Charts of the Week

The world’s “early hiker” central banks mostly dodged a recession

When inflation alarm bells started sounding in 2021, some countries – mostly emerging markets – acted more quickly than others. Some hiked rates a year earlier than their developed-market peers did. 

This heatmap examines nine of these countries, gauging how they have fared since becoming “early hikers” and whether they have avoided recession. 

We chose several criteria: 1) whether the average quarter-on-quarter annualised GDP growth for the past two quarters is below zero; 2) whether unemployment grew by more than 0.15 percentage points over three months; 3) whether the three-month moving average of manufacturing PMI is below 45; and 4) whether average quarter-on-quarter annualised industrial-production growth is below zero for the past two quarters. Wherever these criteria are met, the values have a red background shading. 

Most of these economies appear to have been robust enough to absorb the tightening by inflation-hawk central bankers. Only Hungary faces a likely recession. ‍‍‍‍‍‍‍‍‍

Repeated nonfarm payroll revisions show a weakening trend

US employment numbers for July showed nonfarm payrolls grew by 187,000. That was slightly less than market expectations, but still in line with a soft-landing scenario. (Two of our users generated forecasts in line with this data release: read about how they did it here and here.)

However, equally newsworthy were the revisions to the May and June NFP figures: they were both reduced. Indeed, NFP is revised at least twice by the Bureau of Labor Statistics, so expect the July number to change as well (and for June to be revised again).

In this chart, we track two years of revisions, calculating the difference between initial numbers released and the latest estimate. So far, every payroll number published in 2023 has been revised downwards. The cumulative revisions since the beginning of the year represent a loss of 245,000 jobs.

Signs of a producer price inflation rebound in China

This chart tracks raw materials purchase prices for the manufacturers’ Purchasing Managers Index (PMI) for China. It also shows the historic correlation with producer price inflation (PPI)– which measures the average change in price of goods and services sold by producers and manufacturers in the wholesale market. (PPI is often a leading indicator for consumer price inflation.)

As PMI prices leave negative territory and climb toward the neutral line of 50, PPI’s year-on-year deceleration is also easing. Given China’s role in the global economy, inflation hawks will be watching.

Foreign direct investment in China declines

China also published its second-quarter balance-of-payments figures this month.

Direct investment liabilities, a proxy for inward foreign direct investment, fell to USD 4.9 billion, a historic low. 

The S&P 500’s probability curve for positive returns

This chart crunches historical data to examine the chances of making money from the S&P 500, depending on how many years you’ve been invested. 

There’s a steep curve at the beginning. If you’ve been invested for a week, your chance of a positive return is 56 percent. If you’ve been invested for a year, it’s 68 percent. And over two years, your probability of making money rises to 78 percent.   

Allocating assets with vigilance (and momentum)

Vigilant Asset Allocation (VAA) is an aggressive strategy designed to take advantage of changing trends. It’s a “momentum” play: you invest in asset classes that have recently performed well, based on the long-observed tendency for such assets to keep rising. (Academics attribute this phenomenon to human behavioural biases, such as herding.) 

For the purposes of this chart, we created a VAA strategy that calculates a momentum score for seven different “offensive” and “defensive” ETFs.* It then allocates the entire portfolio to the winner every month. 

We then compared VAA to returns for a traditional 60-percent-stocks, 40-percent-bonds allocation. Since 2005, VAA has generally outperformed overall, as the top pane shows. The second pane tracks drawdowns, i.e. the decline from the last record high. VAA generally also posted smaller drawdowns, especially during the global financial crisis, suggesting that higher returns came with lower risk. 

Interestingly, this is not the case since 2021; VAA has underperformed.

Tracking inflation’s breadth in the eurozone

This chart visualises the breadth of price increases in the 20-nation eurozone over the past four years.

It does this by looking at annualised quarter-on-quarter inflation rates and then “bucketing” every nation into one of four segments: less than 2 percent in green, 2 to 4 percent in amber, 4 to 8 percent in red, and greater than 8 percent in dark red.

