Charts of the Week

China unemployment

This week, we start with more grim data from the world’s second-biggest economy. China’s national and youth unemployment rate have both surged to a record amid stringent lockdowns. Job prospects for graduates have also deteriorated significantly as the Chinese economy heads towards contraction.

EU consumer confidence

The mood is hardly better in Europe, where consumer confidence has fallen to historic lows across the euro area. As the chart below shows, the current value has dropped below the 25th percentile for almost every country in the bloc.  

EU consumer confidence and inflation

Soaring retail prices obviously discourage people from spending money, and this next chart shows the extent of that correlation.

The proportion of consumers with low (below the 25th percentile) or record low confidence has spiked – to levels comparable with the Great Recession, the European debt crisis and the pandemic – as EU inflation hits a record 8.1% this month.

EU consumer vs business confidence

Interestingly, while consumers are feeling the pinch, businesses have hardly felt more buoyant – so much so that the gap between consumer and business confidence has widened to a record! Amid rampant inflation, are businesses managing to maintain profit margins by passing costs on to consumers?

MENA food inflation

To the MENA region now, where consumers are also feeling the pain – or even hunger pangs – of inflation.  

The chart below shows the degree to which headline inflation across the region is being driven by rising food and beverage prices, particularly in north African countries such as Algeria and Egypt.

MENA breakeven oil prices

Oil producers in the MENA region, on the other hand, are raking in the profits as the war in Ukraine sends commodity prices soaring.

The chart below shows the breakeven oil price each country needs to cover the cost of its imports (external) and balance its budget (fiscal) compared with the current spot price and 10-year average.

(This short article by the Council of Foreign Relations discusses breakeven oil prices and the pros and cons of using these figures for economic analysis.)

Global growth outlook

Thanks to high oil prices, MENA is poised for healthy economic growth this year. It trails only Asian emerging markets in the IMF’s growth outlook for 2022, as the chart below shows. Global GDP is now expected to expand by about 3.6%, with significant variation across regions. Note the toll of the Ukraine war on European emerging markets.

Japan’s real effective exchange rate

Finally, a bit of good news for Japanese exporters and tourists to Japan.

Thanks to the Bank of Japan’s ultra-easy monetary policy, the country’s real effective exchange rate – the weighted average of its currency in relation to an index or basket of other major currencies – has dropped to the lowest level since the early 1970s.  

US unemployment vs natural rate

A key building block of modern, neo-Keynesian macroeconomic theory is that the business cycle is symmetric: the economy fluctuates around the natural rate of interest and the natural rate of unemployment. Accordingly, output gaps should as a first approximation follow a normal distribution.

However, as our economist Julius Probst, PhD recently argued in a Mercatus research paper, the US economy seems to behave instead like Milton Friedman’s plucking model: the economy will follow trend output over time – that is, while there are no artificial booms that push the economy above trend, recessions do pull the economy below potential. Moreover, the steeper the initial decline, the larger the subsequent recovery.

Our first chart shows this inherent asymmetry in the labour market. Since the 1980s, the actual unemployment rate has remained above the natural rate estimated by the Congressional Budget Office (CBO) some 80% of the time. 

US unemployment gaps

The distribution of unemployment gaps – the percentage point difference between the real and natural rate of unemployment - is highly skewed, as the histogram below shows. 

Since the 1980s, positive unemployment gaps – when the unemployment rate is higher than the natural rate – have occurred more often than negative ones. Moreover, they are also much larger in size, consistent with the plucking view of business cycles. For example, during the Covid-19 pandemic, the actual unemployment rate increased 10 percentage points above the natural rate.

Growth and inflation volatility

Speaking of business cycles, it looks like we’re in the midst of a macroeconomic regime shift. The Great Moderation of decreased macroeconomic volatility from the mid-to-late 80s to about 2007 – which resumed after the end of the Great Recession – appears to be coming to an end. 

As the chart shows, volatility of both GDP growth and inflation has surged recently amid macroeconomic shifts and shocks triggered by the pandemic.

Fed tightening cycle and policy rates

The next two charts use our slice analysis function to compare different historical Fed tightening cycles in one chart. 

