Charts of the Week

Demographics and pensions in Spain

Countries are looking for ways to shore up creaking retirement systems after years of expensive promises. Riots in France are in the news after President Macron’s plan to lift the retirement age to 64 from 62. But similarly contentious changes are underway in neighbouring Spain – where the retirement age has been 65 for some time. Younger people and higher earners will pay more.

Our chart compares the population pyramid today (the blue line) with the UN projection for 2050 (the red line) As the “bulge” shifts upward, there will be just 1.7 working-age Spaniards instead of 3 for every retiree.

Spaniards have a life expectancy of 83. The nation’s “baby boom” also differs from other Western countries. Though its civil war ended in 1939 and the nation was neutral in WWII, the birth rate only began to climb in the late 1950s, and that wave of Spaniards is just beginning to retire.

OPEC cuts amid budget pressure in oil producing nations

Oil prices have whipsawed this year. The Brent crude benchmark slid from about USD 85 to below USD 75 in the first two weeks of March on concern that banking turmoil and recession fears would dent demand.

But Brent snapped back above USD 80 after Saudi Arabia and its OPEC+ partners announced unexpected production cuts. 

Looking at some of the national budgets for countries that produce oil, however, perhaps the move shouldn’t have been a surprise. Oil prices have been on a downward trend since the Brent price topped USD 120 a barrel last summer, and some countries could use more fiscal room. 

Our visualisation graphs the current and 10-year average Brent prices against the “fiscal breakeven” price needed for various countries to start posting budget surpluses. It also charts the “external breakeven” oil price at which a nation’s current-account balance is zero, i.e. It covers its import bill. 

OPEC and OPEC+ members on the wrong side of the orange budget line in our chart include Algeria, Bahrain, Iran and Kazakhstan.

‍Modelling the future of non-farm payrolls

As the Fed continues its quest for a soft landing, economists are keeping their eyes on the labour market.

We’ve created a vector autoregression model to predict non-farm payrolls (NFP) over the next year. (Macrobond users who click through to the chart in our application will be able to see the endogenous variables and lags, and be able to refine the model further.)

As our chart shows, the model is predicting slower payroll growth, based on inputs such as job openings and personal consumption expenditures (PCE).

(The “residuals” pane reflects the difference between the observed values and the predicted values in a model; as the 2020 pandemic spike shows, forecasting becomes more difficult during times of turbulence.)

The resilient US labour market has meant recent NFP figures surprised on the upside. Economists therefore expect the Fed to leave the possibility of a rate hike on the table as long as inflation persists and labour markets can accommodate a hike.

Anticipating US jobless claims by tracking layoffs

Another argument for a slowing labour market is the current wave of US layoffs, ranging from Big Tech to Walmart and head-office jobs at McDonald’s.

This chart aims to measure layoffs on a national basis by summing up state-level worker adjustment and retraining notices (WARN), which require firms to provide early warning in case of events like plant closings. 

Every state has different peculiarities, and not all of them report WARN notices, so the sample charted uses 39 of the 50 states. 

As the chart shows, WARN notices are increasing significantly; the year-on-year rate of change level is comparable to that seen in 2001 and 2008-09s. Those were periods where initial jobless claims also rose, as the charts show; as laid-off staff begin claiming unemployment benefits, history is likely to repeat itself. 

Watching for commercial real estate distress at small US banks

The health of US banks remains in the news after the SVB rescue. Last week, we examined how deposits are flowing out of both larger and smaller institutions. 

This week’s charts look at their loan books over two decades, showing how commercial real estate could be the next issue.

Fed figures show that commercial banks’ total loans almost tripled since 2004, reaching USD 11 trillion. But the distribution between institutions has remained roughly stable: large banks account for 60 percent of the loans. (Large banks are defined as the top 25 by assets.)

The second panel focuses only on commercial real estate (CRE) loans. Smaller banks have 70 percent of this asset class after years of taking an ever-greater share versus their larger counterparts. With more observers warning about stress in the commercial real-estate market, smaller banks could suffer disproportionately.

‍The BRICS surpass the GDP of non US developed nations

Two decades ago, former Goldman Sachs economist and emerging-market bull Jim O’Neill coined the BRIC acronym (Brazil, Russia, India and China). The concept was later expanded to include South Africa to become the BRICS. 

