on supporting growth without compromising price stability. 

Mexico’s mixed picture

Mexico's inflationary landscape highlights the multifaceted nature of price movements within the economy. Spikes in sectors such as insurance (up by 19.3 per cent) and tour packages (8.9 per cent), juxtaposed with declines in audiovisuals (down 7.2 per cent) and household items (1.4 per cent), point to varying demand patterns, changes in consumer preferences and external cost pressures.

These dynamics reflect Mexico's ongoing economic adjustments to global economic conditions, exchange rate volatility and domestic policy shifts. 

Poland’s inflation on target, with utility bills in focus

Poland's achievement of its inflation target band, with a 1.5 per cent drop in goods prices and high inflation in services, speaks to the complex economic adjustments under way. Key factors include labor market conditions, wage growth and external price pressures, particularly in the energy sector.

The focus on utility bills – water supply and sewage costs have surged by almost 10 per cent and there is an upcoming {{nofollow}}unfreezing of electricity prices – highlights the impact of government policies and global energy market trends on domestic inflation. 

Thailand’s unusual deflationary trend

Thailand's deflationary environment, which contrasts with global inflationary trends, underscores unique domestic challenges. These include softening demand and the impact of global economic uncertainties on its export-driven economy.

The most recent -0.8 per cent headline and 0.4 per cent core inflation rates in February are well below the 1-3 per cent target range, while the largest category of food and non-alcoholic beverages has been {{nofollow}}shrinking since last year.

The Bank of Thailand's policy meeting, revealing a {{nofollow}}split decision on interest rates, highlights the central bank's cautious approach towards stimulating economic activity without exacerbating inflationary pressures. Factors such as tourism trends, consumer confidence and fiscal policies play critical roles in shaping Thailand's inflation.

Fracking as a leading indicator

Primary Vision's Frac spread count is now available on Macrobond. This indicator measures the number of crews actively conducting hydraulic fracturing (known as “fracking”) of shale in the US, which serves as a leading indicator of oil production.

This chart analyzes the correlation between Frac spread count and future earnings in the energy sector, which is represented by 12-month forward earnings per share sourced from Macrobond/FactSet Equity Factor Aggregates. Historical data shows a robust correlation between the two indicators, suggesting that Frac spread count can provide investors with valuable insights into the future performance of the US energy sector.

Macrobond users can now create dynamic charts using our standard tools, click here to learn more.

Central bank interest rate moves

It has been a busy week for central banks, with more than 20 gathering for meetings and the Bank of Japan making headlines as the latest one to exit negative interest rates.

Many central banks are holding interest rates steady for now, but in a surprise move, the Swiss National Bank (SNB) reduced its main interest rate by 25 basis points to 1.5 per cent on Thursday – a decision enabled by the country’s effective control of inflation.

Markets largely expect interest rate reductions from the Federal Reserve, European Central Bank, and Bank of England over the coming months.‍

Emerging market equities’ returns and the US dollar index

The Federal Reserve’s fund rate appears to have reached a peak since July 2023 and is expected to decline over the months ahead. This is likely to mitigate the strength of the US dollar against the backdrop of robust economic conditions, a strong labor market and a gradual easing of inflation rates, although these remain above target.

In this context, it is useful to analyze the return correlation between emerging market equity indices and the US dollar index on a country-by-country basis, where countries with a more negative correlation appear more attractive.

According to our calculations, most MSCI emerging market mid and large capitalization indices across countries have had a greater negative correlation to the US dollar index in recent years than long-run norms (in terms of medians and percentile ranges). As the chart shows, MSCI Peru, MSCI Taiwan and MSCI South Africa have the largest negative correlations.‍

A sector approach to Japanese equities

Japan’s stock market rally has been supported by solid earnings growth expectations, a weaker yen and Japanese equities not looking overvalued on a price to earnings ratio basis.  While Japanese-listed firms are multinational and exposed to global factors, the country’s economy faces the challenges of a reduced US-Japan interest rate differential, which would support the yen, and {{nofollow}}the Bank of Japan mostly ending its monetary ultra accommodation.

