Charts of the Week

The winning asset classes of 2023: Bitcoin and oil trade places

Midway through December, it’s time to revisit our asset-class “quilt” from last year. What were the winning and losing investments in 2023, and how do they compare to recent vintages?

Bitcoin was by far the best performer among the nine categories we selected, boosted by optimism that ETFs will soon allow more investors to trade cryptocurrency. It’s continuing its streak as the most “binary” asset since 2016 – either performing the best or worst in each calendar year; it trailed the pack in 2022.

Meanwhile, oil went from the best performer in 2022 (on the back of the Russia-Ukraine war) to the weakest performer in 2023 amid concerns about slowing economies and oversupply.

Equities had a strong year. Interestingly, there was little difference between “value” and “growth” stocks in the S&P 500; value held up much better than growth in last year’s bear market.‍‍‍‍‍‍‍‍

The Fed’s history of brisk rate-cutting

Jerome Powell stunned Federal Reserve watchers this week by discussing prospects for rate cuts. The Fed has begun its long-awaited “pivot,” {{nofollow}}according to the Wall Street Journal.

With central banks signaling that victory over inflation is near, our chart examines the lessons of history. Once the “pivot” begins, how many rate cuts follow – and how quickly?

The lines for 1995 and 2002 demonstrate the only “plateaus.” By contrast, the 1990, 2001 and 2007 pivots resulted in a series of rate cuts in rapid succession. 

Futures markets are pricing in six US rate cuts next year – up from four earlier in the week, according to Bloomberg.

Visualising the Magnificent Seven

Apple, Amazon, Alphabet, Nvidia, Meta, Microsoft and Tesla were dubbed the “Magnificent Seven” by Bank of America strategist Michael Hartnett this year. The moniker stuck as these seven high-tech mega-stocks were responsible for much of the S&P 500’s gains in the face of a tighter rate environment and economic uncertainty.

This chart uses Macrobond’s FactSet Connector to assess price-to-earnings ratios across the Magnificent Seven (as well as the S&P 500 as a whole) since April 2013. We generated a Z-score, on the right-hand axis, showing us how far the P/E ratios are from historic averages (a Z-score of zero). 

The purple dots represent the most recent reading; the “candlesticks” represent percentile ranges, with the 10-90 range the “wick.”

Apple and Microsoft are the most richly valued stocks in the group, with P/E multiples in the top 10 percent of the historic range. Meta, meanwhile, is at the bottom of its 25-75 range, even after it more than doubled this year – showing how much more “bubbly” the social-media giant’s stock has been in recent history.

Historically, rate cuts aren’t a short-term tonic for stocks

Back to the Fed pivot. US stocks rallied on Powell’s comments, but history shows that equity performance after the central bank’s first rate cut tends to be unimpressive – probably because looser policy usually comes in response to distress in the economy.

Since 1990, most cycles have seen the S&P 500 fall in the two months after the first cut. The notable exception: {{nofollow}}the gains of late 2007, when the global financial crisis and US mortgage meltdown was just beginning.

US-Japan interest rate differentials and the exchange rate

Monetary policies in the US and Japan are headed in starkly different directions in 2024. The Bank of Japan looks set to abandon the world’s last negative interest-rate policy (and its yield-curve-control interventions) as the Fed loosens. 

This has implications for currencies, which are often substantially driven by rate differentials. US 10-year yields have recently contracted to about 4 percent versus 5 percent just weeks ago; yields on equivalent Japanese debt have held in a range near 0.7 percent. Roughly, this puts the rate differential at 3.3 percent at the time of writing.

This chart tracks observations of the USDJPY currency pair against that rate differential over the past three years. Broadly speaking, dots above the green trend line indicate moments that suggest dollar overvaluation. We’re slightly overvalued at the moment – even though the dollar has weakened from its peak.

We generated that green trend line through a regression analysis. It suggests fair value at a 3.3 percent differential is about 140 yen per dollar.

The ECB might lead the pivot to rate cuts

Markets are convinced that central banks will pivot to interest-rate cuts next year. Who will lower rates first – the Bank of England, the Federal Reserve, or the European Central Bank? 