Another acronym predates the BRICS: the G7, or Group of Seven, a political forum for the biggest industrialised democracies: the US, UK, Germany, France, Italy, Japan and Canada. 

O’Neill posited that the BRICS were so big and dynamic that they would converge with western income levels and grab an ever-greater share of the world economy while the G7’s share shrank.

Our chart shows how O’Neill’s prediction is gradually coming true – at least if you exclude the US.

(This takes an expansive view of the G7, including the entire European Union economy since the group's summits include EU representatives.)

The IMF estimates that the BRICS share of global GDP surpassed that of the G7-ex-US in 2022. That trend is expected to continue.

The timing is interesting; China, the biggest BRIC economy, notably outperformed western GDP growth in the early stages of the pandemic. 

‍Components of German inflation are shifting around

We have dedicated several charts to European inflation in recent weeks. In February, there was evidence of a broad disinflationary trend across the region, though inflation remained elevated in absolute terms.

Last week’s German CPI figures demonstrate the dilemma facing analysts and central bankers. Price increases were more than analysts expected, even though the inflation rate slowed from 8.7 percent to 7.4 percent year-over-year. 

The statistics office has not yet released a breakdown of inflation contributions by sector: housing, food, etcetera. But we can aggregate regional CPI figures to get an early sense of what’s driving the slowdown in inflation. 

As our chart shows, food prices are climbing at an ever-increasing rate. That’s been offset by slowing inflation for transportation and housing. 

Walking on eggshells for Easter

As we head into the Easter weekend, consider the tensions around the humble egg. (The ones laid by hens, not the chocolate version.) This grocery staple has been notable for post-pandemic price surges and shortages in several nations, particularly the UK. 

In the US, eggs cost almost double the price of a year ago, according to the Bureau of Labor Statistics. Opponents of President Biden have specifically cited the egg market as they critique his inflation policy. Some observers have accused egg suppliers of collusion.

Our chart tracks volatility, rather than price. It indicates how there is something else going on besides the general inflation and disruptions to agriculture in the wake of Russia’s war on Ukraine.

That something is avian flu. In 2014-15, the US experienced the largest outbreak of that disease in recorded history. 

That’s when the chart becomes steadily more volatile, as poultry farmers culled and then rebuilt their flocks – only to have an even worse bird flu outbreak occur in 2022-23, following another outbreak in 2020. We have shaded the outbreaks on the chart.

Lent might be coming to an end, but until prices fall, some shoppers are likely to keep avoiding eggs.

The Powell spread is looking recessionary again

We have previously written about the “Powell spread.” The Fed chairman’s preferred recession indicator, and a measure of investors’ expectations, it compares the yield on a three-month Treasury bill and its implied yield in 18 months’ time.

As Powell said a year ago, “if it's inverted, that means the Fed's going to cut, which means the economy is weak."

Our chart tracks the Powell spread using ICAP Forward rates. Recession watchers will note that after easing earlier in 2023, it’s now at its most inverted in at least two decades. 

Housing deflates unevenly around the world

Across most of the developed world, higher interest rates and the more expensive mortgage payments that result are taking their toll on housing markets. In many nations, housing starts, transactions and prices are all contracting. In the US, a further hit could come from the recent bout of banking turmoil, which may cause smaller banks to tighten lending standards.

Our chart tracks home prices in several OECD nations in the months before and after their peaks. While the overall trajectory is similar, there is a divergence between markets. Countries with higher shares of fixed-rate mortgages, for example, tend to experience delayed rate impacts. 

Canada stands out on this chart as it has barely lost ground from its peak. The Canadian panelist among the experts in our recent real estate webinar predicts a greater downturn is ahead. 

‍Sweden and its stubborn inflation

Inflation is hitting many countries, but it has proven especially strong and persistent in Sweden, exacerbated by the krona’s weakness against the euro. Sweden has also done less than some other European nations to shield consumers from the energy price shock. 

Core inflation figures for February surprised on the upside. Under pressure from politicians, supermarkets recently announced price cuts.

Our chart tracks the nation’s consumer price index (CPI) and projects central bank forecasts, past and present. The grey lines show how the Riksbank overestimated inflation pre-pandemic; consistent forecasts for 2 percent CPI growth were followed by flat prices, circa 2012-2015.

The current forecast (in orange) doesn’t anticipate inflation will fall below 2.5 percent until the end of next year. That would still be a higher inflation rate than that seen at any time between 2011 and the pandemic.

