Charts of the Week

Japan is employing ever more immigrant workers

With an aging population causing a labour shortage in some industries, historically immigration-averse Japan has been welcoming more and more foreign workers. As the Wall Street Journal recently wrote, it’s also loosening regulations, potentially letting them stay in the country for good.

As our charts show, the numbers have quadrupled in just 15 years – and the foreign-born now account for 2 percent of the total labour force. The effects in the services, retail and hospitality sectors are easily seen in this visualisation. 

The number of foreign-born construction workers is small, but also notable, taking an upturn in the run-up to the 2020 Olympics.

‍More nations join the US-led disinflation

This visualisation tracks inflation in developed markets before, during and after the pandemic. 

Red squares indicate months where inflation was speeding up; blue squares represent decelerating inflation; and the white line measures the percentage of countries where price increases were accelerating year on year.

The peak global inflation in the winter of 2021-22 is clearly visible – as is the inflation slowdown that broadened in 2022-23. The US and Canada were first to experience sustained disinflation, with Europe following.  

Two decades of central bank decisions: DMs vs EMs

Aiming to visualise a truly global perspective on how monetary policy has evolved, this chart aggregates inputs from central banks around the world – split into a selection of developed and emerging markets. It shows whether a central bank’s most recent move was a hike or a cut.

The Covid-driven emergency stimulus of early 2020 was unprecedented in its breadth: nearly 100 percent of the world’s central banks were cutting rates. By contrast, during the global financial crisis of 2008-09, a few EMs were still hiking as developed markets slashed rates.

The current cycle is also showing a divergence between the two groups. A few emerging markets have started cutting rates this year, but no developed markets have. (Strictly speaking, Japan’s last move was a cut, but that was in 2016, when it moved to negative interest rates.) 

Inflation has resulted in downward real GDP revisions

Macrobond’s revision history function lets users see how perceptions of the recent past contrast with the final analysis. In this case, we examine economic growth adjusted for inflation. 

The macro story of 2023 is how the US has avoided recession (or, at least, postponed it). But stubborn inflation is offsetting some of that good news.

Data published yesterday confirms that for three consecutive quarters, real GDP has been revised downward from the initial estimate. 

Waning equity yields: even three-month Treasuries have caught up

Last week we examined the death of TINA – the narrative during the ZIRP years that “there is no alternative” to investing in equities. After more than a year of rate hikes, there are definitely viable alternative investments today.

This week’s chart revisits the topic. We tracked the S&P 500 earnings yield with the yields from top-rated (Moody’s Aaa) US corporate bonds and three-month Treasuries over recent decades. (The second panel expresses this relationship a different way, tracking the yield spread versus three-month Treasuries for the US stock benchmark and top-rated corporates.)

The current moment is the first time that all three yields have roughly converged since 2007. And for the first time since the early 2000s, the S&P 500’s earnings yield has crept below the three-month Treasury yield.

The corporate bond line is even more notable: debt issued by the strongest companies is yielding less than short-term Treasuries – the first time that has happened since at least 1989.

Equity risk premiums are at the lowest since the GFC

Following on the previous chart, we examine the limited allure of equities through another prism. Stocks are supposed to be riskier than bonds in exchange for higher returns over time – but increased risk comes with less reward these days.

The chart above uses FactSet data to calculate a simplified “equity risk premium” for US stocks: it subtracts the 10-year Treasury yield from the equity earnings yield. 

The risk premium is at its lowest since 2007, edging outside the one-standard-deviation range of the past two decades. 

Equity valuations are high, and bond yields have risen significantly, limiting the excess returns investors can generate from stocks. 

‍Labour participation after Covid

This chart tracks different countries’ participation rate – defined as the percentage of the population that is either working or actively looking for work.

The workforces of major economies have made up all the lost ground from the pandemic – and in some markets, trends are defying demographic change.

In Australia, Japan, and the euro area, participation is higher than it was at the start of 2019 – even as the population ages.

The UK is different from its Continental neighbours. Early retirement surged after the pandemic. Long-term sick leave is also pushing down labour force participation.

