Charts of the Week | Macrobond Financial (2024)

Cryptocurrencies look like other bubbles deflated by the Fed

Cryptocurrencies are suffering across the board after the FTX debacle. As the Federal Reserve and other central banks tighten monetary policy, the sector resembles other deflated asset classes.

Bitcoin is now well below USD 20,000, down from more than USD 60,000 about a year ago. As our table shows, most other cryptocurrencies have seen similar drawdowns. Total crypto market value is now well below USD 1 trillion, less than half its level a year earlier.

FTX and the echoes of Lehman and Enron

The crypto world has seen a high-profile collapse that will enter the history books with other financial downfalls. The following chart plots the price of the FTX token versus shares of Lehman Brothers and Enron, tracking their glory days and subsequent collapse.

As the FTX story unfolds, the bankrupt crypto exchange resembles Enron more than it does Lehman. Indeed, FTX’s new CEO, lawyer John Ray, led Enron through the energy trader’s own bankruptcy almost two decades ago. Enron, like FTX, had weak internal controls; FTX has been accused of fraud in Bahamian court filings.

Lehman, by contrast, was brought down by falling asset prices and investors withdrawing funds, a dynamic similar to a bank run.

Fewer and fewer up days for stocks

The past 12 months have seen more red than green for the key US stock benchmark.

The following chart plots the number of positive trading days that the S&P 500 had over the previous year. The current bear market has pushed that figure to a two-decade trough, much lower than any moment during the 2008-09 global financial crisis.

Somewhat surprisingly, a period in 2015-16, the Fed’s first tightening cycle since the GFC, also stands out as an era that saw more down days than up for equities.

The Bull versus Bear spread correlates with equity performance

This has been a punishing bear market, but at least one indicator suggests it might be over soon.

The following chart plots the American Association of Individual Investors (AAII) Bull-Bear spread – based on a survey of whether respondents feel optimistic or pessimistic about equities – versus a smoothed series for the number of stocks in the S&P 500 that are above their 12-month moving average. (A negative number means more people are bearish.)

The two series are tightly correlated, with the sentiment series tending to lead by more than a year. Our analysis shows the highest correlation is at 0.55, with the AAII series leading by about 15 days. The Bull-Bear spread can thus be used as a leading indicator. After touching a record low in 2022, the spread has returned to more neutral territory, potentially indicating the bear market may be running its course.

Equity market trends historically reflect the presidential cycle

The stock market tends to underperform prior to midterm elections and usually rallies in the aftermath.

The following chart graphs the performance of the S&P 500 during President Biden’s current term against the historic trend for four-year presidential terms after World War II.

We shall see whether this cycle follows a similar pattern.

Democrats and Republicans preside equally over economic misery

The “misery index” was initially created by economist Arthur Okun as a simple sum of the inflation and unemployment rates. (Subsequent variations have put a greater weighting on unemployment and included different variables.)

The following chart tracks Okun’s original misery index alongside the party occupying the US presidency at the time. Republican terms have been slightly more “miserable” than Democratic presidencies, but the difference is marginal and probably not statistically significant.

The 1970s stagflation is prominent on this chart, as is the massive increase during the pandemic. That reflects the impact of the inflation spike during a time of historically low unemployment.

Emerging market growth and the outlook for equity outperformance

Emerging-market stocks have the potential to start outperforming their developed-market peers again.

The following chart uses IMF data to calculate when emerging markets are posting quicker economic growth than developed markets. Unsurprisingly, that differential is correlated with outsized equity performance (after a time lag of almost three years) – as measured by the ratio between price returns for MSCI’s emerging market and global equity benchmarks.

Emerging markets did particularly well from the mid-2000s after developed economies stagnated due to the financial crisis.

IMF forecasts project EM economic growth is expected to stabilize at a level somewhat above that of developed markets. That could indicate a rebound for that stock ratio, which is trailing its usual performance.

Chinese coronavirus cases flare up again

Speculation is rampant that China might soon revise its zero-Covid strategy, which has seen rolling lockdowns of large cities at a substantial economic cost.

The following chart shows how Covid cases are on the rise in the nation’s major provinces again. A more fine-tuned zero-Covid strategy might influence the economic outcome that results.