In the first, we used market prices (Fed funds futures) to predict how the policy rate will evolve over the next couple of years. As you can see, despite surging inflation, it doesn’t seem likely that policy rates will rise too sharply or quickly during the current tightening cycle. 

We can certainly expect it to be less severe than during the Volcker shock (1980/1981), when then Fed Chairman Paul Volcker deliberately triggered a recession through a series of sharp rate hikes to crush rampant inflation. But perhaps not as benign as the post-financial crisis tightening cycle that started in 2015, which had to progress slowly lest it damage an already weak economy.

As such, markets are already pricing in some policy cuts in 2023/2024 – consistent with the idea that the US might face a substantial economic slowdown or even downturn in about a year.

Fed tightening and unemployment

Looking at the tightening cycle and its current impact on unemployment, however, we can see some aberration. 

In contrast to previous tightening cycles – when the unemployment rate fell during the economic upswing – joblessness is now at a historic low, with the US labour market close to full employment. 

As the chart shows, the current cycle has started with an unusually low unemployment rate, which cannot go much lower. So, what will pay the price instead?

With the Fed funds market already pricing in rate declines in 2023, it appears bond market investors expect the US economy to slow down or enter a full-blown recession sooner rather than later. 

German producer prices

The next chart looks at the impact of inflation on Europe’s biggest economy. 

As the heatmap shows, the price of goods sold by German manufacturers has risen sharply, driven by the higher cost of crude oil, gas, electricity and food. The Producer Price Index is up by more than 33% on a year-on-year basis. 

Sri Lanka inflation

Inflation is hitting the pockets of people everywhere, but in some emerging markets, it’s leading to a full-blown economic crisis. 

In Sri Lanka, the inflation rate has jumped to more than 30% from just 5% a year ago, with food prices and transport (a consumer of energy) the biggest drivers. 

Meanwhile, tourism – one of the country’s biggest foreign currency earners – has collapsed in the wake of the pandemic. 

Little surprise then that Sri Lanka recently defaulted on its debt, given the insufficiency of foreign reserves to pay for imports. 

Sri Lanka retail food prices

The next chart takes a closer look at Sri Lanka’s skyrocketing food prices based on high-frequency data collected by the country’s statistical agency each week. 

As you can see, prices of items such as bread, wheat flour, and tomatoes have swelled by at least 50% since January, leading to large declines in real incomes and a severe cost-of-living crisis that has sparked anti-government protests and rioting. 

China and US 10-year yield gap closes

Our last chart this week shows the yield spread between US and Chinese 10-year yields. For the first time in more than a decade, US government bonds are offering a higher yield than those issued by China. 

This partially reflects the different business cycle dynamics of the two countries. In the US, the Fed is tightening policy to control inflation while in China, the government is calling for more monetary stimulus to cushion an economic slowdown caused by its zero-Covid policy. 

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. 

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.

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.

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. 

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. 

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. 

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. 

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. 

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.

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. 

UK inflation forecast revisions

Among advanced economies, the UK is hurting most from inflation and soaring global commodity prices. The Bank of England has had to significantly revise up its inflation forecast in the past year – and our first chart shows the stark 8.25% gap between its prediction in May 2021 and May 2022. The BOE now expects inflation to hit a record 10% this year before normalising back to its target 2% in 2024. 

UK unemployment forecast revisions

Our next chart covers one of the factors contributing to UK inflation – a tight labour market that is forcing wages higher. See how much the jobless rate has fallen after shooting up in the early stages of the pandemic. 

However, as the chart shows, the BOE now forecasts unemployment, currently at 3.5%, to exceed 5.5% by 2025. In other words, the central bank is expecting the UK to tip into recession this year or next – which, at least, would help it rein in inflation. 

German GDP forecasting with vintage data

Germany could also fall into recession should it fully ban gas imports from Russia. The Ukraine war has already dampened the country’s growth prospects, which had started to look rosier after the start of the pandemic triggered a collapse in GDP. 

Our next chart looks at how Macrobond’s vintage data can predict German economic growth. We created a model using industrial production and foreign trade as a proxy for GDP. Note that we used the vintage data available on 15 September 2020, and not the final data revisions for the time series in the model. As you can see, our regression accurately predicted a V-shaped recovery for German GDP after the initial Covid recession.

