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Charts of the Week

Headline-making data and analysis from our in-house experts

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.

Chart packs

Baby bust, tech boom and inflation trends

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 10th-90th 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.

UK immigration trends, China’s property glut and bearish bets on the yen

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

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.

Charts of the Week: 31 May 2024

US inflation surprises signal persistent risks

What the chart shows

This chart illustrates the relationship between US underlying inflation and inflation surprises, with inflation surprises pushed ahead by 12 months. It tracks various measures of underlying inflation alongside the US Citi Inflation Surprise Index. The chart suggests that the inflation surprise index tends to lead actual underlying inflation by about twelve months, showing a predictive relationship across different inflation measures.

Behind the data

Although US Consumer Price Index (CPI) inflation {{nofollow}}in April moderated and was relatively close to expectations, both headline and core CPI measures have consistently exceeded consensus estimates for several preceding months. This has driven increases in the economy’s inflation surprise index. 

Given the higher and more positive trend of overall US inflation surprises, inflationary risks may persist. This persistent inflation risk complicates the Federal Reserve’s decision-making process regarding its monetary policy stance. While the Fed has been considering a shift from a hawkish to a dovish approach, continued inflation surprises may keep such a shift uncertain.

Heavy rains boost Rhine River water levels 

What the chart shows

This chart illustrates the water levels of the Rhine River, highlighting the historical range, the 10-90 percentile range, and the mean levels. The chart compares the water levels for the years 2023 and 2024, showing a significant increase in May 2024.

Behind the data

Last summer, low water levels in the Rhine caused major disruptions to shipping, manufacturing, and energy operations in Germany due to insufficient rainfall. Rainy weather last month, however, has alleviated these concerns.

As we can see in the chart, water levels in May 2024 are significantly above the historical mean and within the high range of historical data. Higher water levels are crucial for maintaining smooth operations in shipping and manufacturing industries that rely on the Rhine for transportation. Adequate water levels also support energy production and other water-dependent operations, providing a more stable environment for economic activities in the region.

China's real estate market slump shows impact of shift from speculative investments

What the chart shows

This chart shows the value of real estate transactions in China relative to GDP, broken down by different types of buildings. Since the pandemic, we can see a significant decline from about 20% to 10% -- driven by residential transactions. 

Behind the data

Chinese authorities have been shifting the real estate sector towards residential purposes and sustainability rather than speculative investments. But the market remains subdued, with declines in investments, sales, and prices. 

This indicates that efforts to curb speculation are working, reducing real estate's contribution to GDP. The market is cooling due to stricter regulations and reduced speculative activity. The economy is diversifying away from real estate dependency, aiming for long-term stability. Policymakers face challenges in balancing market cooling with stimulating sustainable growth. The sector may need supportive measures to sustain demand without reigniting speculation.

Chinese exports rebound unevenly across regions amid high-tech boost and trade conflicts

What the chart shows

This chart depicts China’s export growth by region, seasonally adjusted and sorted by the latest growth figures. It also highlights the growth rates from six months ago, medians, interquartile ranges, and 10th-90th percentile ranges across various regions: Latin America, Africa, Asia, North America, Europe, and Oceania.

Behind the data

China’s foreign trade has rebounded, driven by high-tech industries, despite ongoing trade and tech conflicts with the US. Recent months have shown notable regional variations in export performance. 

Asia, China's primary export destination, has nearly reached expansion levels, likely due to strong regional trade agreements and supply chain integration. Europe and North America have seen narrower contractions in exports, which could be attributed to gradual economic recovery and easing of pandemic-related disruptions. Latin America has shifted from negative to positive growth, possibly due to increased demand for Chinese goods as these economies stabilize.

Despite these improvements, China's export growth remains subdued compared to historical norms. Most regions' growth rates are below typical levels, possibly due to lingering effects of global supply chain disruptions, ongoing geopolitical tensions, and fluctuating demand. Latin America is an exception, showing progress towards central standards, which might be driven by its reliance on Chinese manufacturing and commodities.