Chinese PPI is not passing through to CPI

When it comes to inflation in China, consumer prices aren’t reflecting the pressure that producers are experiencing from input costs.

The following chart displays China’s CPI and PPI inflation rates, followed by the correlation between the two indices. Throughout 2022, PPI surged to a record high, reflecting the global increase in commodity prices. But CPI inflation remained moderate, probably as result of the country’s domestically driven economic slowdown.

As the pass-through from producer prices to consumer prices did not occur, the correlation between the two series turned negative during the pandemic.

Global current account imbalances feel like 2008 again

Current account imbalances are on the rise, renewing interest in one of the hottest topics in macroeconomics.

Economists like Maurice Obstfeld and Kenneth Rogoff argue that rising imbalances were a major factor in the crisis of 2008. More specifically, the global role of the dollar as the reserve currency inflated the value of US assets as capital from Asia and oil-exporting nations flowed in.

There was only a short period of normalization post-2008. The imbalances resumed their rise, especially during the first year of the pandemic.

As our chart shows, the US continues to be the main current-account deficit country; the rest of the world records surpluses. This doesn’t reflect any particular US trade weakness. As Ben Bernanke explained, the trade deficit is the tail of the dog, adjusting to a variety of variables: interest rates, the currency exchange rate, global financial flows, etc.

Ultimately, the rest of the world still craves US dollar assets and exports capital to the US economy.

German consumers are more pessimistic than businesses

German consumer confidence is even lower than it was during the depths of the pandemic. Inflation at 10 percent and the likelihood of recession are probably the factors to blame.

The following chart plots the progression of measures of consumer and business confidence in Europe’s largest economy, with the pre-pandemic business cycle in blue and everything since in green.

Business confidence is also very low – but it has yet to plunge past the troughs of the global financial crisis and the spring 2020 Covid-19 shock.

Slowing momentum for Japanese industry

Japan is one of the world’s leading exporters, so when its industrial companies lose momentum, that’s a signal that the global economy is slowing.

The following chart displays Japanese industrial production as measured by its yearly and monthly growth rates. Compared to a year earlier, Japan’s industrial production is up more than 9 percent. But the month-on-month growth rate is now slightly negative.

Cash is king for more stock investors

Investors’ desire to hold cash increases sharply during times of economic stress and falling asset prices. This is one of those times, and it’s probably a bearish signal for the business cycle.

The following chart tracks equity drawdowns by the S&P 500 over the years as well as the average percentage of individual portfolios held in cash, based on a survey by the American Association of Individual Investors. Periods where the US was officially in recession are highlighted in gray. (In 2022, we’re not there yet.)

Cash balances are at spring 2020 levels, the survey shows.

Tracking German export dependency on the Chinese market

China is a key market for other exporting nations, especially Germany. The following chart tracks the relative importance of exports to China for Germany, the rest of the EU and the United States.

US exposure to China is modest here: exports account for about 0.7 percent of GDP. For the EU excluding Germany, that figure is roughly twice as high: almost 1.5 percent.

Germany has by far the greatest dependence, with exports to China accounting for about 2.7 percent of GDP.

Chancellor Olaf Scholz said he doesn’t want to decouple Germany from China as he visited the world’s no. 2 economy earlier this month – a trip that was controversial domestically and internationally.

A dramatic shift in the trade balance for China and Germany

Sometimes, international trade data doesn’t add up. According to Chinese data (which we have chosen to use for the following chart), the country recently snapped a negative trade balance with Germany that lasted for nearly a decade.

The German data contradicts this to some extent. (This article explains the discrepancies in detail; measurement error is sometimes to blame, as is whether cost, insurance and freight are included in the figures.)

However, regardless of which nation’s statistics are used, recent data shows a dramatic shift. While Chinese exports are still going strong, imports from Germany have recently declined. The most obvious explanation is that the economic slowdown in China is weighing heavily on domestic consumption.

Commodity prices are stabilising as a volatile 2022 winds down

The S&P GSCI is a benchmark tracking a basket of 24 different commodities.

