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June 14, 2024

Baby bust, tech boom and inflation trends

This week's chart pack looks into dramatic shifts in global fertility rates, US bond returns, credit spread stabilization and the unprecedented strength of the S&P 500. We also examine the impact of technology-driven optimism on equity valuations, highlighting the influence of AI and sector-specific dynamics.
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Usama Karatella
Siwat Nakmai
Hank Rainey
Desmond Wong
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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.

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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.

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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.

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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.

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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.

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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.

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