This visualisation tracks the evolution of futures markets to show when a quarter-point cut from the terminal rate has been priced in.  This month, the ECB has taken the lead in the pivot race: its first cut is expected in April, compared with May for the Fed and July for the BoE. (Our next chart discusses the ECB comments that might have prompted this, and explores the effect on German bond yields.)

The three lines have moved in unison since the summer – showing how the pivot is expected earlier in 2024 than previously assumed.‍‍‍‍‍‍‍‍‍

Germany’s yield curve is compressing

German bonds have rallied since ECB official {{nofollow}}Isabel Schnabel recently suggested there is a limited likelihood of further interest-rate hikes in the eurozone, citing a “remarkable” inflation slowdown.

This chart shows the effect on the German yield curve versus very recent history – the current quarter. From 1-year to 30-year securities, yields are at their quarterly lows.

The right side of the chart tracks the deviation from the quarterly and yearly average yields. 

In search of stock bargains, Latin America appeals

US equities have rallied on the strength of mega-cap tech companies, optimism about a soft landing and hopes for lower interest rates next year. But as a result, they are also richly valued, potentially limiting their upside potential. 

Investors looking for cheap alternatives might use our chart to consider emerging markets. Latin America is the most undervalued, based on relative price-to-earnings (P/E) valuations versus US stocks.

In November, the relative 12-month forward P/E of Latin American versus US equities was lower than its 10-year interquartile range. By contrast, emerging markets in Europe, the Middle East and Africa (EMEA) were relatively close to the 10-year median. 

Some of the political and economic headwinds in the region are easing. {{nofollow}}Brazil has started cutting interest rates; in Argentina, markets responded positively to the election of libertarian populist Javier Milei.

The OECD raises (and lowers) inflation forecasts again

The Organisation for Economic Cooperation and Development has released its latest economic outlook, which includes revised 2024 inflation targets for member nations and other countries around the world.

This chart visualises the changes, comparing the latest national or regional figure to the previous OECD estimate (in green). The bottom pane expresses this a different way, showing how much the inflation forecast has gone up or down.

Some nations are faring better than others. For the OECD as a whole, consumer prices are expected to rise more than 4 percent next year – but that's down notably from the previous 5 percent forecast.

Slovakia and Colombia stand out, with the OECD raising their inflation forecasts to about 5 percent next year. Consumers in Spain, Lithuania and Costa Rica are among those breathing a sigh of relief.

The lurking losses inside US banks

The historic increase in interest rates has had a similarly unprecedented effect on banks’ balance sheets – driving down the market value of the Treasuries and government-backed mortgage securities these institutions hold.

Unrealised losses on securities at FDIC-insured commercial banks jumped by USD 126 billion from the prior quarter. Total unrealized losses now stand at USD 684 billion.

Our chart expresses this sum as a percentage of banks’ equity capital: this ratio has crept up to 30.5 percent, near the level seen when Silicon Valley Bank and other institutions failed in mid-2022.

Typically, these losses aren’t realised because banks can hold these assets to maturity. However, in times of panic, these assets are sold at market value – the primary driver of SVB’s collapse. 

Our chart breaks down the FDIC’s differentiation between “available-for-sale” securities and their “held-to-maturity” counterparts, which must stay on a financial institution’s books. Unrealised HTM losses are not reflected in financial statements. 

Ireland’s surging tax receipts, thanks to US multinationals

November is the key month for corporate tax receipts in Ireland – and the nation’s treasury is raking it in.

Our chart tracks November corporation tax receipts over recent decades. Last month, the government received EUR 6.3 billion, a 27 percent increase from a month earlier.

Ireland’s economic strategy has long been to {{nofollow}}attract tax-sensitive foreign investment with one of the world’s lowest corporate-tax rates. Reportedly, {{nofollow}}only three companies accounted for a third of all such taxes collected between 2017 and 2021. Most famously, {{nofollow}}Apple has said it’s Ireland’s largest taxpayer; the tech giant’s Cork-based entity is the “umbrella firm” for most non-US operations.

The surge in the early 2000s is notable. {{nofollow}}Ireland phased in this tax policy between 1996 and 2003.

How funds have moved between stocks and money markets

This is a visualisation of how money sloshes around between equities and “safe” cash investments over time. 