Equities drive gains in 60/40 portfolio amid fixed income struggles

What the chart shows

This chart breaks down the annual returns of the 60/40 portfolio, composed of 60% equity and 40% fixed income, into its equity and fixed income components over the past 25 years. The navy columns represent the annual returns of the S&P 500 Index (equity), the green columns represent the annual returns of the US 10-Year Government Benchmark (fixed income), and the purple markers indicate the overall annual returns of the 60/40 portfolio.

Behind the data

The chart reveals how different components of the 60/40 portfolio have contributed to its overall performance year by year. On a year-to-date basis, a 12% gain in the 60/40 portfolio has been driven by strong equity returns, while fixed income has detracted from the portfolio's performance. This reflects a broader trend where equities have generally outperformed fixed income in recent years, particularly in a low-interest-rate environment that has limited fixed income returns.

Notably, 2022 and 2018 were years where both equity and fixed income yielded negative returns, highlighting periods of market stress where traditional diversification failed to protect against losses. In contrast, 2019 stands out as the year with the highest 60/40 return over the last 25 years, driven by robust equity gains and supportive fixed income performance.

Corporate bond performance mirrors economic cycles

What the chart shows

This chart shows regional credit performance versus global manufacturing Purchasing Managers' Index (PMI) regimes, with total return indices mapped with PMI data since 1999. The chart categorizes credit performance into Investment Grade (IG) and High Yield (HY) across different regions, highlighting their average monthly returns during recovery, expansion, slowdown, and contraction phases of the global manufacturing PMI.

Behind the data 

Corporate credit spreads have remained relatively narrow, driving {{nofollow}}investment demand due to firm fundamentals and lower-than-usual overall {{nofollow}}market uncertainties. Nevertheless, restrictive monetary policies and tight lending standards continue to exert upside pressure on credit spreads, probably weighing on corporate debt returns.

To further explore the historical performance of corporate bonds across regions, we can consider macroeconomic environments based on the global manufacturing PMI. On average, HY credit tends to experience higher profits during recovery and expansion cycles but larger losses during slowdown and contraction phases than IG credit. Similarly, emerging market (EM) credit exhibits a comparable pattern relative to developed market (DM) credit for both IG and HY.

Tracking Asian EM currencies, US labor market discrepancies, and BoJ moves

Evaluating fair value of Asian EM currencies against the USD

The USD Index and US Treasury yields have retreated somewhat from their long-lasting strength, as inflation moderation in April was relatively aligned with expectations. Let’s explore Asian emerging market (EM) currencies in terms of their fair values based on purchasing power parity (PPP) and interest rate differentials.

Purchasing power parity (PPP)

All listed Asian EM currencies are undervalued relative to the USD based on PPP or the law of one price. The degree of undervaluation ranges from mild in INR, TWD, and THB to significant in VND, PHP, and IDR.

Interest rate differentials

With the global monetary cycle still dominantly in focus, led by the Fed, interest-rate differentials could provide insights into FX values, including carry trade strategies. The short-term (2-year), medium-term (5-year), and long-term (10-year) differentials show that most Asian EM currencies appear to be undervalued, except for a possibly overvalued INR.

In conclusion, while many Asian EM currencies seem undervalued against the USD, the persistent inflationary pressures and economic resilience of the US may not allow the USD to weaken significantly in the near term, potentially limiting the appreciation of these emerging currencies.

United States: Are the non-farm payroll figures misleading the market?

This chart looks at two key labor market figures: non-farm payrolls and the Quarterly Census of Employment and Wages (QCEW). To make them comparable, we’ve aggregated the non-farm payroll figures to a quarterly frequency. 

Non-farm payrolls are a leading indicator for the US labor market. Published monthly frequency, they provide a high-frequency snapshot of employment trends. 

