Navigating shifts in global and regional financial trends

G7 inflation trends over the last six months

Last October, we debuted the inflation accelerometer, a dashboard designed to monitor price increase trends across the G7 nations over a six-month period. Each accelerometer – represented as a pie chart – represents inflation rates as percentages of their five-year rolling highs. 

Since its initial release, there have been no new local inflation peaks in any of the G7 countries. Encouragingly, all nations have experienced a deceleration in inflation, with all except Italy stabilizing around the 2-3% mark. Notably, France and the UK have shown significant progress in curbing inflation over the last six months. In contrast, the US has seen minimal improvement, maintaining inflation levels at around 40% of its five-year high.

Global economic recovery gains momentum as financial conditions ease

Recent {{nofollow}}updates from the OECD highlight that the global economy has been performing better than initially expected, particularly in the US. This chart analyzes various economic activity indicators alongside a Global Financial Conditions Index (FCI). We created this composite by integrating {{nofollow}}the IMF’s Developed Markets (DM) and Emerging Markets (EM) FCIs through Principal Component Analysis (PCA). This method included an Autoregressive (AR) model to predict third quarter trends, optimized by selecting the most effective lag length. 

The graph indicated positive trends, as reflected in the global Manufacturing Purchasing Managers’ Index (PMI), industrial production and trade data, all of which have shown signs of recovery recently. The global FCI corroborates these findings, approaching an easing position that favors a supportive macroeconomic environment.

Visualizing three years of S&P 500 sector shifts

This chart presents a colorful ‘quilt’ representation of S&P 500 sector performance over the last three years, showcasing  by comparing the monthly performance of 11 S&P 500 industries, from Real Estate and Financials to Industrials and Energy. For each month, the performance of these sectors is analyzed by calculating the 20^th, 40^th, 60^th and 80^th percentiles, grouping each sector into performance brackets for comparative analysis.

Shades of blue and green represent sectors that have outperformed their peers, while various red hues indicate underperformance, as detailed in the legend. By following the horizontal progression of colors for each sector, you can track its relative performance over time, creating a visual tapestry of market dynamics. Additionally, the closing month S&P 500 price return index is plotted along the left y-axis, providing a reference for overall market trends corresponding to the sectoral shifts.

Bullish trends emerge in Hang Seng and CSI 300 as golden crosses appear

Hong Kong and China’s equity markets are showing optimism as the Hang Seng and CSI 300 indices rally, supported by China’s accommodative economic policies and attractive valuations. Technically, both indices have already reached a “golden cross,” where their 50-day moving averages have exceeded their 200-day moving averages. This technical milestone typically indicates potential upward momentum in the markets. 

The above chart tracks these movements clearly, with green triangles marking the golden crosses for each index. Despite these positive technical indicators, investors may still exercise caution due to ongoing economic uncertainties in China, particularly in the real estate sector. The persistence of these trends will be key to determining whether the recent bullishness signals a long-term recovery or a short-lived rally.

Global central banks' rate expectations diverge 

Central banks around the world are sending mixed signals about their monetary policies. The above, updated with data from one of our partners, Oxford Economics, shows the expected shifts in policy rates by various central banks by the end of 2024, based on the futures contracts expiring this coming December. It illustrates market expectations for rate adjustments as a response to evolving economic conditions globally. 

Recent developments show that Sweden’s Riksbank and the Swiss National Bank have aligned their strategies, opting for the first policy rate cuts, while the Bank of England has chosen to hold its rate steady as of last week. Notably, while most central banks – including the Federal Reserve, European Central Bank and the Bank of Japan – are projected to cut rates by the end of 2024.

ECB Analysis of Systemic Stress in the Euro Area Financial Sectors

This chart, based on an {{nofollow}}ECB working paper, tracks systemic financial stress in the euro area, breaking it down into sub-indices including equities, bonds, FX, money market and financial intermediaries. Each component reflects a different aspect of the financial system’s health, with the data presented as a one-month moving average as of September 2024. 

Systematic stress has shown a general decline since September 2022, indicating a period of relative stability. However, a noticeable uptick in the stress level associated financial intermediaries poses a question: Is this merely a temporary fluctuation? Or does it signify the onset of deeper financial instability? 

The lower part of the chart, which depicts the correlation of these indices with systemic stress, offers additional insights into how closely each index’s movements are related to overall financial health.