‍Swedish wages washed away by an inflation waterfall

Unsurprisingly, the inflation spike has impacted wage negotiations. Labour unions demanded an increase of 4.4 percent, turning down mediators’ offer of a 3.7 percent wage hike this year and 2.8 percent next year. 

As our chart shows, even if the unions get what they want, real wage growth will be thwarted by the various components of inflation.

The last time real wage growth was so poor was in the 1980s. Nevertheless, the Swedish National Institute of Economic Research predicts that real wage growth will turn positive again next year. 

‍Floating rates mean sinking Swedish home values

As an earlier visualisation in this chart pack showed, Sweden is a nation where house prices are on a relatively swift downward trajectory. Given the prevalence of floating interest-rate mortgages in Sweden, tighter monetary policy has more of an immediate hit on household budgets.   

This chart graphs house prices for Sweden as a whole, the capital city of Stockholm and the rest of the municipalities tracked by Valueguard – by way of percentile and “high-low” bands tracking the dispersion.

It shows how the decline is hitting the whole country at once – the first time that has happened since our data partner began compiling the figures. (One is reminded of the subprime crisis-driven US downturn, the first time there was a housing bust on a national scale.) 

‍US bank deposits shrink as money market appeal grows

The Silicon Valley Bank affair focused minds on the FDIC’s deposit insurance limit of USD 250,000. Amid concern that deposits over that sum might not be safe, funds flowed out of smaller, regional US banks.

However, deposits at the 25 largest US banks had been shrinking well before the SVB crisis, and inflows from spooked regional bank depositors didn’t reverse this trend – as our chart shows. (The chart tracks the rate of change; inflows turn to outflows at zero on the Y axis.)

Where were the funds going? Probably into money markets.

As the chart shows, US money-market funds’ assets are now USD 500 billion higher than they were twelve months ago. After almost a year of steady interest-rate increases, low-risk assets are finally generating more appealing yields.

‍Tracking the defense spending laggards in NATO

Members of the NATO alliance meet in Lithuania in July. 

As Russia’s war in Ukraine moves into its second year, NATO Secretary-General Jens Stoltenberg wants member states to pledge to spend at least 2 percent of their GDP on defense.

At the end of 2021 – and as Presidents Trump and Obama both complained about – few of the non-US NATO members surpassed that 2 percent threshold, as our chart shows. (This has been changing since Russia invaded Ukraine, with nations rethinking previous stances and replenishing weapons stocks depleted by supplies to Kyiv.)

The larger the bubble on the chart, the bigger share of its budget that a nation spends on defense. Among the states that will meet Stoltenberg’s pledge, Britain’s annual military outlay dwarfs the rest in absolute terms. 

‍Export weakness is deflating reopening optimism in China

China might have hoped for more of a boost from reopening its economy, but that’s being thwarted by sluggish global demand for its exports.

As our chart shows, monthly exports have been falling on a year-on-year basis for five months. (To be sure, a year earlier, export growth was especially healthy amid the pandemic-driven consumption boom.)

The future of this trend will depend not just on the depth of the next recession, but trade tensions between China and the US, as some companies pursue “reshoring,” “near-shoring” and “friend-shoring” strategies that shift production out of China. 

Slicing up the emergency balance sheet expansion at the Fed

The Silicon Valley Bank crisis prompted a sharp reversal of the Federal Reserve’s effort to shrink its balance sheet. The Fed had been letting securities mature for months, gradually reducing the stockpile of bonds accumulated during waves of quantitative easing.

In just two weeks, the balance sheet expanded by more than USD 339 billion. This pie chart breaks down that increase and its two main components: the bailout of depositors and last-resort lending.

About USD 180 billion was loaned to the Federal Deposit Insurance Corporation, classified under "Other Credit Extensions." Traditionally, the FDIC borrows from the Treasury; however, the Fed stepped in amid the current political standoff over the debt ceiling.

Primary Credit jumped by USD 105 billion due to lending through the "discount window," normally a last-resort funding source. This topped the weekly peak in 2008, reflecting the stress on banks’ funding as higher rates pressure their fixed-income assets. 

The Bank Term Funding Program grabbed the headlines; this limited-time, emergency facility provides liquidity to banks. It’s been a relatively small slice of the pie so far, accounting for about USD 53 billion.