The blue line charts the ratio between the total assets of US money market funds and stock-market capitalisation; we’ve added a median line for that ratio. We then compare that to US interest rates (in green, pushed forward 18 months) and overlay periods of recession, in gray. Currently, assets in money-market funds stand at about 16 percent of the value of the stock market.

The experience of the 2000s stands out: rates rose, then the global financial crisis tanked the economy and stocks; investors fled to money markets for a safe return, and the ratio we are tracking soared. During the period of ultra-low rates that followed, money markets lost their appeal and equities recovered. A less pronounced version of this correlation occurred in the pre- and post-pandemic cycle.

History might not repeat itself. Currently, the US economy is facing a unique situation: short-end rates are at their highest levels in decades – increasing {{nofollow}}the appeal of money markets– but the economy might still be on track for a soft landing, which would be less damaging for stocks than the GFC or 2019-20 cycles. 

Visualising an analyst-driven investment strategy using FactSet

Wall Street analysts are {{nofollow}}sometimes derided for being behind the curve, but we’ve constructed a chart showing that it can pay to listen to them.

This chart taps the FactSet Connector for historic analyst ratings on Ford Motor Co. The bottom panel assigns weightings to “underweight,” “sell,” etc. to generate a month-by-month average rating from 1997. 

The top panel compares buying and holding Ford stock with a dynamic strategy: whenever the average analyst view descended to the midpoint of the “hold” range, our theoretical (and perhaps jaded) investor decided analysts were actually saying it was time to sell. Once the average crept above that level, the strategy would buy Ford again.

Ford avoided the bankruptcy that hit Detroit rival General Motors after the GFC, but on a 25-year basis, the stock was still dead money. A dynamic strategy based on analyst ratings, meanwhile, would have made five times your initial investment – and sometimes more.

Futures markets agree: the hiking cycle has ended (except in Japan)

Is the global interest-rate “pause” here? Communications from central banks are trending that way: {{nofollow}}Federal Reserve Governor Christopher Waller said policy is “well-positioned,” while {{nofollow}}Bundesbank President Joachim Nagel said the inflation outlook is “encouraging.” 

Futures markets, meanwhile, are almost unanimous in suggesting we have seen our last rate hike. 

This chart tracks various futures markets (SONIA, ESTR and Fed funds, for instance) to show the rate path priced in by different central banks.  Not only is the current level seen as the peak rate in most cases, the long-awaited “pivot” to cuts is priced in for 2024 – something Nagel and others have signaled is too early to contemplate. (Interestingly, the Reserve Bank of Australia is seen as staying on hold for slightly longer than its peers.)

As ever, the big outlier is Japan. As we’ve written before, it’s the last central bank with negative rates, and “lift-off” is expected next year.‍‍‍‍‍

A simultaneous slump for Western sentiment and Chinese exports

We’ve previously written about China’s disappointing exports. This chart links that performance to worsening sentiment in the country’s predominant export markets.

We’ve created “Chinese Importer PMI” (the blue line, and the right-hand axis) by compiling purchasing managers index readings in China’s biggest markets: the US and the European Union (about 40 percent of the weighting when combined) but also Japan and the ASEAN nations. It also includes Hong Kong, which re-exports Chinese goods. 

The PMI, a measure of sentiment among manufacturing executives, indicates contraction when it’s under 50 – where we are today. It has tracked the year-on-year rate of change in Chinese exports reasonably closely since the pandemic. 

A corporate dashboard for debt-laden AT&T using FactSet

We’re returning to a theme: corporate debt burdens {{nofollow}}after the historic increase in borrowing costs.

The FactSet Connector simplifies the integration of comprehensive company, financial, and portfolio data into the Macrobond platform. We used it to highlight {{nofollow}}US telecoms giant AT&T in this dashboard, but it could be easily applied to many companies.

This heat map uses FactSet’s Fundamentals data to shed light on the evolution of AT&T’s financial health across the last three years. It looks across four broad categories: Leverage (rows 1-4); debt-servicing capacity (rows 5-6); profitability (rows 7-8); and liquidity position (row 9).

The “heat” in the map describes how each quarterly observation ranks in the last five years of data for that metric.  Broadly, AT&T’s leverage metrics have improved after flashing bright red two years ago.