As our chart shows, that basket is now evenly split: half of the commodities posted a positive monthly return for October, and half were in negative territory. The green line tracks that percentage. At different points this year, almost all the commodities in the basket were rising or falling in tandem.

The GSCI index’s monthly return (in blue) has been edging back into positive territory.

A breakdown of commodities shows fuel and coffee getting cheaper

The following chart shows the monthly return for commodities by category.

Fuel prices are declining again. And while several food-related commodities are more expensive, there is good news for coffee drinkers: after surging earlier this year, prices are coming down.

Plunging US oil inventories and surging production

The stock of petroleum in the US has plunged by an unprecedented amount this year, as our chart shows.

It’s now at the lowest level since the late 1980s. Part of the decline can be attributed to the government’s decision to release part of the strategic petroleum reserve to curb domestic fuel inflation.

Meanwhile, US crude oil production is exceeding 12 million barrels per day once again -- which should alleviate price pressures, at least on the margin.

Lacklustre US labour productivity

The Bureau of Labor Statistics recently released productivity estimates for the US economy. Unfortunately, they are anything but stellar.

The chart below graphs productivity for the years following the start of several US recessions. The current situation, as graphed by the thicker line, is not following those past trends.

During the Covid-19 shock, labour productivity initially surged rapidly, potentially due to the rise of remote work. However, for more than a year now, productivity has stagnated – and even declined.

It’s not clear whether this is a fluke or a real trend. One plausible theory focuses on the very high number of job-switchers. The pandemic led to some significant shifts between industries, and a record number of US workers resigned from their jobs in 2021/2022.

A domestic tourism boom in Japan

Until quite recently, international travel to Japan was completely restricted due to the pandemic. So far, only a trickle of travelers are taking advantage of Japan’s reopened borders.

However, hotel accommodation is surprisingly healthy given the lack of foreign visitors. As the first chart shows, occupancy has recovered quickly, and is close to its pre-pandemic average.

Domestic travelers are reportedly spending almost twice as much as they did last year. The significant depreciation of the yen might also be having an effect; by increasing the price of foreign travel, it makes “staycations” within Japan’s borders more attractive.

Emissions grow unevenly over the business cycle

Economic growth has lifted living standards for billions of people. But that growth has coincided with rapid expansion in carbon emissions, at least during the early stages of industrialisation and economic development.

Conversely, one of the few silver linings of economic contractions is slower growth in emissions.

The following chart tracks global business cycles going back to the 1850s and graphs their estimated CO2 emissions. During a typical expansion (which lasts an average of 3.5 years in this period), emissions increased more than 12%. During a typical recession (about 1.5 years long on average since 1854), emissions increased by about 2.3% -- a much slower pace even when adjusted for the shorter time frame.

Per capita emissions show which nations are using cleaner energy

The following chart tracks energy use and emissions per capita for major economies over recent decades.

The US and the EU both saw an increase in per capita energy use and emissions until the 1990s, but since then, both economies have reduced per capita emissions steadily through a transition to cleaner energy. (The US has always emitted far more per capita than the Europeans, but both have made relative progress on that front: current per capita emissions are about half their peak.) Meanwhile, per capita energy use has slipped, but not as dramatically.

Russia’s emissions and energy use (and economy) collapsed after the fall of the Soviet Union. Both have recently picked up again.

China has been on a completely different trajectory, with energy use and emissions per capita rising steadily as the country industrialises.

Fed funds futures suggest pivot talk is premature

The Federal Reserve just raised its key interest rate by 75 basis points to a 14-year high of 4 percent. Is it still too early to talk about a “Fed pivot” to a more dovish stance?

Recent labour market data shows the economy is still going strong: unemployment is at a record low, and job vacancies are at a record high. Moreover, third-quarter growth surpassed expectations, with gross domestic product rising 2.6 percent, showing that the recession scare earlier this year was just that.

While the housing market has started to cool significantly, this has yet to materially affect the larger economy. That’s why it’s probably too early to talk of a Fed pivot, and futures are telling us as much. Traders are effectively betting that rates will peak above 5 percent next spring, as our table shows.

The Powell spread is almost negative

One of the key charts to watch when looking for a potential Fed pivot might be Chairman Jerome Powell’s preferred gauge of the bond market: the spread between the three-month Treasury yield and the expected yield on those bills in 18 months’ time.