These challenges come on top of demographic issues including a shrinking workforce and rising social security costs. Against this backdrop, it is worth considering a sector-specifc approach to investing. This chart compares price to book ratios and return on equity, showing valuations together with profitability. Utilities and consumer cyclicals appear more profitable relative to the price to book ratio than other industries.

Record Chinese copper inventories 

This chart examines Chinese copper inventories, which have risen to historic highs since China agreed to {{nofollow}}production cuts in response to raw material shortages and underperforming plants.

This news has lifted copper prices, which have reached heights not seen since April 2023, as treatment and refining charges (TC/RCs) have plummeted due to a constrained supply of copper concentrate.

This drop in TC/RCs, driven by the rapid expansion of smelting capacity in China, India, and Indonesia, poses challenges for smelters, potentially impacting copper prices despite concerns over a global economic downturn. The closure of First Quantum Minerals' Cobre Panama mine has further tightened short-term projections, coinciding with increased demand from sectors such as power generation and electric vehicles due to the energy transition.

US: CPI increased 3.2% year-on-year 

US inflation numbers released this week show that the overall cost of living, as captured by the Consumer Price Index, increased 3.2 per cent from a year ago, with an increase of 0.4 per cent month over month.

The monthly measure was in line with expectations, while the 12-month reading was marginally higher. An increase in energy costs, reflecting global oil price fluctuations and domestic energy policy changes, helped to boost the headline inflation numbers, while food price rises slowed.

This deceleration was greater than expected, possibly due to better supply chain conditions and agricultural outputs.

EU: inflation continues to decelerate

This heatmap tracks the annual percentage change across the major items in the EU’s inflationary basket of goods and services. It is important to note that food and non-alcoholic beverages, transport, and housing have the highest weighting in the basket, in that order.

Headline inflation decelerated to 3.1 per cent on an annual basis, down from 3.4 per cent The highest inflation points were in non-alcoholic beverages, tobacco, water and insurance, potentially reflecting changes in consumer habits following the pandemic and regulatory impacts on insurance and tobacco products.

On the other hand, milk, cheese and eggs, communication, and transport services all experienced almost no or even negative annual inflation. This may be attributable to market competition keeping prices down as well as technological advances improving productivity and reducing costs.

Japan: inflation cooling, with utilities key contributors

Japan’s overall inflation has been cooling, driven by price drops for electricity and gas. Several food items have also shown moderation in prices.

On the other hand, prices for transportation, medical care, culture and recreation are rising, perhaps in line with service costs and wages. These may be driven by demographic changes such as an ageing population and labor shortages.

The {{nofollow}}Bank of Japan closely monitors wage growth as a key determinant in deciding the timing and degree of adjustments to its yield curve control and negative interest rate policies.

UK: a mixed inflationary picture

This heatmap tracks the evolution of inflationary items in the UK. The highest-weighted items are restaurants and hotels, recreation and culture, and transport. Across these, insurance, tobacco and alcoholic beverages prices rose fastest, reflecting tax policy changes and post-Brexit dynamics.

Conversely, gas and electricity fell the most – by 26.5 per cent and 13 per cent respectively, which may be due to government policy interventions and shifts in global energy markets.

Sweden: inflation driven by housing

The weak Swedish crown has made the Riksbank’s task to slow inflation a tough nut to crack for an economy reliant on energy and commodity imports. While several categories are showing a slowdown in price increases, Swedish inflation is primarily driven by increasing housing costs.

These reflect both dynamics in the domestic market, such as limited supply in major cities and strict building regulations, along with the broader global economic environment.

Canada: positive news for disinflation

A real estate crisis continues to loom large in Canada, where high demand and limited supply have made shelter prices, both rented and owned, relatively hot categories. However, headline inflation rates have finally dropped below the upper target limit of three per cent, signaling a potential easing of price pressures across the economy. February's figures are expected to be released next week, raising the question of whether the downtrend will continue or be driven up again by real estate.

Meanwhile, tobacco prices have finally begun to drop, offering smokers some relief in an otherwise challenging market. This could be the result of changes in market dynamics and regulation affecting consumer behavior and company pricing strategies.