More of the EU enters recession – technically, at least

The term {{nofollow}}“technical recession” refers to two consecutive quarters of negative economic growth. Economists consider other measures to assess whether a nation is “truly” in recession, given the vagaries of revised data and sometimes tiny quarterly moves. Nonetheless, the march of technical recession across Europe on this heat map gives cause for concern. 

Almost all of the third-quarter figures have trickled in from across the European Union. Sweden has joined the Netherlands, Austria, Denmark, Czechia and Estonia in technical recession. 

Germany’s economic malaise has seen Europe’s industrial engine dip in and out of contraction over the past two years, but avoid technical recession – for now.

US inflation: the importance of the base effect

The “base effect” refers to the importance of the year-earlier figure when considering a year-on-year analysis. Put another way, it’s important to be mindful of an outsized surge or drop a year earlier; the month-on-month trend might be more meaningful.
This chart points out the help that base effects can give to US inflation readings, considering that the worst of the price surge took place in 2022. It charts scenarios for year-on-year inflation figures, assuming different month-on-month trends.

Even if the month-on-month change is marginally positive, the year-on-year figure might still decelerate – as the purple line shows.

The “Bull-Bear spread” and market breadth

Our first chart this week – and our first “guest chart” ever – comes courtesy of Macrobond user {{nofollow}}Oliver Loutsenko, founder of OVOM Research in New York.

He was inspired by our previous edition of Charts of the Week, which visualised the ups and downs of bullish and bearish stock-market sentiment as polled by the American Association of Individual Investors.

His own chart tracks the AAII’s weekly “Bull-Bear” spread, in purple and pushed ahead by 15 trading days, against a measure of market breadth: the percentage of stocks in the S&P 500 that are above their 12-month average.

“Sentiment can often be leveraged to give you an idea of where market breadth is going, and, by extension, price,” he writes.‍

The dysfunctional Argentinian economy awaiting Javier Milei

Libertarian populist Javier Milei won Argentina’s presidential election after promising radical change. He advocates policies including replacing the nation’s currency with the US dollar, slashing government departments and even liquidating the central bank. 

Our dashboard of economic indicators over the past five years shows why Argentines might have been tempted to vote for such extreme change. As some of the red cells in the top right indicate, inflation has been in triple digits for almost a year. The government budget deficit is running at almost 7 percent of GDP, and industrial production is declining.

Corporate stress risk in Canada and Brazil under Altman’s model

If you’re looking for {{nofollow}}companies that might be in trouble after the historic increase in borrowing costs, this analysis suggests that you might find them in Canada and Brazil. 

The “Altman Z-score” refers not to the tech executive in the news, but to the professor who developed a formula for predicting companies at risk of bankruptcy. (He {{nofollow}}has recently been sounding the alarm about the “end of the benign credit cycle that we have enjoyed since 2010.”)

We offer the Altman Z-score through our FactSet add-on database. This indicator considers a company’s liquidity, profitability, leverage and other metrics. ({{nofollow}}Read more about the methodology here.) If the Z-score surpasses 3, the likelihood of bankruptcy is low; if the Z-score is below 1.8, one should be concerned that a company might go bust.

We can also apply this analysis to entire stock indexes, as we did here for global benchmarks from different countries. The US stands out as the developed market (DM) with the most robust companies; emerging markets, especially China and India, seem less vulnerable overall than DMs.

Wheat-field health versus crop-chemical shares

Corteva is one of the biggest US agricultural chemical and seed companies. It was spun off after the merger of Dow Chemical and DuPont in 2019.

This chart compares Corteva’s share price to data from the US Department of Agriculture: the percentage of winter wheat crops in “good and excellent” condition in 18 states. (We’ve reversed the axis for the latter indicator.)

We’ve pushed the crop-condition line ahead by about two months to show an interesting correlation: when conditions in the wheatfields improve, shares in the chemical maker sell off – and vice versa. Corteva shares were doing best during 2022, {{nofollow}}when the winter wheat crop was historically small amid drought conditions in key states.

(We’ve written previously about USDA crop quality indicators: during the summer of 2023, drought was still impacting Kansas’ wheat fields after a cold winter.)