The difference between the pre-pandemic era and the inflationary episode that began in 2021 is stark. Up until April of 2021, the norm was that 70 percent of the nations in the eurozone were probably experiencing very little inflation. 

By the spring of 2022, all of the nations in the currency bloc were in the two most inflationary buckets. 

While 2023 has seen a broadly disinflationary trend as tighter monetary policy takes hold, inflation hawks will note the renewed spike that occurred in April and May. 

Global PMI: comparing manufacturers in different regions

The Purchasing Managers Index (PMI) is one of the world’s key economic indicators. Manufacturing executives are polled to get a sense of whether economic activity is contracting or expanding. 

This chart looks at the contributions of the world’s various regions to global-level manufacturing sentiment, aiming to assess the more optimistic and pessimistic geographies.

It assesses PMI from 34 major countries and re-centres them at zero. Next, these time series are weighted by their country’s share of value added in global manufacturing. Finally, they are aggregated into their respective regional territories.

For the most part, Asia-Pacific, the EMEA region and North America have seen PMI sentiment move in unison – from a post-pandemic resurgence through late 2020 and 2021 to a shift to negativity in mid-2022. EMEA has been notably negative in recent months, while Asian manufacturers have reported intermittent flickers of optimism.

Satellites are watching the sluggish activity at Amazon’s logistics centres

Amazon reported better-than-expected earnings this week, with CNBC calling the figures a “blowout.” The e-commerce and cloud computing giant returned to double-digit sales growth, while indicating its core online retail division is recovering.

For most of 2023, the Amazon story had been one of cost cutting and warehouse closures after consumers’ pandemic spending boom faltered. 

This chart aims to get a sense of real-time activity at Amazon’s US logistics centres using data from SpaceKnow, which uses algorithms to analyse satellite images. The series used here, CFI-S, is a daily aggregation of the area in square meters that changes between two consecutive satellite images – i.e. vehicle movements.

Activity has been dwindling over the course of 2023 – remaining steadily below the average annual trajectory since 2017.

British firms are filing for bankruptcy

A growing number of companies are filing for bankruptcy in the UK. In the second quarter of 2023 alone, 6,342 companies were declared bankrupt – the highest level since the global financial crisis.

What’s going on? The unsettled, inflationary, post-Brexit economy can’t be helping. But this is also likely a delayed impact from the pandemic, worsened by ever-increasing interest rates. To preserve employment, government subsidies and loans kept many businesses afloat through 2020-21 (as this chart shows).

The burden of repaying these loans has resulted in “zombie” companies, and operators and creditors appear to be pulling the plug. 

As our chart shows, the largest contribution (shown in green) is Creditors’ Voluntary Liquidations, a process that is typically applied when debt-burdened, insolvent companies liquidate their business – but involve their creditors in the process to reduce losses. (There are currently relatively few administrations, which occur when there’s the perceived chance of saving a business, or compulsory liquidations, when creditors ask the courts to step in.) 

Yield curve control loosens in Japan

The Bank of Japan is the last major central bank to maintain ultra-loose monetary policy. Markets have been watching for signs that a true tightening cycle will begin, given that inflation is running hot. 

As our chart shows, the yield curve control (YCC) range – the shaded grey area – was widened at the start of this year, which we wrote about in January. The YCC allows the BOJ to control the shape of the government bond market’s yield curve, keeping short- and medium-term rates close to its 0 percent target.

Recently, the BOJ unexpectedly adjusted YCC again. The 0.5 percent “cap” on 10-year JGBs was watered down; yields will be allowed to move closer to 1 percent. 

As our chart shows, the 10-year yield has jumped outside the band. But for now, the BOJ is downplaying the prospects for an “exit” from monetary easing. 

India’s stock market is running hot

India’s equity market has rallied to all-time highs, attracting attention from global investors. 

This chart uses data from FactSet aggregated by Macrobond to dive into fundamental valuations, comparing Indian equity sectors’ price-earnings ratios with post-2007 norms (as represented by the 5-95, 10-90 and 25-75 percentile bands). The broad market is also included.

As the green dots indicate, 6 of the 10 sub-sectors are trading at PE multiples above the 75^th percentile – indicating a richly valued market. The healthcare and non-cyclical consumer sectors have shot above their 95^th percentile.