Chinese households avoid borrowing

Is China’s great reopening stuttering? Bank lending gives cause for concern: domestic credit growth has been weaker than expected, and there’s an interesting bifurcation in the data.

As our chart shows, on a twelve-month cumulated basis, new lending is growing year-on-year. But demand is solely driven by non-financial enterprises.

Since January 2022, new household loans have been shrinking, as seen by the swath of orange-coloured bars in negative territory – something rarely seen in the previous few years.

This is the context for this month’s rate cuts by the central bank, which is keen to boost the recovery.

The Fed dot plot creeps toward tighter for longer

The Federal Reserve “dot plot,” the de facto monetary-policy forecast, entered the lexicon about a decade ago. It polls seven Fed board members and presidents of the 12 regional Feds. The resulting 19 dots show where central bankers see the Fed funds rate going.

This chart compares dot plots for the two most recent Federal Open Market Committee meetings in March and June.

The June 14 FOMC saw the Fed hit the pause button on rate hikes, saying it wanted to “assess additional information.” But look at the dot plot from that meeting and a more hawkish tone emerges.

Most members now expect the fed Funds rate to average 5.6 percent during 2023, compared with the current 5-5.25 percent range, indicating that additional hikes should be expected in the near term.

For 2024, most of the policy makers are plotting higher rates than they were three months ago. Expectations are creeping higher for 2025, as well.

Scatterplotting the UK inflation crunch

The inflation surge is easing in many countries, but its stubbornness in Britain is proving to be a global outlier. Data this week showed that the consumer price index rose 8.7 percent in the year to May, defying expectations of a slowdown.

This chart breaks down that CPI number, showing the components with the highest and lowest inflation (the x-axis), adding their month-on-month trends, and cross-referencing these sectors with their weighting (the y-axis).

Food is heavily weighted in the CPI and has been experiencing by far the most pronounced inflation, approaching 20 percent in the previous month. The year-on-year pace slowed in May, but remained well above 17 percent.

Restaurants and hotels also have a heavy weighting, and inflation in that segment accelerated slightly from a month earlier. (That’s the kind of services inflation might be worrying the Bank of England the most, showing how higher wages are feeding into core inflation measures that exclude food and energy.) Healthcare has a smaller weighting, but also showed a notable inflation pickup versus April.

TINA no more as alternatives to equities look good

Amid a decade-plus of low rates, many investors came to believe “there is no alternative” to equities – a mantra known by its acronym, TINA. But as rates go higher, other investment alternatives are increasingly attractive. (Or, TARA. “There are reasonable alternatives.")

This candlestick chart aims to show the power of Macrobond’s data by examining the post-1990 range and recent trends for the S&P 500’s earnings yield, corporate credit, six-month Treasury bills, and three-month cash deposit yields. The latter three all offer returns that are competitive with the US stock benchmark and are significantly above their median historical yields – and much higher than they were at the start of 2022.

At their current yield of around 4.5 percent, stocks aren't really on track to deliver inflation-busting returns – and are riskier than these other investments.

The monetary experiment in Turkish central banking

Turkey followed an unconventional monetary-policy approach in the years before President Erdogan’s recent re-election: cutting key interest rates and letting inflation soar to multi-decade highs. Capital fled Turkey, aggravating the collapse of the lira. The central bank’s reserves withered as it attempted to maintain currency stability.  

As this chart shows, the historic relationship between rates and inflation was shattered in 2021 – a stark contrast from the central bank’s hard-fought battle to tame inflation two decades earlier.

Following his re-election, Erdogan appointed a new central bank chief with a mandate to bring down inflation. The recent jump in the repo rate from 8.5 percent to 15 percent reflects yesterday’s central bank meeting; monetary tightening probably isn’t over.

Journalism keeps shedding jobs

Traditional media companies, unable to find a sustainable response to free content on the Internet and fragmenting audiences, have been shedding staff for two decades now (a subject close to COTW’s editor’s heart).

This year, there was another blow: an advertising cutback as the economy slows. (Perhaps AI will replace editors at a large scale next.)