UK banks’ weakness versus their US and European counterparts

During the long period of loose monetary policy, banks in many countries were clamoring for higher interest rates. Now that they have them, national fortunes are diverging, as our chart shows.

This visualisation plots some of the biggest UK, European and American banks based on their estimated return on equity and price-to-book values for next year. The positioning of JPMorgan Chase and Morgan Stanley show Wall Street’s dominance against rivals. 

The weakest corner of the chart is populated by Britain’s five big banks. Barclays, which recently announced the {{nofollow}}worst drop in dealmaking fees of any major investment bank, has the worst price-to-book estimate of any of the banks in the chart. 

Undervaluation and overvaluation for the British pound

The British pound is having a strong fourth quarter as a result of American news flow. It’s returned to September levels against the USD as markets increasingly believe the Federal Reserve might be done hiking rates. (The latest leg up occurred after minutes from the Fed’s Open Market Committee were released, suggesting policy makers have moved to a decidedly cautious stance.)

This chart tracks the GBP/USD spot rate against a “fair value” model that is based on terms of trade, earnings yields, a nowcast of gross domestic product and the 10-year/2-year spread for British government bonds. (Macrobond users can click through to the chart to discover more details about the methodology.) 

This model suggests that the GBP has moved into slight overvaluation. 

Credit-card use shows how US consumer spending is withering

We wrote recently about Americans’ lingering post-pandemic savings cushion, and how that probably allowed consumer spending to stay stronger than it otherwise would have in this tightening cycle.

This chart uses near-real-time card transaction data that suggests the “cushion” effect is finally waning – showing that weekly consumer spending has dropped below pre-pandemic levels.

The Bureau of Economic Analysis uses credit card, debit card, and gift card transaction data to create early estimates of retail and food spending. These estimates capture the difference in spending from the pre-pandemic norms relative to the day, month, and annual trend.

As the holiday season approaches, many observers will be watching this indicator and others like it for signs of a rebound – or further deterioration. 

The lacklustre return of Chinese tourists in Asia

China’s reopening disappointed {{nofollow}}the optimists this year – including Thai hoteliers and Tokyo department stores, most likely.

This chart tracks how Chinese travelers are resuming their pre-pandemic travel patterns – or not, depending on the market. It creates a month-by-month “recovery rate” comparing the number of trips to a given country to its 2019 equivalent.

Singapore – the recipient of more business travelers than the other destinations – has fared the best. But cumulative tourism to Southeast Asia’s financial hub this year stands at just 36.3 percent of the old normal. Japan and Thailand have lost ground recently, {{nofollow}}as some press reports discuss.

For more information on the behaviour of the Chinese consumer, we invite Macrobond customers to consult {{nofollow}}Macromill’s weekly survey data. ({{nofollow}}At the start of this year, it was showing that Chinese consumers were putting a low priority on foreign travel.)

Investors have had mixed feelings about this choppy market

This dashboard tracks US stock-market sentiment using weekly data from the American Association of Individual Investors. (We’ve previously visualised the AAII’s Bull-Bear Spread, another way of thinking about similar data.)
This year is notable because bears, bulls and those in between have all taken turns as “sentiment leaders” – with none of these three categories polling above 60 percent at a given moment. (By contrast, previous years have often had a decided bearish or bullish slant – above 60 percent at times.)

The bulls have perked up lately after November’s S&P 500 rally pushed the US benchmark back toward its mid-summer highs of the year.

Amid Southern Europe’s rebound, youth unemployment is stubborn

Much of Southern Europe appears to be an economic success story. {{nofollow}}Greece is said to be in a growth “megacycle” and has regained an investment-grade credit rating. Spain recently revised GDP figures to reflect a {{nofollow}}stronger-than-expected post-pandemic rally. 

However, youth unemployment has been a {{nofollow}}historic problem in the region, and remains so.

This chart compares “activity rates” for persons aged 15 to 24 in the eurozone, comparing the latest figure to the pre-pandemic level and the high-low range since 2000. (Eurostat defines the activity rate as the number of people in the labour force as a percentage of the total population.) 

Greece is doing better than it was pre-pandemic but still trails the rest, and Spain and Italy are in the bottom five.