The telecom sector is an interesting laggard on a relative basis, trading near its historic average. This segment also has by far the most volatile historic range. 

Visualising US voters’ unhappiness

This chart uses polling data from RealClearPolitics to visualise the proportion of Americans who thought their country was on the “wrong track” at any given moment.

We have tracked this metric over the course of the four-year presidential terms since 2009.

Strikingly, Joe Biden has faced much more voter dissatisfaction in the second and third years of his term than Donald Trump did in his, as the chart shows. Unemployment was low in both 2018 and 2022, but the current president has faced a much higher inflation rate.

The “wrong track” numbers shot up in Trump’s last year, 2020 – touching 70 percent at the start of the pandemic and also at the very end of his term, when the incumbent disputed his election defeat.

Interestingly, voters appear to be so polarised that the “wrong track” number only briefly dipped below 50 percent for a short time – under Obama. 

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For stock investing, your local currency has rarely mattered more

When investing in equities outside your home market, you’re also trying your hand at a bit of currency speculation, at least in the short to medium term. This has been even more the case over the past 12 months. First, the “King Dollar” period saw the greenback crush almost all competition; this was followed by a retreat.

This chart examines the returns for a hypothetical US investor’s non-American stocks this year. Performance is split into stocks’ return in local currency (in blue) and the currency effect (in green). These net out to a total return represented by the purple dots.

Japan has had a hot equity market this year – but the weak JPY is working against you if you’re measuring your performance in USD. By contrast, US-based investors’ European stock returns have been boosted by EUR strength – and this is even more the case for investors with exposure to Latin American equities and currencies. 

Visualising volatile commodities and their moves in tandem

Commodity volatility is a well-known phenomenon. But it can be interesting to visualise how different commodities often trade in unison. 

This chart tracks the percentage share of different commodities that were posting a positive monthly return at a given moment over the past four and a half years. Purple represents agricultural commodities, metals are in blue, and energy is in green.

The crash during the outbreak of the pandemic, famous for its negatively priced oil, is clearly visible. Most commodities snapped back after that initial shock.

The unified swoon in mid-2022 is also interesting. The market was unwinding the price shock that followed Russia’s invasion of Ukraine; meanwhile, concerns about rate increases were beginning to weigh on perceptions of US demand. China’s still locked-down economy remained sluggish. 

Changing perceptions in the Fed funds futures market

In the wake of the Federal Reserve lifting its key interest rate to a 22-year high this week – and another GDP print that was stronger than expected – this visualisation shows how the elusive “pivot” to rate cuts has been pushed further out, at least as far as futures markets are concerned. (Remember that in May, the market expected a lengthy “pause” through 2023.)

The columns represent five upcoming Fed meetings. The large blue bar indicates the probabilities that are seen today. For the September meeting, futures estimate that there’s a roughly 75 percent chance of the key rate staying in its current range of 5.25 to 5.5 percent; there’s a 25 percent chance of a hike one step up.

The smaller bars represent the market’s perceptions two weeks and a month ago. Interestingly, the market seems to have become more convinced of a Fed “pause” this fall, rather than one or even two more rate hikes.

The market is pricing a very small chance of a pivot in December and somewhat larger probability for cuts in January or March.

Disinflation isn’t a thing in Argentina

Disinflation is spreading around the world, but there are a few exceptions. One is Argentina, Latin America’s third-biggest economy and a nation with grim experience of historic episodes of hyperinflation.

Earlier in 2023, year-on-year inflation soared past 100 percent for the first time in 30 years. In June, the annualised inflation print reached 115 percent. 

This chart visualises the change in consumer prices as a steady progression over the course of various calendar years. Last year was an record outlier in recent history, and this year is even worse. 

‍‍Bitcoin crash cycles

Now that cryptocurrencies have been around for more than a decade, grizzled veterans of the space can say they’ve experienced four different crashes: 2011, 2013, 2017 and 2021.

This chart tracks Bitcoin and compares the lengths, in days, of these four episodes’ drawdowns and recoveries. 