Euro area inflation dispersion

Looking at the wider euro area, inflation rose to a record 7.5% in April – but just as worrying is the high degree of inflation dispersion within the bloc. Baltic economies are plagued by the sharpest rises – even exceeding 15% for Estonia while in Malta, the rate is as low as 5%.

This dispersion is problematic for the eurozone as it cannot control price levels of individual countries; it can only target an average for the entire bloc.

(Note: Country weights for the Baltics and Malta are too low make a marked impact on the aggregate eurozone inflation index.)

US early retirement trend

Like the UK, the US labour market took a huge hit when the pandemic struck in early 2020 – leading millions to take early retirement. As our chart shows, the population of people aged above 55 not at work rose rapidly above trend. However, that trend is now reversing as the labour market recovers – sending the unemployment rate to the lowest in 50 years. 

Birth rate and house prices in Japan

An ageing population coupled with a low birth rate is adding to Japan’s housing market woes. Prices have been falling since its massive real estate bubble burst in the early 1990s and will struggle to recover as the population shrinks. 

China’s ageing population

China’s population is also set to have a disproportionate number of elderly people – not helped by its 35-year one-child policy that was scrapped in 2015. Our China age pyramid shows that by 2050, those aged 50 and above will represent the largest share of the population. 

Plunging Chinese imports

In markets, Chinese imports fell sharply in the first quarter as Covid-19 curbs hampered freight arrivals and weakened domestic demand. A rapid depreciation of the yuan will add further pressure to import prices in the following months, exacerbated by high commodity prices. 

Falling copper and aluminium prices

Copper and aluminium are among the commodities that saw a significant boost in the past year as demand rose for materials that would help economies transition to net zero; the two metals are used in the production of solar panels and batteries. 

However, prices fell recently amid slowing global activity. Could this spell the beginning of an end to ‘greenflation’? 

ARK Invest hedge fund performance

Finally, we look at the fate of a prominent US hedge fund after its sizeable holdings of Coinbase shares tumbled. Total assets under management at ARK Invest, which bets on disruptive innovations, have plummeted from USD50 billion in February to less than USD20 billion today after the cryptocurrency company missed Q1 estimates.

As our last chart shows, the performance of its fintech ETF is now significantly worse than both the S&P 500 and Berkshire Hathaway’s self-described “boring” investments.

Global growth revisions

We start with two charts showing how the global economy is increasingly moving towards a more stagflationary environment as the commodity price boom sets off a global supply shock.

IMF forecasts for global GDP growth show some significant downward revisions for this year and next. 

While 2021 saw some good momentum as countries lifted lockdowns and began recovering from the pandemic-triggered recession, the outlook for the coming years now seems less bright.

Global inflation forecast revisions

Meanwhile, inflation forecast revisions have been moving in the opposite direction. This is especially true for Eastern European countries heavily affected by the war in Ukraine and the resulting commodity price shock. 

Among large, advanced economies, the UK is suffering most; the IMF increased the country’s inflation forecast for 2022 by almost 6%.

But that pales in comparison to the figures for Turkey and Russia, which have been revised up by 40% and 20% respectively.

Russia inflation forecast revisions

Taking a closer at the outlook for Russia, this chart displays different vintages of the IMF’s inflation forecast. While there had already been some upward revision before the start of the year, almost all of the increase since then happened after the start of the Ukraine war and the associated macroeconomic shock of western sanctions. 

US construction starts

Revisions to US construction starts appear strongly correlated with house price changes. The chart below shows the difference between the initial release for construction starts and the first revision to that series. 

Upward revisions tend to happen when house price growth is strong, while downward revisions happen when the housing market is very weak, such as post 2008. 

We can see from the graph that recent revisions have come in negative. This – along with other leading indicators (see the next chart) – tells us that a potential correction in the US housing market could be around the corner. 

US mortgage rates

Mortgage rates in the US recently surged to more than 5%, up from just 3% less than a year ago. Credit markets had clearly anticipated the Fed’s rate hikes. As the chart below shows, higher lending rates tend to coincide with slower house-price growth. With mortgage costs skyrocketing, we can expect prices to soon begin sliding.  

China manufacturing and services

The next three charts were created with the slice function, which allows you to overlay different time periods for one series in one chart. 

