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January 26, 2023

CO2 trends, dollar weakness and anticipating the pivot

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Nicolas Tremel
Arnaud Lieugaut
Karl-Philip Nilsson
Usama Karatella
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The evolution of emissions by country

The following charts show how the composition of the world’s carbon emitters has changed over the past 20 years. It’s no surprise to see that China’s industrialisation has been a game-changer; as the US, Japanese and European share shrinks on a relative basis, Asia’s biggest economy now accounts for almost a third of global emissions, more than doubling its proportion since 2003. 

India’s contribution is also of note, rising to 7 percent of global emissions from 4 percent. Overall carbon emissions have increased to 37 billion tonnes from 27 billion tonnes 20 years earlier. 

These trends highlight the importance of US-China climate talks, which resumed late last year. US climate envoy John Kerry said in Davos last week that he was hopeful about a breakthrough.

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Dollar Index weakness amid speculation about a less hawkish Fed

King Dollar was one of the main themes of 2022; the Federal Reserve’s rate hikes sent the global reserve currency surging against almost all peers. 

The Dollar Index (DXY) measures the greenback against the currencies of major US trading partners. As the chart below shows, we have had a reversal this year amid increasing bets that the Fed will be less hawkish than some feared. Service and manufacturing PMI indicators are predicting recession. 

There are two notable trends in this chart: 1) before the pandemic, swings in the Dollar Index were not nearly as extreme. And 2) the Japanese yen has been a much bigger factor in the last 12 months than it was previously, when DXY reflected more of a dollar-euro dynamic. (Read guest blogger Harry Ishihara’s recent comments on the Japanese reticence to change course on monetary policy.)

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The stock market rotates after tech selloff last year

The narrative for equity markets is also changing with perceptions of the Fed’s path this year. Indeed, markets are anticipating the next rate hike will be 25 basis points, rather than a half percentage point. Sectoral trends in the equity market are also consistent with an economy that will not deteriorate as much as some feared.

This dashboard breaks down the market by sector. Interestingly, as we head into a potential recession, traditionally defensive stocks – consumer staples, healthcare and utilities – are underperforming. 

Meanwhile, the pain has stopped, or at least paused, in the world of tech. Communication Services and Information Technology are atop the dashboard – as measured by not just recent performance, but the Relative Strength Index (RSI) and stock momentum relative to the previous 50 days. 

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A measure of US analyst downgrades is at the highest in 30 years

To be sure, many warning signs for US markets remain. This chart tracks analyst downgrades – often an excellent leading indicator for stock-market underperformance. 

In particular, the chart measures the relative number of earnings-per-share downgrades for US equities versus global equities over the previous 100 days. 

This reflects the fact that leading macroeconomic indicators degraded more quickly in the US than elsewhere.

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The persistent discount for Russian crude

As Russia persists with its war in Ukraine, so do the sanctions on Russian crude. 

This chart shows the price divergence between the key western European (Brent) and Russian (Urals) crude-oil benchmarks. Starting almost a year ago, when the war began, Russian oil became about $30 a barrel cheaper as the Brent price spiked. (This spread, which has stayed relatively consistent, is tracked in the bottom section of the chart and is near its widest since the start of the conflict.)  

In September, the G7 nations imposed an effective cap of $60 a barrel on the Urals price. 

In December, as the EU banned imports of Russian oil, we showed how Russia turned to India and China to find buyers for all that discounted crude.

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Projecting terminal interest rates

When will central banks stop hiking rates? It’s fair to say that over the past year, that’s been the overarching question in macroeconomics. 

We have revisited this theme several times: in our recap for 2022, we showed how markets no longer expected the Bank of England to out-hike the Federal Reserve, as they did for several months in the second half of the year. (This moment can be seen where the lines on the chart below cross, in about November)

Rather than project the future interest rate curve, this chart purely shows what the market was anticipating the peak policy rate would be over time. After steady increases in tandem over most of 2022, the lines have flattened as concern about inflation eases.

Notably, as recently as a year ago, the terminal rate was seen as zero for the ECB.

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Time traveling with pivot expectations

Here is a different visualisation of this theme. Rather than tracking how high futures markets expect the peak (or “terminal rate”) to be for various central banks, this chart tracks when markets believe the Fed, ECB and BoE will stop hiking.

Markets have consistently expected the Fed to be the first to stop hiking for most of the past year, but it was still a different world in July: markets expected the Fed would have reached its terminal rate already by now, a full year ahead of the ECB. Meanwhile, expectations that the UK’s central bank would still be hiking in 2024 have faded.

Despite what futures markets are showing, it is notable how many observers remain sceptical that the Fed will be ready to “pivot” in May, as this chart suggests.

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Bah Humbug for more Christmas shoppers

It appears that the cost-of-living crisis – and perhaps concerns about a worsening economy in 2023 – prompted US consumers to hold back last Christmas, as they did the year before.

This chart tracks how December spending compared to its November equivalent over the course of recent decades. There have been surprisingly few Christmas splurges lately. 

While this chart tracks US retail sales, we have noticed disappointing figures in other countries as well.

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Visualisation of urbanisation

The United Nations calls urbanisation one of four “demographic mega-trends,” along with population growth, aging and international migration. As a nation’s people move to cities, education, income and longevity generally improve.

The visualisation below charts wealth against the urbanisation rate for some of the world’s biggest economies. Population is indicated by the size of the bubble.

We wrote last week about India overtaking China as the most populous country. As this chart shows, India is still far behind China on urbanisation; it is the most notably rural country on the chart.

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UK public borrowing creeps higher

British deficit spending is creeping back into pandemic-era territory, as our chart shows. (The peak months for the Covid-19 furlough spending and business-support programs are shown in the shaded area on our chart; January is notable as the month when the UK posts a surplus from tax receipts.) 

Public sector borrowing last month was GBP27.4 billion, the highest December figure since monthly records began in January 1993. 

This reflects two main macro themes of 2022: surging interest rates and the energy crisis. The UK spent more to help households with their utility bills, while interest payments to service the national debt soared. 

The rising rate environment is a key factor behind why markets reacted so strongly to former Prime Minister Liz Truss’ scrapped plan to borrow even more. 

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