As our graph shows, this “Powell spread” has decreased significantly as the Fed hiked aggressively. It’s now very close to inverting. And yield curve inversions are a classic harbinger of recessions.

US stock benchmark dragged down by tech pain

The chart below tracks the S&P 500’s 20 percent slide this year and breaks it down by sector. Almost every industry group has experienced negative returns -- with energy being the notable exception.

Big Tech shares have been crushed in recent weeks, and the US benchmark’s information technology sector reflects that. It has by far the biggest weighting in the S&P 500: close to 30 percent.

Consumer discretionary and communications stocks, two sectors with weightings above 10 percent in the benchmark, have also contributed quite substantially to the recent equity market drawdown.

Unemployment is oddly low for a bear market

One of the more peculiar macro correlations is the one between US equity markets and the nation’s labour market.

Historically, large declines in asset prices are correlated with a higher unemployment rate. (This is precisely why the economist Roger Farmer has advocated that central banks should directly target asset prices to manage economic fluctuations and unemployment.)

However, while equity prices have plunged this year, unemployment has continued to fall. The current situation is an extreme outlier, as the following chart shows: the biggest equity drawdown that has ever occurred with joblessness below 4 percent.

Macro hedge funds win and fixed income funds suffer

This is an update of a chart that we posted recently, tracking the performance of various hedge fund strategies versus the S&P 500. That broad equity benchmark is now doing worse than all strategies.

One of the interesting things about the current environment is how macro-driven it is: after a series of large macroeconomic shocks, central banks are the most important actors as they rapidly tighten rates to combat inflation.

Macro funds have navigated this tricky environment the best so far, posting positive returns of several percentage points.

Unsurprisingly, fixed income hedge funds have suffered. They’re down more than 10 percent year-to-date after rate hikes slaughtered global bond markets.

Chinese pork prices are rising again

China is the world’s biggest consumer of pork, and it’s heavily weighted in the national consumer price index. The nation even has a strategic frozen pork reserve to shield farmers and consumers from price swings.

As our chart shows, pork prices have surged more than 50 percent this year, with reports citing the high cost of feed and the impact of reduced breeding stocks a year ago, when prices were falling. Authorities are releasing stocks from the pork reserve to stabilise prices.

In recent years, only 2019 saw a steeper increase. Prices more than doubled that year after an outbreak of African swine fever.

EU carbon trading shows it will get more expensive to pollute

The following chart displays forward prices for the right to emit CO2 in the European Union, with the positions on the X axis reflecting the number of months out from the present moment.

While the curve for the near future is relatively flat, emission prices more than a year from now are approaching EUR 100 per metric ton. The entire pricing curve is three times as expensive as it was three years ago, though it has been mostly stable over the past year.

These rising expenses are bad news for polluters but definitely good news for the climate.

Shipping rates are plunging back to normal

The explosion in shipping costs is over, and the next graph shows just how unusual 2021-22 was.

Due to a combination of strong demand and supply-chain disruptions, shipping rates through much of 2022 were five to eight times higher (and sometimes more) than their pre-pandemic norm. That unprecedented surge was a big contributor to the global spike in inflation.

In recent months, shipping rates have been normalising rapidly as global trade stagnates. As our second chart shows, world container trade is slightly lower than a year ago as the world’s central banks tighten monetary policy.

US household assets boomed and busted in the last recession

The pandemic had many surprising effects on the economy. For example, many American families became much richer. That wealth effect is now being unwound.

The following chart displays the evolution of US households’ financial assets three years before and three years after the beginning of various recessions (that’s the “0” in the middle of the x axis).

One look will tell you that the Covid-19 shock was an extreme outlier. Thanks to unprecedented fiscal and monetary stimulus, stock prices and real estate surged. Compare that to the effect of the recession that started in 2007 – the lowest line graphed on our chart.

Now, however, we are seeing a big reversal as the Federal Reserve tightens monetary policy rapidly to bring down inflation. Equities are in a bear market as a result, and the US housing market is under pressure as well.

