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May 31, 2024

Charts of the Week: 31 May 2024

This week's chart pack analyzes key macroeconomic trends impacting global markets. We explore China's real estate and exports market, corporate credit performance in different PMI-based macro regimes, and US inflation. We end with a bit of bright news from the Rhine River!
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Siwat Nakmai
Usama Karatella
Karl-Philip Nilsson
Yuman Tang
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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.

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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.

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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.

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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.

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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.

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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.

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