In contrast, the QCEW program publishes a quarterly count of employment and wages reported by employers, covering more than 95% of US jobs. 

The chart shows a historically significant spread between these two indicators. So which one more accurately reflects the current state of the labor market? 

Markets weigh up BoJ rate hikes amid excess inflation but low real wage growth

The Bank of Japan (BoJ) is in tightening mode, which contrasts with the approach of major global central banks leaning toward monetary accommodations. 

The chart shows expectations of higher policy rates, as evidenced by rising 2-year government bond yields and 2-year swap rates. This trend is further supported by elevated core inflation (excluding fresh food and energy), which has been in positive territory and is the highest observed in decades, recently reaching 2.9% in March. 

However, despite the BoJ’s intention to see sustainable wage growth to support rate hikes, real wage growth in March remained relatively flat. Additionally, economic growth falling below expectations does not bolster the central bank’s {{nofollow}}hawkish stance.

Tracking the RMB's growing share of global payments and transfers

De-dollarization has been a topic of debate over time, with the use of other currencies gradually increasing. 

This chart shows the growing role of the Chinese renminbi (RMB) in global financial transactions. 

Despite the significant rise in RMB usage for China’s overseas transfers and remittances, with the RMB surpassing 50% and overtaking USD shares in these areas, its share of global payments and trade finance markets remains around 5%, according to SWIFT. This indicates that while the RMB is gaining ground, the USD continues to dominate global transactions.

HK and China EPS estimates: recent upgrades for future years

While Hong Kong and China equities have been performing relatively well lately and have already reached their golden crosses, let’s revisit their earnings estimates.

The predictions for earnings per share (EPS) for both regions have been revised downward compared to six months ago. However, in the past three months, their EPS has been upgraded for the next few years (2025–26), despite remaining unchanged for this year in Hong Kong and experiencing a downgrade in China. This shows the market’s optimism for earnings growth in the medium term, despite some short-term revisions.

SF Fed news index v US consumer perceptions

This chart compares US economic news using {{nofollow}}the San Francisco Fed’s News Sentiment Index, with US consumers as measured by three indexes, illustrating the relationship through regression analysis.

The UMich index, which is influenced by personal finances, inflation and retail gas prices, shows that consumers have been more pessimistic compared to the economic news. 

The Conference Board (CB) Consumer Confidence index, which is closely tied to resilient labor conditions, indicates that US consumers have been more optimistic than economic news suggests, 

Overall, US consumer perception, derived from both the UMich and CB indices using PCA, appears to align with economic news but leans somewhat toward pessimism.

Navigating shifts in global and regional financial trends

G7 inflation trends over the last six months

Last October, we debuted the inflation accelerometer, a dashboard designed to monitor price increase trends across the G7 nations over a six-month period. Each accelerometer – represented as a pie chart – represents inflation rates as percentages of their five-year rolling highs. 

Since its initial release, there have been no new local inflation peaks in any of the G7 countries. Encouragingly, all nations have experienced a deceleration in inflation, with all except Italy stabilizing around the 2-3% mark. Notably, France and the UK have shown significant progress in curbing inflation over the last six months. In contrast, the US has seen minimal improvement, maintaining inflation levels at around 40% of its five-year high.

Global economic recovery gains momentum as financial conditions ease

Recent {{nofollow}}updates from the OECD highlight that the global economy has been performing better than initially expected, particularly in the US. This chart analyzes various economic activity indicators alongside a Global Financial Conditions Index (FCI). We created this composite by integrating {{nofollow}}the IMF’s Developed Markets (DM) and Emerging Markets (EM) FCIs through Principal Component Analysis (PCA). This method included an Autoregressive (AR) model to predict third quarter trends, optimized by selecting the most effective lag length. 

The graph indicated positive trends, as reflected in the global Manufacturing Purchasing Managers’ Index (PMI), industrial production and trade data, all of which have shown signs of recovery recently. The global FCI corroborates these findings, approaching an easing position that favors a supportive macroeconomic environment.