Credit Suisse CoCo wipeout sends AT1 yields soaring

The emergency takeover of Credit Suisse by its domestic rival UBS sent shockwaves through a particular securities market: Additional Tier 1 bonds, known as AT1 or CoCos (contingent convertible bonds).

AT1 securities were created in Europe after the 2008 financial crisis to bolster banks’ capital and shift risk away from taxpayers. 

Controversially, Swiss regulators ordered that Credit Suisse’s AT1 holders be wiped out as part of the rescue, in contrast to equity holders (like the Saudi National Bank) that received small payouts from UBS as part of the deal.

Our chart shows the impact on the USD 250 billion CoCo market. Yields have soared, tripling from their lows, as these instruments are now perceived as much riskier. The second panel shows that the ICE BofAML benchmark has slumped about 20 percent from its pandemic peak. 

Some of the Credit Suisse AT1 holders are considering legal action; meanwhile, EU regulators have attempted to calm the market, saying that equity holders should be first to absorb losses before AT1s are written down. 

Visualising a risk dashboard for banking turmoil

With the banking industry unsettled on both sides of the Atlantic, we have created a visualisation of the European Banking Authority’s risk dashboard that can be toggled between different countries.

Each quarter, the EBA publishes a broad range of risk indicators for the banking system. These include capital strength metrics (like CET1 ratios), measures of non-performing loans, and profitability.

Our table includes data up to the third quarter of last year, so it will be some time before it reflects this quarter’s turmoil. It uses the EBA’s own green-yellow-red “traffic light” thresholds for good, intermediate and bad readings.

In the case of Germany, the picture was mixed two quarters ago. Profitability metrics and liquidity capabilities were poor, but banks had strong solvency ratios and asset quality.

Comparing volatility in the equity and rates markets

This chart compares volatility in equity markets – the VIX index – with volatility in the bond market – the MOVE index. Unsurprisingly, the historic relationship between the two is positive: when volatility surges in one asset class, it tends to spread in the other. 

In recent weeks, between the Credit Suisse AT1 wipeout and bets on a Fed “pivot” to dovish monetary policy, market turmoil has been focused on the fixed-income space. Our chart reflects this.

The purple dots reflect the most recent readings of the two volatility indices. MOVE is high; the VIX is not particularly elevated. The historic relationship between stock and bond volatility suggests that the VIX might “normally” be as much as double its current level. 

The South African energy crisis keeps getting worse

South Africa gets 90 percent of its electricity from Eskom, a state-owned utility that has produced steadily less power as it lurches between corruption scandals. As the nation’s population grows, the utility and its old, poorly maintained plants can’t keep up with demand.

The situation is so critical that Eskom resorts to intentional outages, known as “load-shedding,” to prevent a collapse of the national grid.

This visualisation shows how the situation has worsened in recent years. We chart the historic average yearly trajectory of power generation since 2000 against the shrinking production seen in 2021 and 2022. As 2023 rolls on, the January figure was far worse than it was for the two previous years – 2 million MWh below the historic average.

Eskom’s troubles are weighing on economic growth; the nation’s central bank estimates that the energy crisis will cut 2 percentage points from GDP growth this year. Power cuts hurt daily life in a myriad of ways; water shortages result as pumping stations are cut off from energy, while businesses are forced to close.

A decade of doldrums in Latin America

The 1980s are typically dubbed Latin America’s “lost decade.” Many nations were unable to service their foreign debt, while the prices of the exported commodities that were key to many of the continent’s economies were depressed in a hangover from the 1970s boom. 

Interestingly, the past 10 years show an even worse growth trend for the region – whose economic expansion was slower than almost any other part of the world. 

Weak investment and productivity are factors, as was the pandemic; a region with less than 10 percent of the world’s population suffered more than a quarter of all recorded Covid-19 deaths. And commodity prices have only recently recovered their mid-2000s liveliness. 

The International Monetary Fund’s forecasts for the rest of the decade suggest an only somewhat improved trend.‍

How the Vietnamese currency band widened over the years

Vietnam manages its currency, the dong, by allowing it to trade in a range against the US dollar. As our chart shows, that range has widened over the past two decades as policy makers tolerate greater volatility. 

The dong was under pressure in 2022 as the dollar strengthened, driven by the aggressive Federal Reserve tightening that depressed most emerging-market currencies. 