The 2011 crash (in blue) was unlike the others: it was the deepest, and also had the quickest recovery to its pre-crash level – 625 days. 

The current, post-2021 cycle (in orange) also just hit 625 days. A repeat of the post-2013 and 2017 cycles would see Bitcoin take two more years to climb back to its previous peak. 

‍‍‍China’s youth unemployment

Youth unemployment in China has stayed well above pre-pandemic norms following the dismantling of zero-Covid restrictions, even as overall urban unemployment is improving. 

Joblessness among 16-to-24-year-olds reached 21.3 percent in June, nearly double that cohort’s level in June 2019.

The seasonality in the chart is notable, showing the effects of new graduates entering the workforce in the summer.

Chinese real estate, city by city

As global real estate comes under pressure from higher interest rates, this dashboard examines residential real estate prices in China’s 70 biggest cities.

This breadth is important given that declines have largely been seen in second-tier markets. By contrast, Beijing, Shanghai and Chengdu, for example, are in much better shape.

The first and last columns track the year-on-year percentage change reported for June (which drives the top-to-bottom ranking) and six months earlier, respectively.

The middle graph aims to visualise how trends have evolved since mid-2022 – and how the distress appears to be stabilising. The blue bars show the latest year-on-year price change; the green dots represent that figure’s value six months earlier, which was worse (i.e. further to the left) for most cities.

A cooling US inflation heatmap by sector

This heat map examines the cooling trend in US inflation from a new angle. It breaks down different sectors using the statistical deviation (or Z-score) from the normal rate of change.

As the “legend” column indicates, bright blue indicates year-on-year growth in CPI that is far below the norm. Bright red indicates inflation in that sector was running much hotter than usual. 

As the “all Items” overall reading for June shows, headline CPI is finally cooling down – driven by the transport, medical care and education sectors. Inflation is still running hotter than the historic norm for food, housing – and especially recreation, where price growth is 2.6 standard deviations above the average. 

Revisiting US inflation scenarios for 2024

Despite positive signals of disinflation, this visualisation (which revisits an analysis we published almost a year ago) shows just how much of a journey it would take for inflation to flatline completely.

These scenarios chart the potential evolution of year-on-year inflation figures, assuming different month-on-month trends.

A “Goldilocks” soft-landing scenario for Chairman Powell might be the blue line, or something just below it. CPI growth of 0.25 percent month-on-month for the next 12 months would result in the year-on-year inflation print receding to about 2.6 percent, approaching the Fed’s long-term target.

The scenarios represented by the yellow line, and the lines below it, indicate a situation where Powell might have hit the monetary brakes too hard. 

On the other hand, if month-on-month CPI stays at 0.5 percent or higher, the year-on-year figure will be even higher than it is today. 

Anti-corruption peaks and valleys in the EU

This visualisation uses an index of perceived public-sector corruption compiled by the Social Progress Imperative, a US non-profit organisation, to measure European Union countries.

A higher score indicates that a country is perceived as more “clean.” Predictably, the Nordic nations of Denmark, Finland and Sweden score the best, with little difference from a decade earlier.

What’s interesting is how trends have changed in many other nations since 2011. Italy, Greece and the Baltic states appear to have made notable progress in cleaning up corruption.

Scores for Hungary and Cyprus, meanwhile, are deteriorating.

(Macrobond users can toggle between this visualisation and an alternative “candlestick” chart.)

Brazilian currency volatility, from Lula to Bolsonaro and back

This double-paned visualisation explores volatility and the exchange rate for Brazil’s currency under different presidential regimes.

The top pane tracks weekly percentage change in the real’s exchange rate against the dollar. A notable spike is seen around the global financial crisis of 2008, as one might expect. However, the sustained BRL-USD volatility since the outbreak of the pandemic is remarkable.

The second pane tracks the exchange rate against the dollar. Over a 15-year period, the broad story is depreciation – but higher prices for Brazil’s commodity exports coincide with a stronger real, as we saw during much of President Lula’s first stint in office. 