The first shows the impact of China’s zero-Covid policy on manufacturing and services activity. This year, the PMI New Orders index, which measures incoming business orders for manufacturing, fell to a record low for April. Given China’s importance in global manufacturing, this will put further pressure on global supply chains and exacerbate inflation across advanced economies.

US equities

US stocks are suffering as the Fed tightens monetary policy. The S&P 500’s year-to-date performance in 2022 is at its worse since 1939!

US bond markets

Bond investors are not faring any better as interest rates rise across the board. The year-to-date performance of US government bonds has also been poor, with returns of -12% so far. It hasn’t been this bad since the mid-80s.  

The positive correlation between equities and bonds this year makes 2022 an outlier. 

US mid-term elections: Impact of Roe vs Wade

And lastly, we turn to US politics. A leaked draft document revealed that the US Supreme Court will likely overturn the landmark 1973 Roe vs Wade ruling that made abortion legal across the US. This would make abortion rights a decision for individual states instead – an outcome the Republican party had fought years to achieve.

But this development does not sit well with many Republican voters, as our chart below shows. Prediction markets show a sharp drop in support for the GOP ahead of November’s mid-term elections. By contrast, bettors are predicting a boost for the Democrats as people rally behind women’s rights. 

‘Sell in May and go away’ delivers mixed results

We start the week by looking at the classic ‘Sell in May and go away’ investment strategy. It involves divesting equities in May and re-investing in November to avoid the lacklustre summer period that historically has led stocks to underperform.   

Using the Macrobond Investment strategy function, we look at returns you would have achieved since 2000 if you had exited between May and October each year, with returns had you stayed invested in the S&P 500 or Euro Stoxx 50 throughout. 

You can see that the ‘Sell in May’ tactic delivered on its promise for European equities, but less so for US stocks. 

US equity returns worst since Great Recession

Now let’s look at some of those equity returns on a more granular level. The heatmap below visualises monthly returns of the S&P 500 and the mean for each year since 2000.

You can see that so far this year, average returns are already at the lowest since the 2008 global financial crisis.  

GDP growth forecasts revised down

It’s been an eventful 2022, to say the least, and economic forecasters have thus had to adjust their growth predictions for the year. 

Using data from FocusEconomics – now available as a Premium Dataset – we show the extent of downward GDP growth revisions for selected regions and economies. Note the severe, though not surprising, change for Russia. 

Forecasts by FocusEconomics

Our new FocusEconomics premium dataset also allows you to chart predictions by forecaster. Here, we show the various forecasts for US inflation this year. 

US inflation forecasts revised up

While individual forecasts varied, one trend was clearly apparent – they all expected US inflation to rise. 

Using the cross section analysis function, we charted the evolution of forecast revisions since January 2020 – broken down by median, percentiles and high/low range.

Predictions of a sharp climb in consumer prices were certainly on the mark! 

US wheat prices surge to record

Rising food costs are a major contributor to inflation in the US, not helped by wheat prices surging to a record thanks to Russia’s invasion of Ukraine; the two countries supply a quarter of the world’s wheat.

We can probably expect those prices to rise even further given the poor wheat crop from US farms following an unusually dry winter in key production states. 

This chart compares the spot price for wheat with production conditions as described by farmers surveyed by the US Department of Agriculture. Note the double whammy of high wheat prices and low wheat supply. 

Chinese copper supply dwindles

Moving to China now, where the government’s zero-Covid policy continues to grind much economic activity to a halt and disrupt supply chains. 

As this chart shows, stocks of copper in Chinese warehouses are shrinking rapidly across all locations following a top-up in supply at the start of 2022. 

China copper supply at decade-low

To better understand the scarcity of Chinese copper, we performed a slice analysis that compares week by week supply so far this year with the weekly average over the last 10 years. 

While it’s usual for stocks to fall at this time of the year, note how the build-up ended earlier than usual – and how stocks are now at a 10-year low for this period.

China mobility lowest in Asia Pacific

As a result of China’s harsh lockdowns, movement within its major cities, as well as in Hong Kong, has slowed significantly. 

This chart compares high-frequency mobility indicators for selected APAC countries. (As Google’s community mobility data does not include China, we used road congestion data for four of its major cities instead.)