This chart tracks the calendar-year progress of layoffs in the US media industry in recent decades. As of May, 2023 has had the most layoffs of any calendar year up to that point. The only years showing similar patterns were recessionary: 2001, 2008, 2009 and 2020.

Recent high-profile cuts occurred at the Los Angeles Times and Washington Post. New platforms aren’t immune: the Athletic, a high-profile disruptive online sports-journalism platform bought by the New York Times just last year, is letting go 4 percent of its journalists. And perhaps most notably, Vice Media has filed for bankruptcy.

Producer prices fall across the OECD but CPI stubbornly refuses to follow

This chart compares how companies and consumers are experiencing inflation across the OECD nations.

The producer price index (PPI) is a measure of the average change in prices that an economy’s domestic producers receive for their output. It’s often considered a leading indicator for consumer price inflation (CPI) – with the lag in recent years estimated at about three months.

In the most recent quarter, we’ve seen PPI drop for most OECD countries – but CPI is still increasing for almost all of them, though it’s slowing.

Note Norway, the nation with the most pronounced PPI drop. We’ve written about the nation’s peculiar “hyper deflation” before – a byproduct of its hydrocarbon-dependent economy and year-on-year comparisons to the price surges that followed Russia’s invasion of Ukraine.

A heat map for natural catastrophe vulnerability

We’ve repeatedly highlighted concerning weather-related data. As the climate becomes more volatile, which nations are most vulnerable to catastrophe – and which ones have best prepared themselves to cope? 

This chart measures these dangers using indexes designed by Germany’s Alliance Development Works. They differentiate between exposure to disaster and state vulnerabilities – such as deficiencies in state “coping capacity” (such as infrastructure, insurance and healthcare) and future-oriented “adaptive capacity” (reduction of disparities, climate protection and disaster prevention). More information on the methodology can be viewed here.

The Philippines, India and Indonesia have the worst overall scores, which is concerning given the anticipated multi-year disruptions from El Niño – the Pacific Ocean phenomenon that affect Southeast Asia. 

China, on the other hand, has by far the world’s worst exposure to natural disasters, but has been building its state capacity – resulting in an overall benign score. A similar trend is seen in Japan. 

The up and down arrows measure whether nations have made progress in the various categories versus 15 years earlier – or if dangers for citizens are getting worse.

Currency volatility over the decades

Currencies have been in the news during this tightening cycle as “King Dollar” demolished all rivals in 2022 and retreated this year. There was also a bumpy ride during the US debt ceiling drama.

However, on a historic basis, recent years have not been all that volatile, as our chart shows. 

We measured historic volatility for eight of the G-10 currencies against the dollar by applying a month-on-month percentage change and standardising the results. Using the resulting Z-score (a statistical measure of deviation from the norm), we generated volatility “bubble sizes” for moments in time.

The 2008 financial crisis stands out as a period of unanimous volatility against the greenback. It’s also of note that several currencies appear to have been more volatile pre-2000. Japan’s yen experienced more sustained volatility after the 1985 Plaza Accord.

Britons scarred by the Truss/Kwarteng episode might be surprised to see that recent sterling trading has not been especially volatile compared to the early 1990s era of “Black Wednesday,” when the pound crashed out of the European exchange-rate system. (As we wrote last year, while some UK market moves in late 2022 were historic on a weekly basis, the market turmoil was relatively short-lived.)

‍‍Projecting borrowing-cost expectations using Blue Chip

The prestigious Blue Chip forecasts, published by Wolters Kluwer, compile predictions from top US economists to generate key insights on the economy. To demonstrate their power, we chose to examine the US secured overnight financing rate (SOFR). 

SOFR is a broad measure of the cost to borrow dollars overnight while posting Treasuries as collateral. (It was developed as an alternative to the scandal-ridden Libor rate.) Effectively, it’s a measure of changing credit conditions.

Blue Chip’s survey compiled SOFR expectations from 41 institutions. This chart tracks their average and various percentile ranges.

It shows how, overall, analysts are pricing in cheaper borrowing costs – and, by implication, Federal Reserve rate cuts – from early next year. But the percentile ranges highlight the diversity of opinion. Several economists are predicting a steep decline; others, presumably concerned about financial stress or sticky inflation, predict little change. 