In October, Vietnam widened its trading band to lessen the pressure on its foreign-exchange reserves (a phenomenon across emerging Asia that we wrote about in December). 

The dong-dollar exchange rate is now allowed to rise or fall as much as 5 percent per day, compared with 3 percent previously. The currency’s increased flexibility is important; the central bank unexpectedly cut the rate at which it lends to banks earlier this month, underscoring the need to support the economy.

Real estate and tightening cycles

Higher interest rates are already starting to deflate some of the world’s frothier real-estate markets. Residential mortgage borrowers are seeing payments increase and affordability decrease; developers are finding it harder to secure financing.

But history suggests that a Fed tightening cycle can be a good time to own US real estate. The Fed is usually tightening to control inflation, and real estate is a classic inflation hedge. 

This was certainly the case in the late 1970s, as shown by our chart tracking the extent of rate hikes (the dots) and returns for all categories of real estate (the bars) during recent tightening cycles. As the key Fed rate was hiked more than 1200 basis points, property returned 20 percent a year.

In the much less inflationary 2004-06 rate-hike cycle, property again returned almost 20 percent.

Inverted yield curves through history

Historically, an inverted yield curve – when long-term interest rates are lower than short-term ones – is a good warning that a recession is coming. Traders are predicting that higher borrowing costs will slow the economy, prompting central banks to cut rates in the future.  (We wrote that this was occurring back in June.)

This chart tracks a universe of different US bond-yield spreads, showing the percentage that are in normal (blue and green) or inverted (orange and red) territory at a given moment. (The diffusion index is composed of 15 different US government benchmarks, ranging from 1-month bills to the 30-year, long-term bond.) 

The spiking inverted curves before the early 1990s, early 2000s, GFC and pandemic recessions could not be more obvious on this chart.

For quite some time, observers have been predicting a recession is inevitable as the Fed tightens policy to tame inflation. The bond market agrees: according to our chart, more than 80 percent of the yield-spread permutations tracked are inverted. About 80 percent have an inverted spread above 50 basis points, the greatest proportion in at least 40 years.

The SVB effect on Fed funds futures

Many people bet on a Federal Reserve “pivot” to dovish policy this year. Few of them probably envisioned a Californian bank failure as the specific catalyst. But the Silicon Valley Bank episode (and Signature Bank, and the subsequent interventions involving First Republic Bank and Credit Suisse) is consistent with the central-banking cliché “tighten until something breaks.”

This chart tracks futures markets to gauge evolving perceptions of the outcome of the March 22 Fed meeting. (We have previously published several different visualisations of Fed funds futures on similar themes.) How have attitudes changed since September?

Consider the green bars on the left-hand side. Six months ago, traders bet there was a 40 percent probability that the Fed would be done its tightening cycle by now and would be cutting rates again. 

As inflation proved sticky, traders swung the other way and refused to rule out the possibility of a massive rate hike of 75 basis points or more (the red ridge). Then inflation slowed, and the consensus view became a 25-basis-point hike (in purple). 

Recent job and inflation reports surprised on the upside, prompting renewed concern that a 50-point hike was quite possible (dark blue). But after SVB, that possibility is off the table; the market expects a 25-basis-point hike – or, possibly, as the grey zone indicates, none at all.

Digging into US bank deposits and assets in the wake of SVB

As analysts and regulators pore over the wreckage of SVB, they are likely to focus on the duration mismatch between its assets and liabilities (i.e. the “volatile” deposits suddenly pulled by the tech sector and venture capital).

It’s worth examining trends during the pandemic. Deposits surged, while loan demand fell. Banks often placed the difference into securities, as our chart shows – peaking above USD 6 trillion in the first quarter of 2022. 

Accounting standards necessitate that banks designate these securities as either “Available for Sale” (AFS) or “Hold to Maturity” (HTM), meaning they will stay on the bank’s books until they expire. We can see a shift in the second pane; the share of HTM surged, and is now evenly split with AFS securities for the first time since the era of 1990s deregulation.

From an accounting perspective, the two are treated differently. HTM securities eat into liquidity: as banks committed to hold them until maturity, they are tricky to sell if cash is needed in the short term. 

SVB was known for having a significant portion of its securities’ assets classified as HTM, with most of those bought during the recent period of record low rates.