Financial assets are still more highly priced than they were pre-pandemic. But the current plunge is probably a necessary reversion to the mean. The economics professor Ricardo Caballero argues that it was optimal to use monetary policy to boost asset prices beyond their fundamentals when the economy was in shock and US interest rates could not fall below zero; now, it’s natural for asset prices to retreat while GDP catches up.

The remarkable US labour market

Despite various signs of weakness in the US economy, the labour market is still running quite hot.

The graph below is a Beveridge curve, which represents the relationship between unemployment and job vacancies. (It slopes downward because higher joblessness is normally combined with fewer jobs available.)

Our chart tracks the US for various time periods since 2000. The curve for the Covid-19 and post-pandemic period is remarkable for its very high peaks of both unemployment and job vacancies.

Economists are debating whether the high number of vacancies at the present time accurately reflects the state of the labour market. For a given unemployment rate, a higher level of job openings usually means more structural inefficiencies: the unemployed don’t have the skills to match vacancies, or won’t move geographically to fill them. Over recent decades, the Beveridge curve has shifted outwards after large recessions – potentially implying an ever-growing structural labour market mismatch.

The Fed is trying to cool the labour market to bring inflation down, but with a soft landing: reducing the number of job vacancies without creating excess unemployment.

Fewer ships are calling at the Port of Los Angeles

Shipping and port activity is a key indicator for the strength of consumption and the wider economy. Just months ago, the Port of Los Angeles, America’s busiest, was bottlenecked. Rather suddenly, that has changed.

Volatile US rental prices take a long time to filter through into CPI

When it comes to rent increases, the official measure of inflation is saying one thing -- but market prices are telling you another.

The chart below tracks month-on-month changes to US rental prices from Zillow, the real-estate website. We calculated and graphed the median value and percentile bands based on rent indices from 382 metropolitan areas. Then, we overlaid the rental component of the consumer price index.

The result? Surging market rents significantly outpace their CPI equivalent throughout 2021 and early 2022. There’s little doubt that the CPI series is a lagging indicator here, understating actual price increases.

Today, we see the reverse. The US housing market is cooling, and market rents are plunging at a rapid rate. But the CPI series is still going up!

This time lag is a risk for the Fed, which runs the risk of overshooting as it tightens monetary policy.

West Coast house prices plunge in unison and more viciously than in 2007

Maybe it’s those high-paying tech jobs, or the natural beauty, or the weather. But the west coast of the US is known for having some of the most expensive housing in the world.

As the Fed hikes rates, cities up and down the Pacific seaboard are now seeing house prices plunge in unison. That’s notable given that house prices are usually quite sticky – only declining substantially during major economic downturns, such as the 2007-2009 crash.

The following chart tracks the changes to the S&P Case-Shiller Index for San Diego, Los Angeles, San Francisco and Seattle. Even at the start of 2022, these cities were experiencing rapid price appreciation, with monthly rates of change exceeding 3 percent.

The situation has changed rapidly. Home prices are now falling at a month-on-month rate exceeding 2 percent. That’s a more rapid reversal than the pre-financial crisis boom and bust.

The Hang Seng Index keeps slumping

Hong Kong’s stock market is historically a key destination for mainland Chinese investment flows. This year, it has been in the doldrums, wiping out more than a decade of gains.

The following chart tracks the recent performance of the city’s benchmark Hang Seng stock index as well as technical indicators including the Bollinger band and moving average. After this month’s plunge, we are well below the benchmark’s moving average. The Hang Seng is trading at its lowest since 2009.

China’s economic model is being challenged by adverse demographics and a deflating real estate bubble.

The lessons of repeated ECB inflation revisions

The following chart shows how the ECB kept raising its inflation outlook – only to have even that elevated forecast outpaced by reality. This year has dented confidence in central banks’ ability to predict the future.

On the one hand, it should be emphasized that 2022 saw inflationary shocks that would have been hard for the ECB to anticipate: namely, Russia’s war with Ukraine and China doubling down on its zero-Covid strategy. (Moreover, many private forecasters didn’t do much better.)