As El Niño returns, watch out for damage

El Niño is back. This climate pattern mostly affects Pacific-facing nations like Australia, but sometimes it can impact the global economy. Some regions experience severe droughts; others, heavy rainfall. The last time a strong El Niño was in full swing, in 2016, the world saw its hottest year on record. 

This chart displays the Southern Oscillation Index (SOI), which measures differences in sea level pressure and helps capture this climate event – and its “sister,” La Niña (a cooling event). Sustained negative values (below -7 on the chart) indicate El Niño episodes. We have highlighted the most severe events, when the SOI was below -20.

The more negative the value, the more severe the El Niño – making the sudden shift in May concerning: the SOI plunged from 0 to -18.5. 

The second panel tracks the economic costs of extreme weather, which have been gradually increasing over time. Since 2000, two notable spikes have coincided with severe El Niño events.

Surprisingly few OECD economies are in recession

Markets are fretting about the prospects for a global recession. But on a historic basis, the global picture for developed markets has rarely been better than it is in 2023.

This dashboard tracks the number of countries in a recession per year. The sample universe is 35 countries, all of which are OECD member nations. 

It may not be a surprise that 2020 and 2008 stand out for broad economic trauma. Meanwhile, 2006, 2016 and 2017 were golden years. 

Three economies are in recession in 2023 and one of them is Germany – which recently dragged the entire eurozone into a recession in revised data.

‍‍Crowded houses in Europe

As Europe’s economy grows ever more integrated, cultural and economic differences remain. This chart examines the variation in intergenerational households – or overcrowding, if you’re a young person stuck at home and sharing a room. 

Eurostat defines the “overcrowding” percentage rate as the proportion of households that do not meet the following standard: one common room, one room per couple, one room per single adult, and one room per pair of children or same-gender teenagers.

Our chart indicates that under-18s are more likely to suffer from overcrowding in pretty much all member states, but particularly in Eastern European countries such as Bulgaria, Latvia, and Romania.

There are also prominent numbers of “overcrowded” adults in Greece and Italy. It’s possible that this reflects cultural traditions of young adults living with their parents for longer.

‍The sticky legacies of ECB interventions

This chart shows how the legacies of past central bank interventions get wound down very slowly.

We’ve broken down the European Central Bank’s balance sheet to show the effects of different asset-purchase programmes. The most significant increase occurred in 2015, with the launch of the PSPP (public sector purchase programme). The ECB bought “peripheral” (ie. Spanish, Portuguese, Italian and Greek) government bonds to support market liquidity. 

Most of these economies have recovered from the worst of the early 2010s debt crisis, but more than EUR 2.5 trillion in PSPP purchases still weigh on the ECB balance sheet. 

The aftermath of the pandemic is lingering, too, as seen by the green wedge stemming from PEPP (pandemic emergency purchase programme). 

The ECB said in May that its asset purchase programmes will cease reinvestments in July. But it will take years for these portfolios to mature and shrink substantially 

The darkest-coloured part of the chart reflects monetary policy operations. As the ECB tightens policy to tame inflation, it has shrunk by about EUR 1 billion over the past year. 

Central bank liquidity and stocks

Is central bank liquidity a key determinant of stock-market returns? In February, we wrote about how Japan’s unorthodox monetary policy was probably boosting global equity markets, even as the Federal Reserve was tightening.

Indeed, there is a 96 percent historic correlation between the combined balance sheets of the world’s major central banks and the performance of the S&P 500.¹

In the chart above, we track the theoretical value of what the S&P 500 “should” have been, given that correlation, against the US stock benchmark’s actual performance.

The second panel expresses this relationship in a different way, measuring the S&P’s variance from the model. The one-standard-deviation range is highlighted in gray.

As central banks drain liquidity, the S&P 500 has crept higher and is more than 1 standard deviation away from the trend. Are we headed for a correction, or will markets defy shrinking balance sheets as they did during the tech-driven surge of 2018-19? 