How big and small US banks swapped roles

The SVB crisis might also lead to an examination of how and why smaller US banks became more aggressive in extending credit. Are they generally more poorly capitalised and overextended compared with larger peers?

This chart tracks banks’ loan-to-deposit ratios over recent decades. Perhaps unsurprisingly, they peaked just before the global financial crisis in the wake of a long credit boom.

Breaking down the behaviour of larger and smaller banks, as defined by the Federal Reserve, reveals interesting trends. Pre-GFC, small US commercial banks had a lower loan-to-deposit ratio than their larger peers (which the Fed defines as the top 25 domestically chartered commercial banks). From about 2012, that started to reverse. 

Recently, ratios for all banks dipped during the pandemic as deposits surged and loan demand weakened. But just before the pandemic, loans represented 90 percent of total deposit liabilities for small banks, compared to just 70 percent (already a record low at that time) for large banks. 

Job openings are easing but remain strong

As tighter monetary policy does its work, the employment market is softening a bit. But job openings remain stronger than they were pre-pandemic in most countries. 

This chart measures job openings as a share of the labour force in different countries, compared with the December 2019 level (the dotted line). It plots each nation’s 2021-22 peak, when demand soared as economies reopened, as well as today’s level. 

Only Portugal and Germany seem to have fallen back to pre-pandemic levels; the US leads nations, with job openings 2.5 percentage points higher than in 2019. 

A pessimistic Britain expects to trail the 2010s growth trend

This chart compares US, UK and eurozone central bank growth expectations against the “trend line” between 2010 and 2019. Britain’s central bank stands out with its pessimistic outlook.

The UK economy is no bigger than it was on the eve of the COVID-19 pandemic, and as this chart shows, the Bank of England does not expect to recover that ground until 2026 at the earliest.

It’s a stark comparison with the pre-pandemic, pre-Brexit period. Even after the financial crisis slowed growth, UK GDP growth per capita tended post some of the strongest performances in the G7 during the “austerity” era. Over that time frame, the eurozone’s below-trend growth is visible on our chart, a result of the region’s debt crisis.

‍UK strikes evoke the Thatcher era

Londoners are getting used to strikes disrupting the city’s transport network. Across Britain, such labour disputes are having the biggest impact since the 1980s.

As our chart shows, the last time the number of working days lost from strikes was as high was during the premiership of Margaret Thatcher – an era famous for its labour unrest. The last 12 months have seen industrial action in the transport, storage, information and communications industries.

It's worth noting that this figure not only includes the striking workers, but people who were unable to get to their workplace.

As the second pane of our chart demonstrates, showing the mean yearly value for each decade, missed working days due to strikes had been comparatively rare since 1990.

‍‍The British budget surprise

There was one notable bright spot for the British economy recently – at least if you were the finance minister. (The nation’s taxpayers might disagree.)

This chart tracks month-by month government revenue over the past three years, expressed as a percentage change versus the same month in 2019.

This past January saw revenue jump 36 percent versus 2019 levels. It’s the month when taxes are due, and self-assessed income tax receipts were the highest since monthly records began in 1999. 

This windfall, which meant public borrowing was less than expected, created room for Chancellor of the Exchequer Jeremy Hunt to expand public spending and offer tax breaks.

Warm weather stops Putin's plan to disrupt European economy with energy cutoffs

Had Putin consulted the weather forecast before invading Ukraine, he might have been better prepared. His strategy of disrupting the European economy by cutting off its energy supply has been thwarted by unseasonably warm weather and strong winds, which have reduced demand and allowed time to secure alternative sources and increase storage capacity.

However, the situation remains precarious. While the chart shows that the Year-To-Date Average Fill Level % is relatively positive compared to previous years, prices are still twice as high as they were before the conflict, and demand from Asia is increasing. Furthermore, the reopening of China's economy will intensify competition for scarce resources. As evidence of Europe's growing uncompetitiveness, companies such as BASF have closed plants.

Will the weather be as forgiving in the future?

Fed chair testimony triggers market correction amid hawkish signals

The recent "good news is bad news" macro story is still unfolding, as Jerome Powell's recent testimony to Congress caused markets to fall sharply. The hope that the recent tightening was coming to an end seemed misplaced, as Powell made it clear that he was prepared to speed up if the steady stream of strong data refused to dry up.

