Charts of the Week (Aug 18, 2023)

Investor sentiment Two contrarian indicators of financial markets have lately moved to levels that suggest the recent trend toward risk averse behaviour seen of late may not be a big surprise. For example, the American Association of Individual Investors’ (AAII) recent surveys had previously indicated unusually high levels of bullish sentiment about the path that stock prices might take from here. Equally, latest data for the Chicago Board Options Exchange’s (BCOE) VIX index had suggested unusually low implied market volatility, another gauge that suggested investor sentiment was high (chart 1).

The US consensus The latest Blue Chip Economic Indicators survey, in the meantime, has offered mixed messages about the economic outlook in the US in the period ahead. For example, although expectations for US corporate profitability have edged up over the last two months, they have done so from a very weak base. In the meantime and notwithstanding a spate of weaker-than-expected inflation data, consensus forecasts for CPI inflation in 2023 have been locked at relatively high levels for several months. And this, in turn, is arguably one reason why expectations for long-term interest rates have been shifting up over the last couple of months as well (see chart 2).

Consensus growth expectations for 2024 The messages about the outlook for global growth from the latest Blue Chip survey were arguably more downbeat. Consensus GDP forecasts for 2024, for example, were marked down for most major economies with the notable exception of the US. The scale of the downgrades to the UK GDP outlook next year were particularly acute compared with elsewhere (chart 3).

UK supply side bottlenecks Those downgrades to the UK outlook, however, certainly chime with the latest dataflow released this week. Softer-than-expected labour market activity, coupled with firmer-than-expected wage and core inflation pressures were the key headlines. But the underlying details were equally discomforting. For example, firming service sector inflation is being led higher by intensifying healthcare costs. And this is combining with record numbers citing long-term sickness as a key reason to steer clear of the labour market. The UK more generally is also now one of the only major economies where output has yet to re-claim pre-pandemic levels.

Japan’s economy On a brighter note Japan saw its GDP climb by 1.5% q/q in Q2. That was roughly twice the rate of growth that had been forecast and marked the biggest rise in almost three years. The underlying details were nevertheless not as auspicious. Looking at the contributions to GDP growth over the past 12 months reveals an outsized contribution from net trade, which much of that impulse, in turn, a function of sluggish import demand in Q2. That though can be traced in part to a negligible contribution to economic growth from consumer spending as well as because of the recent weakness of the yen.

Geopolitical risk Lastly we note that geopolitical risk has been declining and is now hovering close to levels that prevailed prior to Russia’s conflict with Ukraine. That at least is the message from the latest reading for the Caldara and Iacoviello geopolitical risk index (chart 6). For the record, this index is calculated by counting the number of articles in 10 well-known global newspapers that are related to adverse geopolitical events in each month.