Rich and poor retirees around the world

This scatter chart uses OECD data to compare the mean disposable incomes of working-age people (aged 18-65) and retirees (defined as 65-plus) in different countries. If your nation is on the diagonal line, that means the two age cohorts make the same amount of money. 

If not, this gives a sense of how far your nation is from “income coverage parity”. The smaller the dot, the lower the relative income for older people in that nation. 

Retired South Koreans have the biggest income gap with their younger counterparts. But in Italy, the over 65’s make slightly more than the rest.

Tracking Australian commodity exports: LNG, iron ore and the rest

Australia’s resource-based economy is famously resilient. The last recession Down Under was more than 30 years ago.

For the last 20 years, Australia has especially benefited from China’s sustained demand for minerals and hydrocarbons.

This chart breaks down Australian export revenue over the years, highlighting the ever-growing importance of iron ore, natural gas and coal. The big three commodities account for more than 60 percent of the total, compared with about 15 percent in the late 1980s.

Coal has been important for decades. But liquefied natural gas (LNG) exports are a relatively new feature of the Australian economy. The nation now jostles with Qatar for the top rung among LNG exporters.

For iron ore, China is the world’s dominant market, buying 70 percent of seaborne supply. The effect of China’s zero-Covid policy on the composition of Aussie export revenue in 2021-22 is clearly visible – as are the windfall gains that LNG exporters have reaped from higher global gas prices in the wake of Russia’s invasion of Ukraine.

What’s been displaced, share-wise? Manufactured goods and agriculture, most notably.

‍A mixed picture on our emerging markets dashboard

This dashboard assesses the most recent data points for economic activity across 10 major emerging markets. 

Using seven indicators, we break down the health of these economies. Green signifies strength; red indicates weakness. 

As oil prices decline and sanctions bite, Russia’s poor GDP performance stands out. And in the wake of Recep Tayyip Erdogan’s re-election, so does Turkey’s rampant inflation.

Indonesia suffered a particularly pronounced slump in exports due to the year-on-year price drops for coal and palm oil, two of its most important commodities.

China, the biggest emerging market, is showing a bit more green than red overall as its stock market recovers.

‍‍In search of an AI bubble index

Artificial intelligence breakthroughs have dominated headlines in 2023. ChatGPT has become a cultural phenomenon.

Cynics compare the hype around AI to past dotcom and crypto bubbles. Is there a way to compare the current craze to past investment trends?

We’ve created a mini-AI index and charted it against investment crazes ranging from 1970s gold to 1990s Asian tiger economies, as represented by the Thai stock benchmark. We also included the FAANG, which defined the late 2010s. (With the Fed-driven bear market of 2022 in the rearview mirror, it seems this Big Tech trade is back on.)

So far, there are few pure-play AI stocks; most of the hype has focused on Nvidia, a venerable chipmaker once associated with video-game graphics. It’s now seen as the dominant supplier of AI-related hardware and software. Microsoft, meanwhile, is integrating OpenAI into its Bing search tool. Both tech giants are in our nascent AI bubble index. We’ve also added Alphabet, Palantir and AMD.

Many of the interesting pure-play AI companies, like Midjourney and Hugging Face, are still privately held. As they come to the market, Macrobond users can customise their own AI indexes accordingly.

‍Visualising the whiplash from revised forecasts

Pessimism was abundant in 2022, but 2023 has seen surprising economic resilience on both sides of the Atlantic.

This chart visualises how consensus estimates for 2023 inflation (x axis) and GDP (y axis) evolved for the US, UK and eurozone from the start of 2022.

Economists consistently underestimated inflation for most of last year. As central banks hiked rates in response and the economic outlook grew darker, the arrows for all three economies headed in the same direction. Inflationary, Brexit Britain took the most rapid voyage to the lower right corner.

As optimism about growth kicked in, we see the lines “bounce” higher in unison. Only the eurozone is showing much optimism about disinflation in what remains of the year.

‍The biggest pieces of the pie in local stock markets

Most economies around the world are associated with a particular industry. The UK is dominated by London’s financial hub. Canada and Australia are known for their resources. But as this visualisation shows, sometimes national stock markets’ composition defies stereotypes.

