UK immigration trends, China’s property glut and bearish bets on the yen

Global debt and interest rates reveal fiscal challenge

What the chart shows 

The chart presents a comparative analysis of cross-country government debt to GDP against 10-year government bond yields and their volatilities. It includes data for both advanced economies and emerging and developing economies, with each country's position depicted by a bubble. The size of the bubbles indicates the bond yield volatilities, measured on a daily, annualized basis, with a 3-year look-back period.

Behind the data

Government debt has been higher relative to economic output across advanced economies and emerging and developing economies. Meanwhile, we may have been shifting to a world of higher interest rates—in both nominal and real terms—and higher inflation compared to pre-pandemic periods. This is due to certain structural issues, such as deglobalization, supply chain relocations and {{nofollow}}sizeable government spending.

In this chart, Japan stands out. Its debt exceeds 250% of economic activity but manages to maintain low interest rates and low volatility thanks to the Bank of Japan’s (BoJ) yield curve control (YCC). 

The US and European countries follow, with their debt levels exceeding 100% of GDP, accompanied by elevated levels and greater volatilities of nominal interest rates. Among developing countries, Egypt is notable for having larger debt and higher long-term interest rates.

Moreover, economic growth outlooks could resume potential trends more closely, which have been relatively lower over time across countries. Accordingly, this government debt data suggests that long-run {{nofollow}}fiscal risks, in terms of sustainability, are among the macroeconomic challenges that policymakers and investment professionals continue to face.

Immigration into UK slows despite surging non-EU inflows 

What the chart shows

This chart illustrates net long-term immigration to the UK from 2011 to 2024 as a rolling 12-month estimate, broken down into three categories: Non-EU, EU and British. While immigration slowed in 2023, inflows continue to be significantly higher than historical averages. Most immigrants (+797,000) came from non-EU countries, while net migration was negative from EU countries (-75,000) and British nationals (-37,000). 

Behind the data

As the UK prepares for the polls on 4 July, immigration remains a key socio-economic issue. Official data released on 23 May indicated that net immigration to the UK slowed to 685,000 in 2023, with work replacing study as the primary motivation for immigrants. 

Additionally, these estimates have been revised upwards from previous figures. The peak net migration for Q4 2022 was adjusted to 764,000, and the net inflows for Q2 2023 were revised up by 68,000 to 740,000. This upward revision highlights the sustained high levels of immigration the UK is experiencing, driven mainly by non-EU nationals seeking employment opportunities in the country. As immigration continues to shape the socio-economic landscape, it will undoubtedly influence voter sentiment in the upcoming elections.

Chinese cities face property glut amid sluggish recovery

What the chart shows

This chart provides a detailed view of the real estate clearance time in China, segmented into Tier-1 (economic powerhouses such as Beijing, Shanghai, Guangzhou and Shenzhen) and Tier-2 cities. Clearance time is a critical metric in the real estate market as it indicates the number of months required to sell the current inventory of properties. 

Behind the data

The clearance time in Tier-1 cities has fluctuated significantly over the years, and since 2022, it has risen steadily, suggesting a slowdown in property sales possibly due to economic uncertainties and stricter regulatory measures.

By comparison, Tier-2 cities generally have longer clearance times, reflecting less dynamic market conditions. The trend in these cities has been more stable, with gradual increases over time. However, like their Tier-1 counterparts, Tier-2 cities have also experienced an increase in clearance times since 2022. This slowdown across both types of cities highlights a sluggish market recovery in the wake of the pandemic, which is also evident in the decline of property transaction values relative to GDP.

Stocks and bonds move in sync as inflation uncertainty looms

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What the chart shows

This chart illustrates the relationship between stock market performance, bond market volatility and inflation uncertainty. It overlays the MOVE Index (a measure of bond market volatility), the S&P 500 Index, and the Economic Policy Uncertainty (EPU) Index, highlighting recent trends and correlations.

Behind the data

US Treasury yields serve as the benchmark for all borrowing rates, including those for corporate debt and consumer credit cards. A {{nofollow}}relaxed bond market is essential for economic activity and the overall health of all markets.

Since late 2021, US stocks—by means of diversification in particular, as represented by the {{nofollow}}S&P 500 Equal Weight Index—have been relatively aligned with overall US Treasury implied volatility, as measured by the {{nofollow}}MOVE Index. Additionally, further softening in bond volatility observed since last year may favour stock market strength (see upper pane).

The alignment between the S&P 500 Equal Weight Index and the MOVE Index underscores the influence of bond market conditions on stock performance. Lower bond volatility typically results in lower borrowing costs, providing a supportive environment for corporate investment and consumer spending, which in turn can bolster stock prices.

However, there remains a possibility that inflation uncertainty persists. This is proxied in the chart by the Inflation Equity Market Volatility (EMV) Indicator, which shows approximately a 0.7 five-year rolling correlation with the MOVE Index (see lower pane). The persistent correlation between the MOVE Index and the EMV Indicator highlights the intricate relationship between bond market volatility and inflation uncertainty. Amid resilient growth, US stock performance could face challenges due to this lingering uncertainty.

High yield bond spreads narrow as demand surges amid economic optimism

What the chart shows

The chart displays the frequency distribution of the ICE BofA US High Yield Index Option-Adjusted Spread (OAS) across various spread ranges from 1997 to the present. The X-axis represents different spread ranges in basis points, while the Y-axis shows the number of days the spreads traded within each range. The current spread range of 300-350 basis points, highlighted in red, indicates that high yield spreads are at a relatively narrow range compared to historical data.

Behind the data

Given the high short-term yields, many income-seeking investors have recently turned to cash. However, high yield (HY) bonds have also gained appeal, offering yields close to 8% amidst inflation and steady economic growth. This has led to a resurgence in HY demand after two years of significant outflows.

On the supply side, HY bond issuance has also increased after hitting a decade low in 2022. Nevertheless, the dominant pressure comes from demand, resulting in an approximate 10bps compression of spreads year-to-date to around 325bps. This compression reflects the robust appetite for high yield.

The frequency distribution chart suggests that spreads are priced for a perfect economic soft landing. Since 1997, spreads have been tighter by only about 7% of the time, indicating that the current market conditions are seen as relatively favorable.

Bearish yen bets rise to 17-year high 

What the chart shows

This chart illustrates the net positions of leveraged funds and asset managers in yen futures contracts. We can see that the net number of contracts held short by these entities are currently at their highest level in 17 years, surpassing 140,000 contracts.

Behind the data

This bearish sentiment towards the yen can be attributed to several factors. Firstly, the Bank of Japan (BoJ) has maintained an accommodative monetary policy stance, signaling that it will keep financial conditions easy. Despite the recent rate increase, the BoJ has indicated that this does not herald an aggressive hiking cycle, unlike the tightening observed in the US, UK, and Europe. This dovish outlook has contributed to sustained weakness in the yen as investors anticipate continued low-interest rates in Japan.

Secondly, the robust performance of the US economy has led investors to scale back their expectations for interest-rate cuts by the Federal Reserve. As a result, even though Japan has moved its rates away from negative territory, they remain significantly lower than those in the US. This disparity in interest rates has further fueled the bearish bets against the yen.

However, the high level of short positions also sets the stage for a potential short squeeze. If the BoJ decides to intervene aggressively in support of the yen, it could trigger a rapid unwinding of these bearish bets. Such a scenario would not only impact the currency markets but also affect corporate Japan. Many of the country's largest exporters and multinational companies have benefited from the weak yen, which has boosted their earnings. A sudden strengthening of the yen could reverse these gains, turning an earnings uplift into an earnings drag.