On the other hand, the forecasting failures show that many macroeconomic models, especially the ones used by central bankers (namely, the dynamic stochastic general equilibrium model, or DSGE), are seriously flawed. They implicitly assume a strong likelihood that inflation will revert to the mean. That assumption is currently not borne out in reality.

The eurozone inflation heatmap has very few chilly sectors

The following chart is a euro-area heatmap showing the total harmonized index of consumer prices (HICP) as well as many of its subcomponents.

Inflation is running lukewarm to very hot across many industries. This heatmap would have looked very different just a year ago.

The wild ride and collapse of natural gas prices

After soaring earlier this year, natural gas prices in Europe have come back down with a thud.

The first chart shows how Dutch gas futures are back below EUR 40 per Mwh -- not that far off the pre-pandemic price. We’re a long way from the summertime panic, when the war in Ukraine and supply-chain issues sparked fear about wintertime gas shortages.

Part of the reason for the price collapse is that Europe’s autumn weather has been quite mild. Furthermore, Europe managed to fill up its gas storage sites -- despite lower imports from Russia. As the next chart shows, most national inventory levels are above 90 percent and ahead of European targets.

Liquefied natural gas exported from the US has been crucial. As the chart also shows, LNG storage is way up in Spain (where boats are anchored offshore, waiting for prices to rise before they unload their gas) and to a lesser extent in France, the Netherlands and Italy.

Clocking out another downswing in the EU

The following chart is a “clock” tracking the European Union’s progress through the business cycle, divided into four quadrants: contraction, upswing, expansion, and downswing. The arrows track the overall economy as well as five subsectors.

The data starts in January 2020, and the arrows quickly head downward to contraction as the pandemic gathers pace. Since then, the economic climate indicators have traveled in a full circle around the clock, including upswing and expansion during the economic recovery in late 2020 and 2021.

As central banks hike rates aggressively, we are already in the downswing and contraction phase again.

Financial stress is more European than American this time

Measures of stress in the financial system are showing that the turmoil of 2022 is playing out quite differently than the global financial crisis of 2008 or the Covid-19 pandemic.

The following chart plots the US stress index from the Federal Reserve Bank of St. Louis against a similar measure that the European Central Bank calculates for the euro region. The weekly data points go back to 1999.

We’ve highlighted the GFC and pandemic periods to show how financial stress was elevated on both sides of the Atlantic during those episodes. During the worst of Covid-19, financial conditions were tighter in Europe than they were in the US. The ECB was also able to keep stress much lower than it did during the European debt crisis a decade earlier.

This time is different. The eurozone is experiencing a broad-based increase in financial stress. But even as the Fed hikes rates rapidly to bring down inflation, financial conditions still seem to be quite loose for the US economy -- at least according to the St. Louis Fed’s metric. This might be fodder for Fed hawks who see room to keep tightening.

Chinese travel slows as we await GDP

China unexpectedly delayed the release of its gross domestic product figures, a move that is unlikely to reassure markets concerned about the nation’s sharp economic slowdown and the consequences of its zero-Covid strategy. A new release date has yet to be scheduled.

While we await the GDP figure, we can contemplate alternative data sets that may give an idea of how lockdowns are affecting economic activity.

The following charts track plummeting road and public-transit mobility data related to the city of Zhengzhou, the capital of Henan province. The metropolis is a manufacturing hub for the iPhone, and made the news recently after one of its most populated districts was locked down to tame a coronavirus flare-up.

The first chart uses a “willingness index” (measuring searches and inputs into navigation tools) for travel from China’s two biggest cities to Zhengzhou. The second tracks passenger volumes on the city’s subway.

A prominent Chinese official has a favourite alternative dataset

A Communist Party congress effectively removed Li Keqiang from senior leadership in China over the weekend. Li, previously the nation's no. 2 official, is viewed as a proponent of market-oriented reforms.

His prominence inspired the Economist magazine to create the Li Keqiang index. This measure uses high-frequency data – private-sector loans, energy consumption, and rail freight traffic -- to construct an alternative picture.

Li is said to prefer this data to GDP to truly assess the Chinese economy. (Recent research suggests that China is among a group of countries that have been overstating GDP growth by quite some margin.)

That said -- as one can see in the following chart -- both GDP and the Li Keqiang index tend to move in the same general direction.