This chart first breaks down global equities into different sectors and weights them as a percentage of total market capitalisation. We then take national and regional stock markets and compare them to that global breakdown. When a sector is overweight in a given nation compared to its global importance, we highlight the percentage in bold: perhaps unsurprisingly, tech is disproportionately large in the US, Japan and the China-dominated Emerging Markets aggregate.

The importance of banking in developed markets stands out. Even with Europe’s banks a shadow of their former, pre-GFC selves, they account for a quarter of equity capitalisation. Canada’s energy sector is disproportionately large on a global basis, but it’s still surpassed in value by the nation’s banks. 

US bank loans at a time of stress

Amid a spate of US bank failures, we’ve examined prospects for a potential credit crunch from several different angles.

This chart breaks down trends in the value of loans extended by US domestic banks.

The second-quarter turmoil amid the collapse of Silicon Valley Bank resulted in shrinking loan supply, a trend that bottomed out in April. The flow of commercial real estate and C&I (Commercial & Industrial) loans decreased for four consecutive weeks during that period. 

These segments bounced back by May after the additional support provided by the Federal Reserve. Since the collapse of First Republic a month ago, increases have eased.

‍Chinese trips to the shopping mall are leveling off

We’ve added data from SpaceKnow, which combines satellite imagery with proprietary algorithms to generate data about human activity in almost real time. We’ve applied this unique data provider to shine a light on Chinese consumers’ activities.

We’ve written extensively about China’s great reopening and the boost it has given global growth. But will this rebound be sustained?

SpaceKnow offers an indicator that tracks parking activity close to Chinese shopping malls. We’ve charted it against national statistics about urban retail trade. The correlation is high (above 0.7).

While the latter indicator has shown a steady pickup in growth, the satellite data – which is effectively a more recent “nowcast” – shows a sharp slowdown in the year-on-year increase in the number of parked vehicles around shopping centres.

Are consumers returning to online shopping after post-lockdown splurges at bricks-and-mortar shops, or does the satellite data herald a broad slowdown in consumer spending? 

Drought and the US agricultural heartland

We recently wrote about how drought threatened Thai rice production. As the world continues to grapple with food inflation, a lack of rainfall is also hitting the US grain belt. 

This year, drought has compounded difficulties with a winter wheat crop that was already damaged by extreme cold. (Farmers in Kansas normally plant a wheat crop in the autumn that grows during the winter and early spring, with the grain harvested in the summer.)

Our chart tracks the percentage of fields with conditions described as “poor” or “very poor.” The line is well above the last decade’s 25-75 percentile range, let alone the average.

The USDA recently said that farmers in Kansas, the No. 1 US state for wheat production, will likely abandon about 19 percent of the acres they planted last autumn. That’s an increase from 10 percent last year.

All of this has implications for supply in the world wheat market – especially if the UN-brokered deal on Ukrainian shipments through the Black Sea is derailed by Russia.

The UK’s surprising resilience

Defying the Bank of England’s previously ultra-pessimistic outlook, the UK economy was surprisingly resilient in recent months. The IMF recently said it expects the UK will escape recession in 2023, helped by a return of stability after Liz Truss’s brief prime ministerial tenure.

Indeed, while GDP growth has been basically stagnant for four straight quarters, the only period that dipped into negative territory was the third quarter of last year.

The chart above assesses consumer and business confidence surveys and tracks Z-scores, a statistical term describing the variation from the norm. Historically, a drop below 1 standard deviation from the mean has been a sign of recession.

While the average Z-score decidedly dipped below 1 for a time, it did not stay there for long and is rebounding. This indicator did not come close to the depths seen in the 2008 or pandemic recessions.

‍‍Visualising China’s trade partners by deficits and surpluses

This visualisation ranks China’s major trading relationships. 

As the world’s factory, China runs a trade surplus with the economies highlighted in green. The list is led by the United States: China’s exports to its largest trading partner have reached USD 555 billion, about triple the level of imports.