Post-2020, as the world learned to cope with coronavirus, President Bolsonaro’s Brazil was a global monetary policy outlier, as we wrote last year – hiking rates earlier and harder than most, making the real one of the few currencies to appreciate against King Dollar.

Notably, volatility has been receding since Lula returned to office this year.

Rainfall relief in southern India

As we have previously written, El Niño is back. This phenomenon can result in droughts for some Asia-Pacific nations and heavy rain in others. (In May, we wrote about how Thailand’s rice crop was threatened.)

This chart tracks South India, which experiences a monsoon period from June to September every year. The nation’s meteorological department recently confirmed that South India had its hottest, driest June in more than a century.

This chart’s Y axis tracks the positive and negative percentage rainfall difference from the historic average over the calendar year. It tracks both 2023 and the highs and lows from 2020-22. The line for 2023 indeed shows the lower-than-average rainfall in June, while also showing a return to the historic average so far in July. 

This visualisation also shows the power of Macrobond’s granular, regional data. Users can access even more local micro-geographies if needed.

US mega-stocks defy gravity

In May, we studied how the largest companies in the US – especially Big Tech – were almost solely responsible for gains by the S&P 500. 

This visualisation tracks 3 ½ years of performance by the 10 biggest US stocks by market capitalisation: Meta, JPMorgan, UnitedHealth, Berkshire Hathaway, Tesla, Nvidia, Alphabet, Amazon, Microsoft and Apple. 

After swooning through 2022, their combined market cap is almost back at its all-time high. The outperformance by Meta, Microsoft and Apple since January is particularly notable.

Some might say the present period has parallels with the early 1970s “Nifty Fifty” bull market. These were viewed as can’t-miss, buy-and-hold, blue-chip equities, and investors piled into them even after valuations became stretched. (They subsequently underperformed.) 

Decoding July performance patterns: analysing the US stock market (S&P 500)

This chart analyses the performance of the US stock market (S&P 500) during the month of June. It uses data from 1928 to 2023 to show the average performance of the index up to a specific date within the month. For instance, the values on July 4th represent the average performance of the S&P 500 index up to that date for every July 4th from 1928 to 2023.

The chart consists of two sections. The first section is a simple line chart that illustrates the typical pattern of the US stock market. It shows that the market tends to have a strong start at the beginning of the month, levels off and slightly declines around two-thirds of the way in, and then rebounds towards the end. On average, by the end of July, the month-to-date performance of the market is 1.4%.

The second section is a unique bubble chart where the size of each bubble corresponds to the strength of the month-to-date performance figure. The bubble representing July 2nd, for example, has a month-to-date figure of 0.3% and is the smallest bubble. Conversely, the bubble representing July 28th has a month-to-date performance of 2.1% and is the largest bubble.

Recovery trends and real estate implications: London tube and New York subway usage

This chart looks at London Tube and New York Subway usage from 1^st March 2020 through to 2023. It uses daily data to track passenger levels across each day of the week and expresses these levels as a percentage of pre-pandemic levels. 

We can see that on average, both London and New York are seeing a gradual move back towards what was considered “normal”. London underground usage is around 80% of pre-pandemic levels, while New York City subway usage is around 70%. Could the rising trends in these charts bode well for a recovery over time in office, retail, and commercial real estate more broadly? Or will the “new normal” of reluctance to travel on Monday and Friday continue to weigh on these sectors?

Comparative analysis of government bond yields: Spain, France, Germany, and the EU

This chart uses Macrobond’s Yield Curve analysis to illustrate the full term-structure of a selection of European countries’ government bonds. We chose Spain, France and Germany, and compared this to the EU. 

The EU is paying more to borrow with its joint bonds than the bloc's leading members, denting the appeal of common issuance for those countries and emboldening opponents of fresh debt sales. During the global bond sell-off of the past year, the EU's borrowing costs rose more swiftly than those of many member states.

Today, they have risen above French borrowing costs, even though the EU's AAA credit rating outshines France's AA status. At shorter maturities, Brussels’ yields are even higher than those paid by Spain and Portugal - long considered among the bloc's riskier debt markets.