The Netherlands leads the pack by some distance. Dutch unemployment is generally low of people for all ages, but several observers attribute the youth figure to a system where the {{nofollow}}minimum wage is set particularly low for people below the age of 23. 

A Japanese inflation heatmap as the BOJ ponders ending negative rates

Japan reports inflation figures on Nov. 24. That’s important because its central bank is looking for a positive wage-price spiral before it abandons the world’s last negative interest-rate policy.

Our colleague Harry Ishihara has written repeatedly about the Bank of Japan’s conception of “good” services inflation, where wage growth snaps the decades-long deflationary funk, and “bad” goods inflation – much of it imported from abroad and exacerbated by the weak yen. 

This heatmap breaks down Japan’s consumer price index into goods and services components. Red and blue cells indicate inflation that’s running higher or lower than the 12-month average for each category.

Goods CPI is running hotter than its services equivalent overall, but subcategories differ substantially. Utilities bills are in free fall ({{nofollow}}thanks to energy subsidies) but food inflation is getting even worse. 

Meanwhile, the services component has more red cells as inflation broadly accelerated this year from very low levels. It has plateaued recently at about 2 percent, the BoJ’s long-run target – but an underlying measure (services excluding imputed rent inflation) has approached 3 percent. 

Projecting the Bank of Japan’s coming rate hikes (while others cut)

Japan’s central bank has been an outlier in the global tightening cycle of 2022-23. Markets predict it will be an outlier in 2024-25, as well – this time as the only hawk.

This chart uses data from the swap market to predict the number of rate hikes or cuts coming from different central banks over the next two years. (We’re assuming the increment of each rate move is 25 basis points.)

The markets expect three cuts from the Federal Reserve over the next two years (a rate reduction of 0.75 percent).  But traders’ consensus calls for the Bank of Japan to finally execute “lift-off” and execute at least one rate hike over that time period.

A rainier-than-usual autumn in Britain

Charts of the Week is edited from London, where it has certainly felt as though we’re unfurling our umbrellas more than usual. Data from Britain’s official weather service, the Met Office, confirms the hunch.

This visualisation tracks cumulative rainfall this year (in millimetres) against historic data dating from 1836. With almost two centuries of precedent, we can create a long-term average trajectory over the course of the calendar year. We can also create the historic high-to-low range for every month (the grey boxes).

We can see that 2023 has often indeed been rainier than average – {{nofollow}}especially since September. But we were never near a trajectory to set historic records. The effect of {{nofollow}}London’s late spring dry spell is also clearly visible – dragging the cumulative trend line back to the average after the wettest March in 40 years. 

Pollution-fighting palladium slides amid wider adoption of EVs

Palladium prices recently dropped below USD 1,000 per ounce, reaching a five-year low. The main driver: its key use case is gradually becoming obsolete.

The metal is a major component used in catalytic converters, which are used to control emissions in traditional internal combustion engines. But as demand for emission-free electric vehicles picks up, demand for the metal has waned. (When palladium prices approached USD 3,000 earlier this decade, automakers also started {{nofollow}}switching to platinum.)

The second pane of the chart tracks long and short positions for the metal on NYMEX, breaking them down between industry players like miners and processors and the rest of the market. Amid the recent price action, the palladium industry appears to be betting that prices will rebound (as we highlighted in red).

An innovative daily data series that’s pointing up for China’s economy

We’ve been posting charts pointing to a nascent recovery in China. Here’s another: the high-frequency YiCai Economic Activity Index. 

This indicator, which is updated daily, is an innovative amalgamation of data: it tracks traffic congestion, air pollution, a commercial housing sales index, and unemployment and bankruptcy indices based on internet searches.

This chart compares YiCai’s track record (in the lower pane) to growth rates for three conventional economic indicators in the top pane: retail sales, industrial production and fixed asset investment. (All three of these macro data figures will be released on Nov. 15.)

The YiCai index has been creeping higher lately. Will it once again prove to be a key leading indicator, as it was through the strong rebound of 2020-21 and the disappointments of 2022?

UK government borrowing in context

It’s been a year since the debacle of the Truss-Kwarteng “mini-budget” that would have seen Britain run massive deficits to fund tax cuts. By contrast, the Sunak-Hunt era has seen a quiet continuity of fiscal orthodoxy, as our chart demonstrates.