The nations in red are those where China has a trade deficit. They’re generally known for producing the inputs demanded by China’s industrial machine. The list includes commodity exporters Australia and Brazil, as well as Taiwan, the world’s dominant semiconductor producer.

The growth-value pendulum no longer swings in unison for China and the US

Last week, we noted how the rebound in tech stocks was driving the S&P 500 as energy shares faded, a reverse of trends seen in 2022. 

This week, our chart breaks down global equities in a different way – showing how “value” and “growth” stocks (as defined by MSCI indexes) are diverging in different economies. A reading above zero indicates growth was outperforming value, and vice versa for a negative number.

Growth stocks get their name from perceptions of their future earnings potential, while value stocks offer more predictable business models at cheap valuations. 

With tech stocks usually considered “growth” and energy usually considered a “value” play, it’s no surprise that a growth strategy outperformed in both the US and EMs including China during the pandemic year of 2020. 

The US and China have been more divergent over the past year. In China, value is still outperforming growth as local tech shares lag behind their US counterparts.

Real wage erosion finally stabilises in Europe

In 2022, we highlighted how inflation was ravaging wages in Europe, more than wiping out any pay increases. Workers will be happy to learn that they are starting to catch up – or, at least, see their purchasing power erode more slowly.

Wages tend to suffer a time lag before they adjust to inflation spikes. As our chart shows, that adjustment is finally occurring. Adjusted for inflation, wages in the eurozone are down 2.6 percent year-on-year. In late 2022, they were shrinking by more than 7 percent on that basis.

Discrepancies are wide across the region. The Netherlands is posting outright real wage growth, while Italy is lagging behind. But the pattern is very similar across the EU’s member states. 

Should this trend continue, central bankers may begin to worry about the dreaded “wage-price spiral.” Wages in the eurozone increased at a record year-on-year pace in the last quarter of 2022, according to Eurostat.

(It’s notable that the recessions of 2008 and 2020 appear to have been good for real wage growth – assuming you kept your job and were able to take advantage of the cheaper cost of living.)

S&P winning sectors rotate in 2023

This chart revisits our “checkerboard” visualisation in December, which ranked winning and losing industry groups in the S&P 500 for every calendar year.

Adding the year-to-date performance in 2023, the winning and losing sectors have almost reversed. Energy was the only sector with positive returns in 2022; it ranks last so far this year. This year’s top three performers were the three worst laggards of 2022. 

Amid a surprisingly resilient global economy, communications services, technology and consumer discretionary stocks are leading the gains.  

Hard, soft and crash landings through history

The Fed is in search of a “soft landing.” These aren’t mythical, but they are relatively rare.

Our chart aims to classify the time periods before, during and after various US recessions as “hard,” “soft” or “crash” landings. We assess three indicators – the unemployment rate, nominal GDP and inflation-adjusted real GDP – and chart their moves.

Current Fed estimates call for a two-quarter, soft landing recession that begins at the end of this year. We’ve charted this accordingly. Historic precedents include 1970-71, 1960-61 and the early 2000s downturn after the tech bubble popped.  

As for crash landings, the pandemic episode of 2020 is in a class by itself. Perhaps unsurprisingly, the GFC was second worst.

Will this recession be more like the hard landings of the mid 70s and early 80s? The CEO of Apollo Global Management is expecting a “non-recession recession,” where the pain is felt more in asset prices. (The 2001-02 popped dotcom bubble period could be categorized this way.)  

‍Previous Fed rate-hike pauses were in much more positive environments

We wrote recently that high-profile investors think the Fed is done hiking rates. Inflation has slowed for a tenth straight month, and financial stress is elevated after high-profile bank failures. Markets are pricing in rate cuts later this year, but if inflation stays high and the economy is resilient, the Fed could “pause, not pivot” for some time.

In 1985, 1995, 1997, 2006 and 2018, the Fed eased off tightening when the economy was in good shape. Stocks rose. We characterize these as “good pauses.” The current environment is quite different. 

As our table shows, industrial production is stagnating, the Conference Board’s composite of leading economic indicators is sliding, the yield curve is sharply inverted, and banks are tightening their industrial lending standards significantly.

