Charts of the Week

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.

S&P 500: the January Effect 

Can the performance of the S&P 500 in January set the tone for the rest of the year? The first month of the year has often been viewed as a bellwether for the following 11 months in a phenomenon known as the “January Effect” or “January Barometer.” 

This chart reveals a trend going back to 1929, showing that a positive January often leads to a yearly gain of 13.2 per cent. Conversely, a negative January typically precedes an annual loss of 1.8 per cent. The rise of 1.6 per cent in January this year hints at a strong 2024, with a six per cent increase surpassing the average improvement when the S&P 500 is in positive territory.‍

S&P 500: the US Election

Investors are understandably eager to understand how the US election could impact equities, particularly the S&P 500. We have therefore analyzed the historical performance of that index at the year-end following past presidential elections, with a specific focus on periods when the incumbent party was Democratic. 

On average, a win by the Democratic party correlates with the S&P 500 achieving returns between 10.4 per cent and 13.4 per cent. 

In contrast, Republican victories see the index delivering slightly lower year-end returns in the range of nine per cent to 9.5 per cent. 

While Democratic wins are correlated with greater returns, the range of outcomes in that scenario are broader and so more unpredictable, suggesting that the S&P 500's performance in election years is not purely politically driven.

Adding Bitcoin to a 60/40 portfolio

A dash of Bitcoin can go a long way to juicing up investment returns, this chart suggests. 

Adding a mere one per cent allocation of the cryptocurrency to a classic 60/40 investment mix (60 per cent equities and 40 per cent 10-year bonds) can deliver a striking six per cent fillip to a portfolio.

This impact highlights not only Bitcoin's role as a powerful means of enhancing returns, but also underscores how digital currencies are reshaping the investment landscape, with minimal exposure potentially delivering disproportionate benefits.

Emerging markets with high bond yields and limited FX risk

The Federal Reserve’s interest rate hikes appear to have peaked, laying the foundation for a potential weakening of the strong US dollar. This would be a major development given the dollar's position as a global reserve currency that has outperformed many other currencies in recent years. 

Meanwhile, many emerging market central banks have lowered their interest rates, potentially making bonds and other investments denominated in their respective currencies more attractive. 

This chart highlights 10-year government bond yields against the backdrop of foreign exchange volatility — a primary concern for bond investors — with the aim of identifying opportunities where the potential for income (yield) and capital appreciation outweighs the risks associated with foreign exchange (FX) volatility. 

India, Indonesia and the Philippines emerge as standout countries from this analysis, with bonds offering both high yields and limited currency risk.

CAGR vs. volatility by asset class

This chart compares the volatility and the Compound Annual Growth Rate (CAGR) of various asset classes over the past 20 years, with CAGR measuring the mean annual growth rate over the period assuming that profits are reinvested at the end of each year.

US equities have been stable over the period, with only minor fluctuations in price while yielding the highest growth rates, suggesting a favorable risk-reward balance for investors.

Emerging market equities have also been volatile, but have delivered lower returns than their US counterparts, indicating a higher risk for the returns achieved. European equities, infrastructure and real estate investment trusts (REITs) have clustered in a band of lower volatility and moderate growth, suggesting they can be considered stable investment options with reasonable growth potential for investors with a lower risk appetite.

Real estate bubbles worldwide

This chart combines the UBS Global Real Estate Bubble Index with economic forecasts from Oxford Economics for major cities around the world. The Bubble Index categorizes markets as follows: below -1.5 indicates a depressed market; -1.5 to -0.5 an undervalued market; -0.5 to 0.5 fair value; 0.5 to 1.5 an overvalued market, and above 1.5 a bubble. Based on the latest data, only Zurich and Tokyo appear significantly overvalued, with their bubble status having increased over the past few years. Compared to two years ago, the number of cities classified as overvalued has dropped from nine to two, reflecting changes in the global real estate market.

Fed's rate peak and government bond yields

This chart examines 10-year government bond yield trends in major economies once the Federal Reserve reaches the highest point of increasing interest rates, known as the “Fed's rate peak,” using data from 1984 to the present. 

