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January 19, 2023

India overtakes China, Japanese yield control and US tech layoffs

This week’s charts examine a historic demographic shift: China is set to be surpassed by India as the world’s most populous nation. We also examine government investment that’s supporting China’s economy, market rumblings surrounding Japan’s monetary policy and soaring grocery prices in Britain. In the US, we chart resilient stock valuations on an international basis, the cooling housing market, layoffs in the tech sector, and contraction in manufacturing. Finally, we construct models to measure Germany’s economy and forecast US inflation.
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Nicolas Tremel
Arnaud Lieugaut
Karl-Philip Nilsson
Usama Karatella
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India is poised to overtake China as the most populous country

According to United Nations figures released this week, India is probably going to overtake China by population this year.

As our charts show, both nations are currently estimated to have populations of 1.43 billion people. But the trend lines are quite different – as is the demographic breakdown shown in the two charts.

India’s death rate has fallen, life expectancy is rising, incomes have increased, and the birth rate remains high. That means the population is young: more than half of Indians are under the age of 40. The population isn’t projected to start declining (under the UN’s fertility assumptions) until the 2060s.

By contrast, China’s population is aging and has started to decline – a legacy of the one-child policy between 1980 and 2015.


Scepticism about yield curve control in Japan

The Bank of Japan is the last of its peers to maintain negative interest rates. It brought in yield curve control (YCC) in 2016; as the central bank owned half the nation’s bond market, the effectiveness of further quantitative easing was limited. YCC allowed the BoJ to control the shape of the yield curve, keeping short and medium rates close to the 0 percent target, without depressing long-term yields excessively. 

Late last year, Japan surprised markets by widening the acceptable range, as the shaded area of our chart shows, to 0.5 percent. This stirred speculation that a greater policy shift could follow, given the tightening cycle being executed by its global peers.

The YCC was in the news again this week. Amid calls to abandon the policy and restore bond-market liquidity, the Bank of Japan vowed to double down and keep buying bonds, as it had throughout 2022’s inflation-driven fixed-income selloff. The yen declined. 

As our chart shows, 10-year swap rates have started to diverge significantly from the 10-year yield, indicating that the market is questioning the sustainability of this strategy.


Cracks in the US labour market

With US tech industry layoffs in the news, our chart breaks down trends in the nation’s labour market by sector during December. 

To be sure, unemployment remains near a record low. But Fed Chair Jerome Powell is watching closely as he seeks to cool the economy. 

Indeed, as Silicon Valley scales back overly optimistic growth forecasts and some pandemic-era business models were in fact not the “new normal,” technology shed the most workers among industries last month, according to data from Challenger, Gray & Christmas.  

In the No. 2 and 3 spots are financial-services companies and insurers, paring their workforce amid speculation that higher interest rates will result in recession. Health care and energy posted the biggest job gains.  


Nowcasting Germany

Nowcast models aim to “predict” the present, given there is a lag before data becomes available, and keep investors ahead of the curve. Last week, we examined the US and presented the community with a template to examine real-time GDP. 

Now, we turn our attention to Europe’s biggest economy. This Nowcast uses a regression model based on weekly and monthly German data that have been shown to be leading indicators for headline GDP, with a significant correlation – as the chart shows.

These indicators include a truck toll mileage index, the Bundesbank’s weekly activity index, and the well-known IFO business climate survey, among others.

Macrobond users can change any of these input variables to create their own Nowcast. 

Amid Germany’s disproportionate exposure to both China’s slowdown and higher energy and food prices in 2022, our template Nowcasts that the economy shrank 1.15 percent in the fourth quarter. 


A scenario for shrinking US inflation that stays above the Fed’s target

This chart aims to forecast US price increases in 2023 using a selection of leading indicators to predict three components of inflation. 

For housing, we used data from Zillow, the real-estate marketplace. For food and beverages, we selected fertiliser prices as a leading indicator. And to forecast the consumer price index (CPI) excluding food and housing, we selected the Atlanta Fed’s business uncertainty survey on employment growth.  

These indicators lead the specified component by 5 to 13 months. 

Based on these historic correlations, and similar trends for the three components, our model predicts inflation will moderate – posting a 4.2 percent year-on-year increase in May 2023. This would be consistent with a recession and weaker oil prices. 

Will this result in a Fed pivot? It’s worth noting that this model shows inflation will still be well above the Fed’s 2 percent target.


China increases public investment to support growth

China reported that fourth-quarter GDP increased by 2.9 percent, one of the slower prints in recent quarters. Generally, the nation’s economy was hampered by the lockdowns stemming from the zero-Covid policy in 2022, as well as a property slump. 

Our first chart tracks GDP growth and its components: final consumption exposure, investment and net exports. 

The second chart shows how China has increased public investment during this slowdown to support growth; by contrast, private-sector investment in fixed assets has slowed and was nearly unchanged year-on-year in the fourth quarter.

Watch for these trends to evolve as the zero-Covid policy is relaxed. Observers will be watching whether a domestic growth rebound mitigates headwinds from a US recession.


US ISM clock is clearly in the contraction zone

This chart shows a “clock” tracking a year and a half of data from the US Institute of Supply Management (ISM). It presents both the ISM Manufacturing (x axis) and Non-Manufacturing (y axis) indices -- particularly key leading indicators for the US economy over the last 18 months. 

Readings below 50 for either index indicate that a contraction is expected over the next three to six months; readings above 50 indicate that expansion is expected. 

We track both the main indexes and the “new orders” subcomponent, considered the most forward-looking indicator. 

All readings are below 50 – a recessionary signal.


Historic trends show US home supply is in line with moderating prices

This scatter chart tracks the historically negative correlation between the supply and price of US homes. The historic average for these two variables is roughly at the centre of the diagonal line.

As one might expect, prices increased in recent years as new supply was constrained in a context of strong growth and low interest rates. 

However, the last six months – as tracked by the dashed line in purple – show how the Fed’s rate hikes are having an effect. (Back in November, we examined the impact on US homebuilding.)

Home prices have moderated sharply, despite a limited supply of homes, and we are more or less back in line with historic trends.


The surprisingly modest US stock valuation discount versus peers

This candlestick chart highlights equity valuations across selected markets, using a premium database from FactSet that aggregates companies. (This methodology could be easily used to analyse different equity sectors and investment styles instead.)

For the US, UK, Germany, Switzerland and aggregate measures of the developed and emerging markets, we track price-earnings (PE) ratios against historic median values and percentile ranges since 1999. 

The chart shows the US is trading at only a modest valuation discount, despite growing expectations of a recession. On the other extreme, Germany trades at a significant discount; we have previously discussed the outsized impact of China’s zero-Covid policy and the energy crisis on the European country’s export-driven economy.


The British food inflation season lasted all year in 2022

Our final chart measures the seasonality of food inflation in the UK since 2015. Usually, British inflation is in fact not particularly seasonal; the main trend of note is that prices seem to increase in the run-up to Christmas. 

The great exception is 2022: the year of post-pandemic supply chain disruptions, exacerbated by the UK’s departure from the EU’s customs union not long before – and the dislocation to global agricultural and fertiliser markets that followed Russia’s invasion of Ukraine.

Prices for food and non-alcoholic drinks increased for 15 consecutive months, and posted a year-on-year increase of 16.8 percent in 2022 – the biggest annual increase since 1977.

As Britain’s cost-of-living crisis persists, hitting the poorest households worst of all, there was little relief to be had at the grocery store at the end of 2022. 

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