Charts of the Week (Apr 7, 2023)

Monetary policy pivots Financial market expectations for central banks’ policy rates have mostly been revised down in recent weeks thanks to the recent spate of banking sector instability. The latest April Blue Chip Financial Forecasts survey, however, has not mirrored those revisions. The Blue Chip consensus for policy rates in 12 months’ time, for example, is typically higher than the rates implied by financial futures contracts. Still, the spread between the projected levels of policy rates in 12 months’ time relative to those rates in 6 months’ time suggests that forecasters are certainly anticipating a pivot toward looser policy in some major economies over the latter stages of this year, and most notably in the US, UK and Canada (see chart 1 below). But the same does not hold true for the euro area (or Switzerland) where policy rates are expected to remain on hold between the 6 and 12 month horizon.

US financial stress and bank lending standards That a pivot toward looser monetary policy is anticipated suggests that many bond investors almost certainly expect a marked slowdown in the US and broader world economy in the period ahead. Whether that chimes with the more optimistic mood in other financial markets, however, is open to some question. As chart 2 below suggests, a phase of the business cycle where US banks are tightening lending standards normally coincides with more restrictive financial conditions, a de-leveraging of balance sheets, and a recession. Recent weeks have also seen a marked tightening of bank lending standards (which in all likelihood will be tightened further in the coming weeks) but a far less marked period of financial stress (relative to the norms of the past).

US labour market dysfunction The incoming global economic data this week have - on the whole - tended to disappoint expectations and chime too with the idea that economic growth is faltering. The degree – and timing – of some follow-through to easier monetary policy, however, is still open to much debate. Core inflation outcomes have remained too high for comfort in recent weeks. And many central banks will remain perplexed about how tight their labour markets still appear to be. Evidence for the latter emerged this week in the form of still-high US job openings data in the latest JOLTs report. While the data for job openings softened in February, their overall level remains uncomfortably high. The Beveridge curve analysis shown in chart 3 below, moreover, also suggests some ongoing dysfunction in the US labour market relative to the norms of the past.

Service sector activity in the euro area Tight labour markets threaten to aggravate wage pressures, pressures that service sectors of the economy typically have high exposure to. Indeed this may be one reason why a new monthly services production index for the euro area turned down in the final three months of last year (see chart 4 below).

UK labour market disputes Although nominal wage pressures have been building, real pressures in most major economies have been very weak. And this has been a key source of instability in the UK in the last few months. Labour market unrest in particular has been in the ascendancy as strike action has been rife. Indeed the number of work stoppages due to labour market disputes has specifically risen to its highest level since the late 1970s, as evidenced in chart 5 below.

Business sentiment in Japan Finally this week we turn to Japan’s Q1 Tankan survey. The results from this revealed some souring in manufacturing confidence in Q1 and specifically to its worst level in more than two years. That eclipsed an improvement in service sector sentiment and reinforced the view that Japan’s economic recovery is faltering. One contributory factor to this concerned the escalation in input price pressures to multi-decades highs that the survey has equally revealed over the past 12 months. While the input price balance edged down to +62 in Q1 from a previous +64 in Q4 2022 the former is still at its highest level since 1981.