China business finance is surprisingly strong

There is an outlier to the gloomy picture generally painted by Chinese economic data. Non-governmental business loans are rebounding, helped by the central bank’s August interest-rate reduction. This could be a turning point; when we examined Chinese credit conditions in May, borrowing was not getting any easier.

The following chart tracks month-by-month medium- and long-term private enterprise financing figures for recent years.

The dark line, for 2022, shows the strongest September reading in recent history. The year as a whole may be on track to outperform 2021, which ended with a whimper.

UK bankruptcies on the rise

As we recently discussed, the UK economy is struggling for a variety of reasons, from the energy price shock to higher interest rates and increased trade friction post-Brexit.

Business failures are another measure of the economic pain. As our chart shows, bankruptcies are at the highest level in more than a decade, almost twice as high as a year earlier. (The lull in 2020 is notable, when the government was shielding business from the impact of the pandemic.)

With the UK forecast to be in a recession by early next year, a further increase in bankruptcies may be likely. That may well exacerbate the negative feedback loop in the economy – adding to the challenge for whoever succeeds Liz Truss as Prime Minister.

The total return wipeout for government bonds

For bonds, the only way was up for a decade. As interest rates headed on their long-term downward trend, the total return on long-run government bonds (15 years and above) for Germany and the UK approached 100 percent between 2010 and 2020. Some investors may have been lulled into a false sense of security.

As interest rates surge globally, bond prices have fallen tremendously, and investors are sitting on enormous (if unrealised) losses. Over the course of 2022, as our chart shows, the entire total return since about 2012 has been wiped out for long-term gilts and bunds.

It turns out that fixed income investments are riskier than what was widely assumed.

The following chart can only be accessed with a subscription to ICE BofA Merrill Lynch data.

Approval rating wavers slightly for Putin

The following chart tracks Russians’ opinion of Vladimir Putin, as assessed by the Levada Center, a Moscow-based polling and research organisation.

According to Levada, the Russian leader’s approval ratings surged after this year’s invasion of Ukraine, as they did when Putin moved to seize Crimea in 2014. Recently, Putin’s approval rating has slipped, though it remains above 75 percent.

Watching small business to predict cooling US inflation

US small businesses are becoming less likely to raise their prices.

That’s according to the National Federation of Independent Business (NFIB), which tracks smaller firms’ intentions for the next three months, as our chart shows. About 30 percent of businesses surveyed plan a price increase over that time; while that’s still a high number, the proportion was recently above 50 percent.

This data set has a very high correlation (almost 80 percent) with actual inflation dynamics; the consumer price index tends to lag the NFIB moves by about five months.

We’ve adjusted the timing on the chart accordingly to show just how close the correlation is. Given this correlation, we can anticipate a normalization in CPI data after the soaring inflation of 2022. The Fed’s tightening cycle may already be having its desired effect.

Perilous territory for mortgage rates and house prices

Hindsight is 20/20 for 2020/21. It is now increasingly clear that both monetary and fiscal policy in the US were too expansionary during the peak pandemic years; nominal gross domestic product (GDP) surged far above trend. The Federal Reserve’s interest rate tightening cycle, the most rapid in decades, is an attempt to play catch-up.

The chart below shows how the current situation has resulted in an unusual housing market in 2022. Generally, as monthly data points going back to 1975 show, there is a very strong negative correlation between house prices (as measured by the Case-Shiller Index) and rates; house price gains accelerated as mortgages became more affordable.

We highlight the last five months of observations to suggest that house prices are too high in an environment of rising yields and mortgage rates.

Monetary policy has a long (and variable) lag before it affects the wider economy via the housing market – something the latest Nobel Prize winner, former Fed Chairman Ben Bernanke, has written about extensively. Some fear the Fed has already over-tightened and the US housing market is cracking under pressure. We will know by the beginning of next year.

Mortgage rate heat map is glowing red for 2022

The heat map below shows how the surging US mortgage rates of 2022 are unprecedented compared with 31 years of recent history. It tracks the three-month change to the 30-year fixed rate in percentage-point terms.