Deflation concerns in China: Unravelling the rapid decline in CPI

As the world is gratefully watching the apparent cooling of US inflation, the latest CPI numbers from China are potentially dropping too quickly, raising concerns about deflation in the world’s second biggest economy.

In the heatmap above, we have decomposed the China CPI data, highlighting a rising trend in red and a slowing trend in blue. The latest headline CPI number dropped to 0% in June, but we can still observe a significant rise in Clothing and Tourism, which may have been boosted by China’s reopening. Worryingly, there are large areas of blue in Food and Energy, which sum up to 45% of the weight of the headline CPI. Specifically, pork and beef prices are cooling down significantly, as well as fuel and transportation.

Fiscal balance trends in emerging markets: Impact of falling energy prices in Middle East and Africa

This chart looks at fiscal balances across a universe of emerging markets, and expresses them as percentages of their respective GDPs. Bars represent the 2023 value, while markers represent the 2022 values. Countries are colour-coded by the region they belong to, as shown by the legend.

This colour coding helps shed light on some interesting broad trends across emerging markets. Firstly, we can see that nearly all Middle Eastern countries’ fiscal balances have worsened, perhaps as a result of falling energy prices. African countries seem to have improved their situations over the last year, possibly for the same reason?

Unveiling UK immigration trends: Shifts in EU and non-EU migration and labour shortages

This chart examines UK immigration levels from 2010 to the end of 2022 using data on long-term migration. The figures are based on rolling 12-month estimates and are categorized into EU immigrants, Non-EU immigrants, and British. Over time, EU migration has gradually decreased while Non-EU immigration has increased, with a significant shift occurring after Brexit. Given overall immigration has actually increased, it is interesting that the UK suffers from acute labour shortages and the jury split on whether the pandemic or Brexit is to blame.

Exploring UK real income trends: Assessing the impact of parliamentary terms on income growth from Blair to Sunak

This chart looks at real income growth across percentile bands over the course of the last 6 parliaments in the UK. Starting from Blair’s landslide victory in 1997, through his second term (the kaleidoscope has been shaken), all the way to Sunak today, we look at how real incomes changed over the course of parliamentary terms. We highlight the 10th and 90th percentiles in midnight blue and crimson red respectively to display the divergence in real income growths. All other grey lines in between represent the other income percentile bands (20th, 30th, 40th, 60th, 80th).It's clear that UK income growth has been declining for some time but what could the culprits be? The GFC? Austerity? Brexit? The pandemic? Or perhaps it is the combination of them all...

The much tighter labour markets of southern and eastern Europe lead the OECD

This dashboard visualises the tight state of labour markets across the OECD member nations. The green dots representing present-day unemployment rates are well to the left of the red dots (the 2000-2022 average) for almost every country.

(ECB President Christine Lagarde recently remarked that service-sector companies scarred by the pandemic may be engaging in “labour hoarding,” even as rates rise, fearful of being unable to recruit should growth strengthen.)

The nations are ranked from top to bottom by their divergence from that historic norm. 

The cluster of former “peripheral” eurozone members that suffered the most in the early 2010s is notable at the top – as are central and eastern European nations that might be said to have completed their post-Communist transitions: Slovakia leads the table with a remarkable 7.3 percentage point reduction in unemployment.

‍Inflation-adjusted gold prices are high, but they’ve been much higher

With gold prices hovering near their all-time high in nominal terms, our chart adjusts this classic inflation-hedge investment to reflect inflation.

This histogram’s X axis breaks down daily gold prices since 1968 into buckets USD 150 wide. The current USD 1,800-1,950 range is highlighted in red: as of yesterday, gold was trading at about USD 1,915 per troy ounce (compared with the all-time high – unadjusted for inflation – of USD 2,072 in 2020).

The Y axis tracks the absolute number of occurrences in a given range; the frequency (percentage) is shown above each bar. 

For the curious, the inflation-adjusted peak gold price was USD 3,300 in the 1980 spike (which was driven by high inflation, oil shocks and geopolitical upheaval). 

Inflation has obviously supported gold once again, but central-bank purchases have too: these institutions reportedly hoovered up 1,079 tonnes of bullion in 2022 – the most since records began. This trend is not unrelated to geopolitical upheaval: central banks in China, India and Russia are concerned about how US sanctions froze reserves held in dollars, euros and pounds.

