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August 11, 2023

Early hikers, NFP revisions and aggressive asset allocation

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Arnaud Lieugaut
Karl-Philip Nilsson
Usama Karatella
Patrick Malm
Editor:
Keith Campbell
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The world’s “early hiker” central banks mostly dodged a recession

When inflation alarm bells started sounding in 2021, some countries – mostly emerging markets – acted more quickly than others. Some hiked rates a year earlier than their developed-market peers did. 

This heatmap examines nine of these countries, gauging how they have fared since becoming “early hikers” and whether they have avoided recession. 

We chose several criteria: 1) whether the average quarter-on-quarter annualised GDP growth for the past two quarters is below zero; 2) whether unemployment grew by more than 0.15 percentage points over three months; 3) whether the three-month moving average of manufacturing PMI is below 45; and 4) whether average quarter-on-quarter annualised industrial-production growth is below zero for the past two quarters. Wherever these criteria are met, the values have a red background shading. 

Most of these economies appear to have been robust enough to absorb the tightening by inflation-hawk central bankers. Only Hungary faces a likely recession. 

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Repeated nonfarm payroll revisions show a weakening trend

Charts of the Week: Early hikers, NFP revisions and aggressive asset allocation

US employment numbers for July showed nonfarm payrolls grew by 187,000. That was slightly less than market expectations, but still in line with a soft-landing scenario. (Two of our users generated forecasts in line with this data release: read about how they did it here and here.)

However, equally newsworthy were the revisions to the May and June NFP figures: they were both reduced. Indeed, NFP is revised at least twice by the Bureau of Labor Statistics, so expect the July number to change as well (and for June to be revised again).

In this chart, we track two years of revisions, calculating the difference between initial numbers released and the latest estimate. So far, every payroll number published in 2023 has been revised downwards. The cumulative revisions since the beginning of the year represent a loss of 245,000 jobs.

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Signs of a producer price inflation rebound in China

Charts of the Week: Early hikers, NFP revisions and aggressive asset allocation

This chart tracks raw materials purchase prices for the manufacturers’ Purchasing Managers Index (PMI) for China. It also shows the historic correlation with producer price inflation (PPI)– which measures the average change in price of goods and services sold by producers and manufacturers in the wholesale market. (PPI is often a leading indicator for consumer price inflation.)

As PMI prices leave negative territory and climb toward the neutral line of 50, PPI’s year-on-year deceleration is also easing. Given China’s role in the global economy, inflation hawks will be watching.

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Foreign direct investment in China declines

Charts of the Week: Early hikers, NFP revisions and aggressive asset allocation

China also published its second-quarter balance-of-payments figures this month.

Direct investment liabilities, a proxy for inward foreign direct investment, fell to USD 4.9 billion, a historic low. 

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The S&P 500’s probability curve for positive returns

Charts of the Week: Early hikers, NFP revisions and aggressive asset allocation

This chart crunches historical data to examine the chances of making money from the S&P 500, depending on how many years you’ve been invested. 

There’s a steep curve at the beginning. If you’ve been invested for a week, your chance of a positive return is 56 percent. If you’ve been invested for a year, it’s 68 percent. And over two years, your probability of making money rises to 78 percent.   

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Allocating assets with vigilance (and momentum)

Vigilant Asset Allocation (VAA) is an aggressive strategy designed to take advantage of changing trends. It’s a “momentum” play: you invest in asset classes that have recently performed well, based on the long-observed tendency for such assets to keep rising. (Academics attribute this phenomenon to human behavioural biases, such as herding.) 

For the purposes of this chart, we created a VAA strategy that calculates a momentum score for seven different “offensive” and “defensive” ETFs.* It then allocates the entire portfolio to the winner every month. 

We then compared VAA to returns for a traditional 60-percent-stocks, 40-percent-bonds allocation. Since 2005, VAA has generally outperformed overall, as the top pane shows. The second pane tracks drawdowns, i.e. the decline from the last record high. VAA generally also posted smaller drawdowns, especially during the global financial crisis, suggesting that higher returns came with lower risk. 

Interestingly, this is not the case since 2021; VAA has underperformed.

*Offensive ETFs: US large-cap equities (SPY), international equities (EFA), emerging market equities (EEM), and US government & corporate bonds (AGG); Defensive ETFS: Investment-grade US corporate bonds (LQD), medium-term US government bonds (IEF), and short-term US government bonds (SHY).

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