Chancellor of the Exchequer Jeremy Hunt, worried about higher borrowing costs, has fended off pressure for tax cuts. He also {{nofollow}}presided over a healthier-than-expected turn in the public finances as the UK economy defied some of the gloomier predictions of 2022. 

This double-paned visualisation tracks the UK’s public sector net borrowing (excluding public sector banks) month by month – both in absolute terms and as a percentage of gross domestic product (GDP).

The blowout borrowing of the pandemic era is highlighted in gray. Today, borrowing is roughly in line with the pre-pandemic era, at least in percentage-of-GDP terms.

{{nofollow}}This week’s King’s Speech suggested there will be more of the same. The government will “support the Bank of England to return inflation to target by taking responsible decisions on spending and borrowing,” the monarch told Parliament. 

The record short Treasury bets that have regulators worried

Hedge funds are making a record bet against US Treasuries. 

This chart uses data from the Commodity Futures Trading Commission to compile net long and short positions in US government debt. There are large short positions against two-, five- and ten-year securities.

While there will be some “fundamental” positioning betting Treasuries have further to fall amid sticky inflation and “higher for longer” Fed rates, most of the short bet is attributed to the “basis trade” – an arbitrage of price differences between cash bonds and futures. Hedge funds borrow a lot of money for such trades – hence the “leveraged funds” referred to in the chart title.

The size of the bet {{nofollow}}reportedly has regulators worried about financial stability risks – especially since yields fell in the first week of November (which some observers say was short-covering of that very same bet, as well as the result of optimism about a “soft landing” for the economy).
Notably, the well-known hedge-fund manager Bill Ackman recently {{nofollow}}exited his own short bet against 30-year Treasuries, saying the trade (and the world) had become too risky.

Europe’s cooling inflation heatmap might show why Lagarde paused

This visualisation revisits one of our favourite themes: an inflation heatmap. Less than a year ago, eurozone inflation was broadly advancing across sectors and geographies.

Today, the harmonised index of consumer prices (HICP) measure of inflation is slowing in almost every country in the currency region – and it has even turned negative in the Netherlands and Belgium.

Will inflation keep cooling off? {{nofollow}}That’s “certainly our forecast,” European Central Bank President Christine Lagarde recently said after she hit the pause button on rate hikes.

An analysis showing the strong Swiss franc is overvalued

The Swiss franc has been the strongest performer among the G10 currencies this year. {{nofollow}}Observers are attributing this to the franc’s safe-haven appeal at a time of geopolitical stress, as well as the central bank’s vow to support the currency if necessary to reduce inflation.

This chart models the franc over the long term, aiming to identify periods of overvaluation and undervaluation based on economic theory including the “law of one price” and interest-rate parity*. The blue line tracks the CHF/EUR rate but multiplies it by the spread in short-term interest rates, and then generates a trend line. (If the Swiss are offering a higher interest rate versus the ECB, the franc is expected to appreciate versus the euro, and vice versa.)

We’re in a period of overvaluation versus the euro by this metric, two standard deviations away from the trend. The franc hasn’t been substantially undervalued under this analysis in more than a decade. ‍

*An academic paper discussing these theories can be found {{nofollow}}here.

Rate-cutting central banks are returning

We can’t really say we’re in a globally synchronised hiking cycle anymore. As our chart shows, almost one-fifth of the 79 central banks we track are now cutting rates.

Last week, Brazil's central bank lowered its key policy rate, joining its counterparts in Peru, Costa Rica, Poland, Chile and Hungary.

Emerging markets were some of the leaders in hiking rates to control inflation, and they’ve similarly taken leadership in a cutting cycle.

Our geopolitical risk index is spiking again

As the conflict between Israel and Hamas enters its second month, and Iranian proxies attack both Israel and American targets, we’re revisiting this geopolitical risk index from Economic Policy Uncertainty.

This academic group creates indices relating to policy challenges ranging from infectious diseases to wars, tracking newspaper archives going back decades.

The situation in Gaza has driven the risk index sharply higher, but it remains well below the shock of Russia’s invasion of Ukraine in early 2022.