Until recently, federal funds futures were pricing in a rate of around 3% for the start of 2025. However, the continued momentum in the labour market, surging retail sales, and strong CPI and PCE prints released in February seem to be forcing the Fed's hand. As a result, markets are now more hawkish, with a 30% increase in the terminal rate already priced in.

China's modest 5% growth target disappoints investors and hits commodities

As China emerged from its lockdown period, markets had risen strongly in anticipation of its economic resurgence and the pivotal role it could play in driving growth across the region. However, the recent announcement of a modest 5% growth target, the lowest in over 30 years, underwhelmed investors. As a result, commodities were particularly hard hit as demand forecasts were reassessed. With so much riding on China's success, can we hope that they plan to surprise on the upside this year?

Early warning indicator flashes red for Sweden's banking system: Risk of housing market crash

The Bank for International Settlements (BIS) defines "Early Warning Indicators" (EWI) of banking crises as deviations of credit and asset prices from long-term trends.

Currently, for Sweden, one of these indicators is flashing red.

In the chart above, we have replicated the BIS calculations using the Hodrick-Prescott filter on the credit-to-GDP and property prices series. To highlight deviations from the long-term trend, we show a +1/-1 standard deviation band.

Stefan Ingves, who served as the Riksbank's governor from 2006 to 2022, repeatedly warned about the build-up in mortgage debt. Due to the high levels of household debt and significant proportion of floating rate mortgages, he likened the Riksbank's job as rate-setter to "sitting on top of a volcano." It appears that his warnings were prescient.

Although the overall private sector credit remains within the standard deviation band, the upper chart shows evidence of a potential housing market crash. There is a record negative gap to the long-term trend, even surpassing 1992's bloodbath.

Regression model predicts further plunge in Swedish real estate prices amid high sensitivity to rates

Continuing on the topic of the Swedish housing market, we have developed a regression model to nowcast short-term changes in real estate prices. Our model utilises several data series as inputs, such as a consumer survey for major purchases within the next 12 months, unemployment, housing inflation, the K/T coefficient (i.e. purchase price / assessed value ratio), and lending rates for housing to households.

The results of our model are clear: real estate prices are expected to continue to decline in the coming months, reaching levels not seen in the past 20 years.

Additionally, our model highlights the high sensitivity of Swedish housing prices to interest rates, as evidenced by the negative coefficient of -3.8 in the regression model. This sensitivity can be attributed to high levels of household debt and the extensive use of variable or short-term fixed-rate mortgages.

Japan's demographic time bomb nears detonation as births fall short of deaths

The demographic time bomb that has been ticking in Japan since the end of the economic boom in the 1980s appears to be getting closer to detonation. Last year, there were over 600,000 more deaths than births, and in eight years' time, it's expected that the number of women of childbearing age will dwindle to a point where population decline cannot be reversed. As a result, Prime Minister Kishida Fumio has stated that Japan has been brought "to the brink of not being able to maintain a functioning society."

Low water levels in Rhine River pose challenges for German economy and European trade

The Rhine River plays a vital role in the German economy, acting as a primary conduit that connects its industries to key North European ports such as Rotterdam and Amsterdam, as well as the Black Sea. The water level of the Rhine is crucial, as low levels require cargo ships to operate with reduced loads, leading to increased shipping costs for German businesses. In addition, bottlenecks can arise, resulting in delays and additional expenses.

Paradoxically, the mild weather that contributed to reducing energy demand and prices has had negative repercussions for the Rhine.

As shown in the chart above, the water level is presently one of the lowest it has been in the last two decades, causing another headache for both the German economy and Europe as a whole.

Mapping bond and equity returns in historic inflation regimes

Investment returns are highly sensitive to inflation. While the effects are more direct on bonds, equities are affected too, despite the flexibility that corporations have to react to inflationary environments.

This colourful scatterplot visualises historic US investment returns in eras of high or low inflation – choosing 5 percent CPI growth as the threshold. Plotting every calendar year going back more than a century, we charted whether returns for the S&P 500 and 10-year government bonds were positive or negative. This results in four quadrants. 

Red dots indicate the high-inflation years.

Using these quadrants, one correlation is obvious: most years with negative returns for both government bonds and equities have corresponded to years of high inflation.

The dotted diagonal line separates years where equities did better than bonds and vice versa. There are more years of equity outperformance, as the conventional wisdom would suggest.

With inflation remaining stubbornly high so far in 2023, we’re near the dead centre of this chart.