‍The US manufacturing construction boom offsets residential weakness

US construction has been resilient through a historic rate-hiking cycle. That’s partly due to a backlog of pandemic-delayed projects. But it’s also a result of President Biden’s ambitious industrial policy programs. 

The Inflation Reduction Act and the CHIPS Act aim to boost domestic investment in clean-energy technology and repatriate the production of key supply-chain products, such as semiconductors. (European observers have worried that the continent’s companies will divert investment to the US as a result.)

Our chart visualises two decades of US building activity, breaking down the year-on-year rate of change by contributions from residential construction, manufacturing and everything else. 

The overall rate of change today is flat – a stark contrast to the plunge (and abandoned projects) that followed the subprime meltdown and GFC. A pullback in residential has been offset by manufacturing construction reaching a multi-decade high.

As the second panel shows, the absolute level of spending on manufacturing construction has more than doubled in just two years, reaching USD 200 billion. 

Swiss inflation is back in the pre-pandemic comfort zone

Remember the pre-pandemic days when a 2 percent inflation target was the de facto standard for many central banks? Switzerland recently became the first developed economy to head back to the “old normal,” perhaps giving hope to other inflation-fighting central bankers.

CPI and core CPI, excluding food and energy, are both back inside the Swiss National Bank’s target range, as shown in grey on our chart.

To be sure, the Swiss had one of the least severe inflationary episodes among developed economies, and the SNB remains cautious, saying more rate hikes are likely in the coming months. 

‍In search of the Fed’s “supercore inflation” for wages

Federal Reserve Chair Jerome Powell introduced a new concept this year with “supercore inflation,” which excludes housing from core personal consumption expenditure (PCE) metrics – aiming to zoom in on prices for services, and by extension, wages.

The “supercore” economic indicator doesn’t actually exist, so we decided to create it. 

This chart tracks overall core PCE (which excludes food and energy), core PCE for goods, the housing components of the PCE. We then calculated a services PCE excluding housing and added it to the chart.

The four lines are quite divergent. While goods inflation has faded strongly, the soaring housing component has only recently peaked after accelerating for more than two years. 

“Supercore inflation” has stubbornly plateaued for longer, running at about 4.5 percent. No wonder Powell has been hinting that more rate hikes are coming. 

‍China’s weak yuan: undervalued or still overvalued?

When China reopened, its currency rose – but the gains were short-lived as economic optimism faded. The yuan touched seven-month lows this week as a gauge of services activity fell more than expected. Meanwhile, the PBOC has implied it will move to support the currency if needed.

Given this context, is the yuan overvalued or undervalued? Our chart applies two analyses: Purchasing Power Parity (PPP) and Interest Rate Parity (IRP). It compares the spot CNY-USD rate to a theoretical exchange rate that perfectly reflects these theories. The second panel shows periods of “overvaluation” (2019-21) and undervaluation, which is the case today. (Macrobond clients can click through to see the methodology, which involves FX rates, CPI and bond yields.)

PPP theory suggests identical goods should be traded at the same price across countries – and FX movements should thus reflect relative inflation, which is higher in the US. PPP theory thus suggests the USD should depreciate.

As for IRP, it assumes an international market with free flow of capital (which, of course, isn’t the case for China). An arbitrage opportunity, or “carry trade” generating easy profit from borrowing in low-yield countries to invest in high-yield ones, will arise if exchange rates don’t reflect interest rate parity. IRP theory would call for the yuan to appreciate to about 7 per dollar.

‍What did equities do after past tightening cycles?

The Fed “pivot” is taking a long time to arrive, with futures trading now anticipating the first rate cut might not occur until mid-2024. In anticipation of that day, what lessons does history have for equity performance?

This chart shows how the S&P 500 performed in the 12 months that followed the end of the last six hiking cycles. We also added the average performance for these six time periods. (The chart uses only price return, ie. capital appreciation, ignoring dividend income.)

The only 12-month period with a negative return was the one that followed the dot-com crash.