For most of 2022, the heat map is showing an increase above 1 percent. That exceeds the steadily “hot” (and famously disruptive) tightening cycle of 1994. Though these increases have already cooled down the housing market, more pain is likely to come.

Another measure of deteriorating home affordability

The US National Association of Realtors compiles a housing affordability index. It tracks price and income data to measure whether or not a typical family earns enough to qualify for a 30-year mortgage on a typical home.

Rate increases are highly negatively correlated with this index, as our chart shows. It tracks monthly data points going back to 1982.

We have inverted the Y axis to highlight how the last four months show historic pressure on affordability. Monthly payments are significantly higher than just a year ago, while prices increased at a spectacular rate until this summer (as the size of the recent individual dots, or “bubbles,” shows).

Europeans are experiencing inflation differently

Everyone is suffering from inflation, but some major European countries have it worse than others, even within the Eurozone. And the differences are widening.

As the Dutch inflation rate soars toward 15 percent, inflation in France is at a much more moderate 5.5 percent. Meanwhile, Switzerland is only experiencing 3 percent inflation, as our chart shows.

The dispersion is explained by different degrees of energy dependency and the energy mix of production. The Swiss are somewhat protected by their strong and appreciating franc, one of the major safe-haven currencies. France caps electricity prices, putting the burden on the state finances rather than the consumer. But the other countries’ consumers are more directly exposed to the energy crisis. (The Dutch combine dependence on gas for heating with a statistical quirk that boosts their reported figure.)

Europeans are expecting inflation to last for years

The European Central Bank surveys consumers to measure their inflation expectations. As real-time inflation rises, so do consumers’ expectations of future inflation, our newly added ECB survey data shows. This is probably not surprising.

But the major headache for the ECB is that consumers aren’t on “team transitory.” As our chart shows, Europeans expect medium-term (three-year) inflation to rise, persisting beyond the short run. This trend is broadly similar across the eurozone.

Unanchored inflation expectations are one of central bankers’ biggest fears. These data points will support the more hawkish policy makers in Frankfurt, and the view that more rate hikes are needed right away to bring inflation back down in a reasonable time frame.

Japanese households are starting to struggle

The inflation rate in Japan is one of the lowest in the OECD. But the nation’s households are still under pressure.

As our chart shows, household spending is up more than 5 percent year-on-year in nominal terms, while incomes have slipped about 1 percent.

To make up the difference, households might be spending money they would have saved in the past. That said, the savings rate is staying steady at about 10 percent -- quite elevated compared to the pre-pandemic “old normal.”

The underpriced Japanese yen

The Japanese yen is at its weakest in 30 years, approaching the fateful 150 mark versus the dollar. That might be the line in the sand for the Bank of Japan, which recently intervened in the currency market for the first time in decades.

The following chart tracks our simple valuation model. It’s based on high-frequency data such as interest rates and measures of Japan's terms of trade, equity prices and OECD economic indicators.

Our model tracked the value of the yen quite well until a few months ago. But there is now a record gap between the currency’s predicted value and the much weaker actual exchange rate.

Based on fundamentals, there is room for the yen to rebound.

US Democrats improve their electoral chances but it is likely not enough

The US midterm elections are less than a month away. Many Americans think they are already experiencing a recession and are unhappy with the spike in inflation. That’s bad news for President Biden’s party.

Our chart tracks Fivethirtyeight (whose model is essentially a polling aggregator) and PredictIt, a market that allows people to bet on election outcomes.

The Democrats have improved their chances over the summer. Even so, PredictIt gives the Republicans a roughly 80 percent chance of winning the House of Representatives. Fivethirtyeight is slightly more optimistic for the Democrats, but still gives the GOP a 70 percent chance of controlling the House.

Norwegian oil riches

The surge in oil and gas prices has massively improved Norway’s fiscal position.

As our chart shows, the government’s revenue from petroleum activities is expected to surpass 20 percent of GDP this year and next.

It’s interesting to track the net transfer to the nation’s famed sovereign wealth fund. During the worst of the Covid-19 crisis, that net transfer was slightly negative as the government withdrew funds to pay for pandemic relief measures. Positive transfers have resumed again and are expected to exceed 1 trillion kroner (USD 90 billion) this year.