Eurozone unemployment eases in unison and unlike previous crises

European labour market conditions are unusually homogeneous.

This chart compares historic unemployment rates for 19 nations that use the euro (excluding Croatia, which adopted the currency this year).

The diamonds and bubbles compare the pre-pandemic readings in February 2020 with the present day. Most are back to the old normal. 

Spain, Italy and Greece have a notably healthier job market today than they did three years ago. 

The historic range for each nation, as shown with the green bar, reminds us that unemployment rates used to be wildly divergent in the eurozone; in the wake of the European sovereign-debt crisis a decade ago, Greek and Spanish unemployment surpassed 25 percent.

In search of a model to measure zero Covid and reopening in China

As the world focuses on China’s reopening, we’ve built a composite index to capture the waxing and waning of pandemic restrictions over the past three years.

Our index uses a broad range of daily alternative datasets, including port activity, road congestion, subway usage, international flights and box-office sales. The chart measures the z-score, or deviation from the historical mean (zero).

Throughout 2022, the composite index and most of its components were almost always below average. The strong shift since the start of 2023 is obvious; the most lively indicators are the rebound in box-office revenue and flights abroad.

Manufacturers report the shortages holding back production

Labour shortages and supply-chain bottlenecks have been a constant theme over the past year. It’s a far cry from 2019, when companies were more concerned about weak demand. 

This chart is based on surveys that ask companies in the US, Canada, Australia and the Eurozone about issues that are holding back production. Broadly, the factors measured are demand, the availability of labour and the ease of obtaining raw materials and equipment. 

The red lines are trends that are getting worse; green lines show improvement from 2019.

These four economies are sharing the same struggles. It’s hard to recruit employees; supply of inputs can be tricky. While the worst of the supply-chain disruptions may be behind us, issues such as the semiconductor shortage continue to hamper the auto sector, for instance.

Entrepreneurial women around the world

Which nations produce the most female entrepreneurs? As International Women’s Day approaches, the Global Entrepreneurship Monitor offers insights.

GEM, an academic research project, calculates what it calls the “TEA rate” – an acronym for total early-stage entrepreneurial activity: the proportion of the population aged 18 to 64 that is an owner-manager of a new business. This data point aims to capture the proportion of entrepreneurs who are driven by a sense of opportunity, rather than people who can find no other option for work.

Quite a few nations – including Morocco, Canada, Israel and China – have a higher TEA rate for women entrepreneurs, as our chart shows.

When we chart this ratio against another measure of economic dynamism, the Global Innovation Index, Sweden stands out as a nation combining a positive environment for female founders with an entrepreneurial culture focused on high-value-added activities.

German house prices deflate

It’s no surprise that residential real estate is slumping as central banks raise rates, making it more expensive to finance a home purchase.

What might be a surprise is that German prices are down more from their peak than nations more notorious for expensive housing markets, like the UK and Sweden. Last year, UBS named Frankfurt and Munich as notable “bubble risk” markets on a global basis.

Since the peak in April 2022, German house prices have dropped more than 11 percent, according to Europace, a platform that handles property financing. Some analysts are predicting that prices will ultimately drop 25 percent from their peak.

As the European Central Bank has tightened policy, a 10-year fixed rate mortgage is now priced at 3.9 percent, compared with 1 percent at the start of last year.  ‍

Anticipating a slump in corporate profitability

For this chart, we explored the relationship between US companies’ profitability and the Institute for Supply Management’s purchasing managers index (PMI) for manufacturers.

The closely watched PMI surveys are a measure of whether economic contraction is likely, based on whether supply-chain managers are expecting growth to pick up (readings above 50) or recede (below 50).

It appears that the ISM PMI is a leading indicator of corporate net margin – closely correlated with a 12-month lag, as our chart shows. Watch for corporate profitability to deteriorate. 

How different aspects of inflation are wiping out your wage gains

Real US wage growth has fallen below its pre-pandemic trend.

As our chart of January 2023 data shows, the headline year-on-year increase in average hourly earnings appears healthy at first, but is being more than offset by inflation in housing costs, food, transport and everything else. That results in shrinking real wages.

Central bankers and employers take heed: wages might have to play catch-up in coming years if this trend continues. As economists warn of a labour shortage, central bankers will be on the lookout for a wage-price spiral – and that’s another potential headwind for corporate profit margins.