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May 19, 2022

Wheat prices, exports and consequences; China slowdown; global equities

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Julius Probst
Arnaud Lieugaut
Patrick Malm
Karl-Philip Nilsson
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Biggest wheat exporters and importers

Food price surges are hurting consumers across the globe as Russia’s war with Ukraine disrupts wheat supplies from the two nations – the world’s biggest and fifth-biggest wheat exporters, as the chart below shows. 

While emerging market economies are suffering most as the biggest wheat importers, low and middle-income households in advanced economies are also feeling the pinch as inflation eats into real incomes. 

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Impact of India’s wheat export ban

With wheat prices soaring, some emerging markets such as India are now banning exports of the commodity to ensure supply for local consumers. But that plan could lead to more severe problems further down the line. 

The chart below shows the extent to which neighbouring countries rely on Indian wheat. Not only has the number of nations risen over the years, but so too the amount they import. 

In Sri Lanka, one of the biggest buyers of Indian wheat, people were already rioting over rising food prices before India started banning exports on 14 May.

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Link between rising food prices and political instability

The events unfolding in Sri Lanka show the impact of rising food prices on political stability, a relationship that has long been highlighted by political scientists and economists. Some believe the Arab Spring protests that erupted across the Middle East and North Africa in the early 2010s were partly driven by the high cost of food. 

Our chart below, which we have published before, takes this seeming correlation further. It shows the correlation between rising food prices and fatalities from terrorism four years later.

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China industrial production

Over to Asia’s biggest economy now and the data from China is looking ever grimmer as the government’s zero-Covid strategy continues to disrupt activity. 

The chart below shows the impact on industrial production, which has fallen to the lowest on record if you exclude the brief plunge at the onset of the pandemic. 

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China GDP forecasting

Using China’s industrial production data, as well as retail trade figures, we created a linear regression model for forecasting the country’s GDP. 

The model below predicts economic growth to fall to 1% in the coming quarter. This would probably push Chinese GDP growth well below the 5.5% target the Chinese government had set for 2022. 

While it’s also considerably lower than the 4% forecasted by Goldman Sachs for 2022, a 1% growth rate in the coming quarter is not implausible given the data we have presented above, which does not even take into account the country’s current slowdown and real estate bubble that is threatening to burst. 

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China credit conditions

Social financing in China, a broad measure of credit and liquidity in the economy, is also declining rapidly alongside the longer term fall in government bond yields. 

While China’s M2 money supply rose to a record CNY250 trillion in April, its differential with social financing has narrowed into negative territory for the first time. It appears even with increases in money stock, borrowing is not getting any easier. 

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China box office revenues

With many parts of the country in lockdown, it is no surprise that fewer people are going to the cinema. The chart below, based on high-frequency data, shows the impact of Covid-19 on box office revenues – both during the first year of the pandemic and now. 

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Euro area inflation distribution

We all know headline inflation is surging across advanced economies. But what do the underlying measures of inflation – such as energy, food, clothing, etc. – tell us? 

The chart below shows the distribution of consumer price rises in the euro area across some 43 sub-components – categorised by the inflation bracket they fall into. As you can see, more items have now shifted right -- into the higher inflation brackets. 

The number of components that show price inflation of 3% is well above the historical average. This shows that inflation today is affecting all sectors and goods in the economy rather than being driven by specific factors, as was the case last year. 

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Sensitivity of global equity benchmarks to US interest rates

Turning to markets now and with interest rates rising, we look at how that may affect global equities. 

The beta coefficient is based on a simple regression and shows the sensitivity of global benchmarks to changes in US real interest rates.

As you can see, it varies significantly across countries and time periods, showing that some equity markets are more reactive to rising US interest rates than others. 

With the Federal Reserve planning to raise rates throughout the year and as global credit conditions tighten, we can thus expect any resulting stock market losses to vary significantly across different markets.

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US equities

Our last chart tracks the S&P 500 against its long-run exponential trend. 

It shows the extent to which equities have surged above trend in recent decades – including the periods leading to the dot-com bubble and the global financial crisis. Asset prices have also climbed to new highs in the last two years following unprecedented crisis intervention from fiscal authorities and central banks.

But overpriced assets don’t necessarily indicate a bubble. Several factors, including the long-term decline of real interest rates, have pushed up the fundamental value of financial assets across the board. 

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