Specifically, it looks at the latest cycle, suggesting the Fed's rate peak was in July 2023, with the European Central Bank and the Bank of England potentially peaking shortly after. 

The 10-year US Treasury yield is above the typical range, suggesting higher interest rates. In contrast, the German 10-year bond, the Bund, shows a slight increase but remains within a normal range, while the UK's 10-year bond, the Gilt, is at or below its average rate. These trends may reflect the recent surge in US consumer prices, Germany's positive economic data and the UK's less favorable economic and inflation figures.

Australia employment indicators

This chart highlights the current state of the Australian job market via a range of indicators such as unemployment and underemployment rates, comparing them to data since 2000. The indicators suggest that the Australian labor market remains tight, although there has been a slight normalization. This ongoing tightness, especially if it continues to be slower to reach full employment, may contribute to ongoing inflationary pressures in the country.

EMs offer superior growth

EMs offer better growth prospects than DMs, according to this analysis of Purchasing Managers’ Index (PMI) data. 

DMs have experienced significant challenges recently, with weakness in the eurozone and the UK and Japan falling into technical recession since the second half of last year.

By contrast, EMs have shown resilience in the face of global headwinds such as higher borrowing costs, worsening trade conditions and inflation.

However, various PMI indicators have exhibited different trends over the last two years. The Services PMI for EMs has consistently outperformed that of DMs. While DM Manufacturing was robust in January 2022, EM Manufacturing has taken the lead since last year. 

The Composite PMI for January 2024 also shows how EMs are outperforming DMs.

Inflation generally easing across EMs

Inflationary pressures are easing across EMs following a peak in response to the Ukraine conflict in March 2022. 

This is due to a combination of factors including lower commodity prices, the stabilization or strengthening of EM currencies against the US dollar and other major currencies, tighter monetary policy and more efficient supply chains.

A full three-quarters of EM economies posted lower headline Consumer Price Indices in January 2024 compared to the previous month. Major Asian and Latin American EMs are also experiencing inflation below their long-term trends.

Over the last four years, EMs have seen more inflation volatility than DMs for a number of reasons including pandemic-related supply disruptions and higher food prices.

EM equities appear undervalued

Now could be the time to buy EM stocks, with valuations looking attractive based on this analysis of MSCI indices’ relative forward price to earnings (P/E) ratios.  

Despite a more favorable growth outlook, EM equities continue to trade at a discount to their DM peers due to perceived risks, offering potential opportunities for investors seeking value. 

The current EM forward P/E ratio is at a greater discount relative to DM than the 30-year median, indicating potential underpricing.

However, it is worth noting that forward P/E ratios in EMs vary significantly by country. This is due to a range of factors including individual countries’ growth prospects, monetary policies and political stability. 

Financial stability is improving in EMs

EM companies are improving their financial stability, according to the Altman z-score. This is a formula for determining whether a company is heading for bankruptcy within the next two years by considering profitability, leverage, liquidity, solvency and activity ratios. 

The aggregate EM z-score is at 4.8, higher than the 4.3 average since 2006. Values look significantly better if considered for private non-manufacturing companies. 

Key factors affecting z-scores in EM include economic policies, external debt levels, commodity dependence and the impact of the Covid-19 pandemic.

Are commodities set to stabilize?

This chart shows the relationship between commodity prices and the US real interest rate, highlighting the inverse correlation between commodity returns and US interest rates. 

Low real interest rates reduce the costs of holding inventory and investing in commodities, making them more appealing to investors, thus increasing demand and prices. Such conditions often contribute to a weakening of the dollar, making commodities more affordable for holders of other currencies. This also makes yield-generating assets less attractive, prompting investors to explore alternatives, including commodities.

The chart shows that the US 10-year real yield turned positive from July 2023, with inflation decelerating. Commodity returns were negative during this period.

While a balance between growth-led demand and monetary easing, leading to lower yields, should help stabilize commodities, a range of risks could impact commodity returns. These include geopolitical risks, volatile shipping costs and uncertain weather conditions.