Visualizing three years of S&P 500 sector shifts

This chart presents a colorful ‘quilt’ representation of S&P 500 sector performance over the last three years, showcasing  by comparing the monthly performance of 11 S&P 500 industries, from Real Estate and Financials to Industrials and Energy. For each month, the performance of these sectors is analyzed by calculating the 20th, 40th, 60th and 80th percentiles, grouping each sector into performance brackets for comparative analysis.

Shades of blue and green represent sectors that have outperformed their peers, while various red hues indicate underperformance, as detailed in the legend. By following the horizontal progression of colors for each sector, you can track its relative performance over time, creating a visual tapestry of market dynamics. Additionally, the closing month S&P 500 price return index is plotted along the left y-axis, providing a reference for overall market trends corresponding to the sectoral shifts.

Bullish trends emerge in Hang Seng and CSI 300 as golden crosses appear

Hong Kong and China’s equity markets are showing optimism as the Hang Seng and CSI 300 indices rally, supported by China’s accommodative economic policies and attractive valuations. Technically, both indices have already reached a “golden cross,” where their 50-day moving averages have exceeded their 200-day moving averages. This technical milestone typically indicates potential upward momentum in the markets. 

The above chart tracks these movements clearly, with green triangles marking the golden crosses for each index. Despite these positive technical indicators, investors may still exercise caution due to ongoing economic uncertainties in China, particularly in the real estate sector. The persistence of these trends will be key to determining whether the recent bullishness signals a long-term recovery or a short-lived rally.

Global central banks' rate expectations diverge 

Central banks around the world are sending mixed signals about their monetary policies. The above, updated with data from one of our partners, Oxford Economics, shows the expected shifts in policy rates by various central banks by the end of 2024, based on the futures contracts expiring this coming December. It illustrates market expectations for rate adjustments as a response to evolving economic conditions globally. 

Recent developments show that Sweden’s Riksbank and the Swiss National Bank have aligned their strategies, opting for the first policy rate cuts, while the Bank of England has chosen to hold its rate steady as of last week. Notably, while most central banks – including the Federal Reserve, European Central Bank and the Bank of Japan – are projected to cut rates by the end of 2024.

ECB Analysis of Systemic Stress in the Euro Area Financial Sectors

This chart, based on an {{nofollow}}ECB working paper, tracks systemic financial stress in the euro area, breaking it down into sub-indices including equities, bonds, FX, money market and financial intermediaries. Each component reflects a different aspect of the financial system’s health, with the data presented as a one-month moving average as of September 2024. 

Systematic stress has shown a general decline since September 2022, indicating a period of relative stability. However, a noticeable uptick in the stress level associated financial intermediaries poses a question: Is this merely a temporary fluctuation? Or does it signify the onset of deeper financial instability? 

The lower part of the chart, which depicts the correlation of these indices with systemic stress, offers additional insights into how closely each index’s movements are related to overall financial health.

Key insights into employment growth and economic sentiment

Assessing China’s economic health beyond GDP

While China’s GDP growth for the {{nofollow}}first quarter exceeded expectations, other key economic indicators such as retail sales, industrial production and fixed asset investment presented a mixed picture. 

In this context, the {{nofollow}}Li Keqiang Index offers an alternative perspective on China’s economic health. Named after Li Keqiang, the 7th Premier of the People’s Republic of China, this index focuses on three essential indicators: electricity consumption, bank loans and rail freight volumes, which Premier Li favored over traditional GDP as more accurate reflections of real economic activity. 

This chart shows that recently, the Index has tended to suggest more robust economic activity than the official GDP figures, indicating a possible upside bias in assessing China’s economic health. 

India’s economic resilience through alternative growth indicators 

The chart provides a detailed nowcast of India's economic performance, using key indicators such as railway freight earnings, electricity demand and gross credit activity, akin to the alternative measures used in China’s Li Keqiang Index.  

