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November 24, 2022

Tech job cuts, Nasdaq’s drop and a homebuilder slump ahead

This week’s charts address US tech job cuts and the falling Nasdaq’s close relationship with indicators tied to the tech sector. Still, Silicon Valley has made California so rich over time that it’s approaching German GDP levels. We examine stocks in different inflation regimes and the decades-long US “twin deficit.” On the inflation front, advanced economies are racking up emerging market-like price increases, but there is relief ahead for German producers. Finally, US homebuilders are set for a downturn, while the Chinese aren’t going out to watch movies.
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Julius Probst
Arnaud Lieugaut
Patrick Malm
Karl-Philip Nilsson
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When tech stocks tumble job cuts are around the corner

When the Nasdaq swoons, job cuts at tech firms are coming within the year.  

That’s the pattern indicated by our chart. There is a high correlation between the US technology stock benchmark’s performance and job reduction in the tech sector (as measured by Challenger, Gray & Christmas) eight months later.

Massive job cuts at Meta, Twitter and Amazon have been in the news. But based on the continued downward trajectory of the Nasdaq, there may well be more pain to come.


The seeming permanence of the US twin deficit

The “twin deficit” is the sum of a country’s government budget deficit and its trade deficit.

As our chart shows, the US has been recording a twin deficit since the early 1970s, with the exception of a very brief period of budget surpluses in the 1990s. 

Many economists argue that the twin deficit is related to the status of the US dollar as the global, primary reserve currency. The world craves US dollar assets, which is why the world’s biggest economy can borrow money relatively cheaply in international capital markets. 


US homebuilding boom is likely to crash back to earth

It seems simple enough: when people are buying newly built homes, construction companies make more of them.

As our chart shows, this is usually a tight correlation, but due to the pandemic and its aftermath, we’ve seen a certain divergence over the past year. 

Homebuilding surged throughout 2021 and early 2022 as the US economy recovered quickly. But the Federal Reserve’s rapid tightening cycle has resulted in mortgage rates that are now significantly higher than any time post-2008.

Consequently, the real estate sector seems to be turning quickly, and the number of houses sold has been plunging. It’s probably only a matter of time until that pain feeds through to new construction.


US equity returns as tracked by growth and inflation regimes

The following chart compares how stock markets (as measured by the S&P 500 in this case) perform in different macroeconomic environments going back to 1970. 

We split the data using the 33rd and 66th percentiles to delineate whether inflation or growth in a given time period was high, “normal” or low. That results in nine different inflation/growth regimes.

Unsurprisingly, equity returns have historically been highest in a high growth-low inflation environment. Equally unsurprisingly, low growth and high inflation is bad news.


Korean electronic part shipments and the Nasdaq tend to move in lockstep

South Korean and Taiwanese exports are often considered leading indicators for global trade. 

For this chart, we chose a more narrow focus -- South Korean electronic component shipments –and tracked the year-on year change against 12-month returns for the Nasdaq.

As the chart illustrates, there is a strong correlation between the two variables. The recent slump in shipments, a drop of about 18% year-on-year, was accompanied by a tumbling Nasdaq index.


German producer inflation should ease as supply chain stress recedes

Germany’s producer price index (PPI) went ballistic over the last year. Input cost increases for German companies topped 40% as the global commodity price shock combined with interruptions to supply chains.  

The following chart shows the tight correlation between this measure of inflation and the New York Fed’s global supply chain pressure index (which has been pushed forward by 9 months). 

As supply chain pressures eased in the second half of this year, German PPI is finally reversing and bound to come down further.


Advanced economies have almost matched emerging market inflation rates

For the first time in many decades, inflation across emerging markets is not significantly higher than it is in advanced economies.

In the following chart, we track not only inflation rates but their volatility, showing the 12-month range of inflation for each country. 

Among advanced economies, the UK ‘s large increase stands out. Among the emerging markets, inflation is extremely pronounced in Russia – an obvious consequence of the war in Ukraine and the Western sanctions that resulted. 


Chinese moviegoers are staying home again amid Covid concerns

If China relaxes its Covid zero strategy, cinema owners will be among those businesses sighing with relief. They experienced a false dawn earlier this year.

The following chart examines Chinese moviegoing over the course of different years, as expressed by the daily box-office return smoothed as a 1-week moving average. It compares the average trend in the 2017-2019 period, the peak pandemic years of 2021-22, and the current year. 

Box office revenue has been significantly lower over the past 100 days than at any time during the past two years. That compares to the spike at the start of 2022, when revenue soared past the pre-pandemic mean. Film-hungry audiences took advantage of a lull in coronavirus cases that coincided with the consumption-boosting Chinese New Year. 

Our recent Covid monitor chart detailed outbreaks by region. Moviegoers are an important gauge of consumer activity, given box office figures are a contributor to domestic retail consumption figures.


California is almost richer than Germany

California’s population is only half that of Germany, but as measured by gross domestic product, the home of Silicon Valley has almost surpassed Europe’s biggest economy.

The following chart shows that shrinking GDP gap, as expressed in dollars. (Obviously, the very strong greenback helps America’s most populous state in this comparison.) 

While the tech sector is retrenching after a great expansion, this chart reflects the enormous amount of wealth and productivity it has brought to the West Coast. Compared to other advanced economies, the Golden State truly stands out and could easily overtake Germany in the years to come. 

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