It might be counterintuitive to have the highest unemployment rate in positive green and the current tight labour market in red – but from a central bank’s perspective, this reflects the “buffer” effect, or slack, that high unemployment has to absorb an inflationary spike.

The current inverted yield curve is not a bullish indicator for stocks. Far from a “good” pause, the bright red may be telling us that rate cuts will come soon and a sharp recession is ahead.

‍European consumer confidence is a positive outlier in our economic cycle clock

This is a version of various “clocks” that visualise business cycles through an upswing, an expansion, a downswing and contraction. This clock tracks the business climate for various economic sectors in the European Union over the past two years, and its methodology is based on this research paper. 

Consumer confidence stands out. It took a major swing into contraction from January 2022, even before Russia’s invasion of Ukraine sent energy prices surging. However, it was already in the upswing quadrant by November, and has continuously improved since. 

Persistent inflation and interest-rate hikes pushed most other business sectors into the downswing quadrant. There appears to be light at the end of the tunnel, however, as they move toward expansion; retail trade is already there. Construction, however, remains depressed, and hasn’t started to make a positive turn. 

Steadfast US stock investors defy bearish consumer sentiment

Historically, as the US consumer became bearish, individual investors pulled money from the stock market. That relationship has broken down, as our chart shows.

This visualisation tracks the results of a survey by the American Association of Individual Investors (AAII), which measures the proportion of portfolios that are positioned in stocks. The divergence with the University of Michigan’s consumer sentiment index began in 2020 – a year that saw the pandemic hammer the economy while tech stocks surged. 

The second panel reflects a statistical measure of correlation. For decades, the 5-year rolling correlation spent most of its time above 0.4, approaching 0.7 several times. Recently, that correlation has sunk to zero. 

As consumer sentiment remains in the doldrums, the AAII says its members continue to position more than 60 percent of their portfolios in stocks. 

‍Russian energy revenues slide

This chart tracks Russia’s energy- and non-energy-related government revenue for the first four months of each calendar year. The effects of volatile oil prices can clearly be seen.

Moscow appeared to derive a perverse benefit from invading Ukraine last year; oil prices surged and so did energy revenue.

However, a year later, revenue has tumbled – even though Moscow’s April oil exports rose to the highest since the conflict began.

While international oil prices have come down, sanctions are making a difference too; with the EU banning Russian oil imports, Russia is selling crude at a discount elsewhere. 

‍A tourism recovery across Asia

International travel is steadily resuming across Asia. As our chart of tourist arrivals shows, we well on the way back to pre-pandemic norms. 

We track destinations ranging from the urban bustle of Singapore to the beaches of Thailand (a favoured destination for Chinese tourists) and Fiji (especially popular with Australians and New Zealanders). The top of the chart – 100 on the y axis – represents a nation’s all-time high.
Except for Hong Kong, which reopened later than the rest, tourist arrivals are more than halfway back to former peaks.

As one of our guest bloggers wrote earlier this year, this should provide a significant boost to GDP. 

‍‍Forecasting Case-Shiller house prices with Indicio

Indicio is a machine-learning platform that lets the Macrobond community easily work with univariate and multivariate time-series models to forecast macroeconomic and financial data. (Read more about our partnership with Indicio here.) Indicio aims to combine different modelling approaches, potentially creating a super-forecast that can outperform any single model.

With global real estate in focus as interest rates rise, we’ve used Indicio to generate a forecast for one of the best-known measures of US house prices: the S&P Case-Shiller index. Ahead of the March figures, which will be released on May 30, our model predicts the coming 12 months for a composite index of 20 major metropolitan areas.

Indicio allows us to create a broad range of univariate and multivariate models. We opted to keep 24 multivariate models, using stepwise RMSE (a measure of historic accuracy) to weight each input model. 

Our forecast is quite bearish. It calls for the Composite 20 index to have entered negative territory in March (-1.28 percent year-on-year in the weighted model) and keep dropping from there. 

(For a deeper dive into the methodology of using Indicio, read a longer article about how we forecast US payrolls here.)