It shows a sustained economic momentum, with the green line indicating that despite fluctuations, the underlying economic structure is poised for continued growth. The differences between the nowcast and the actual GDP data, shown in purple, underscore potential underreported strengths or weaknesses in the economy, offering a more nuanced insight into India's economic trends than GDP figures alone. 

This comprehensive approach reveals an economy that, while facing challenges, demonstrates considerable resilience and potential for future growth.

South Korea’s news sentiment index predicts positive shift in equity earnings

The chart illustrates the relationship between South Korea's news sentiment index and its equity earnings over time, highlighting how changes in media sentiment can precede shifts in financial market performance. 

Developed by the Bank of Korea, the {{nofollow}}Korean News Sentiment Index (NSI) uses natural language processing to analyze news texts from the internet, aiming to gauge the overall economic mood. This index serves as a leading indicator, often predicting economic sentiment around two months in advance of equity earnings reports.

We see that the NSI (in green) fluctuates ahead of the broad market returns of Korean equities (in blue), with noticeable divergences and convergences over the years. For instance, a significant spike in the sentiment index in 2009 precedes a rise in equity earnings, suggesting that positive news sentiment was an early signal of improving economic conditions that eventually reflected in financial statements.

Currently, the NSI indicates an uptrend, suggesting a positive outlook on the economy that may soon be reflected in equity earnings. This makes the NSI a valuable supplementary tool for investors and analysts looking beyond traditional financial metrics and valuations to assess the market outlook for Korean stocks. 

US reports slow job growth in March 

US job growth slowed more than expected in April. Nonfarm payrolls increased by 175,000 jobs, the smallest increase in 6 months. In addition, revisions from the Bureau of Labor Statistics showed 22,000 fewer jobs created in March and February than previously reported. This jobs report falls far below the yearly average of 233,000 jobs and puts it more in line with the pre-pandemic mean which is 190,000.

Signs of a cooling labor market bring some optimism about the possibility of a sooner rather than later cut from the Federal Reserve. 

Federal Reserve maintains rates amid inflation concerns

This chart displays the implied probabilities of future Federal Reserve interest rate levels based on Fed Funds futures trading, offering a snapshot of market expectations for US monetary policy across several upcoming FOMC meetings. 

Notably, while the current rates are maintained at 5.25% to 5.50%, the market sentiment shifts significantly towards a lowering of rates by the end of 2024. This trend suggests a growing anticipation of an easing monetary policy, reflecting the Fed’s cautious approach to achieving sustained progress towards its 2% inflation target before considering any rate reductions. 

The Fed's decision to keep rates unchanged, despite persistently high inflation above 3%, coupled with a strategic slowdown in balance sheet reduction, aims to stabilize the financial system and manage liquidity effectively, preventing potential shortages of reserves reminiscent of the 2019 quantitative tightening issues. 

These policies highlight the Fed's meticulous approach to monetary adjustments, indicating a deliberate path forward amidst evolving economic conditions, which remains critical for global financial markets and has significant implications for developing nations and emerging markets facing pressures from a strengthening US dollar.

Surge in employment across most sectors post-pandemic

The Covid-19 pandemic has profoundly altered employment dynamics across various sectors globally. The above chart delves into the employment changes within the global large-cap market, comparing employee numbers in different sectors to those at the onset of the pandemic in Q1 2020. 

It shows that nearly all sectors experienced an increase in employee numbers. Notably, the energy, consumer cyclicals and non-energy materials sectors have seen the most significant increases, each expanding their workforce by over 57%. The Industrials sector, which ranks second in terms of absolute employee count, has also seen a substantial rise, with a 53% increase.

However, not all trends are positive; the telecommunications sector has experienced a 13% reduction in personnel, highlighting the varying impacts of the pandemic across different industries. 

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