Charts of the Week (Aug 4, 2023)

Blue Chip Financial Forecasts The latest Blue Chip Financial Forecasts survey reveals much disagreement about whether or not the world’s major central banks have now completed their tightening cycles. What seems clearer, however, is that an easing cycle is expected to have commenced within the next 12 months even if further hikes are enacted before the end of this year. This is illustrated in chart 1 below showing the spread between forecasts for policy rates in a number of major economies in 12 months compared with forecasts for 3 months. As that chart further suggests, the degree of policy rate easing that’s anticipated beyond the next 3 months is relatively acute in the US, but not that marked in the euro area.

US financial conditions One reason why an easing cycle is expected to commence in the US concerns financial market and banking sector conditions. Federal Reserve Board staff have recently introduced a new index to gauge financial market conditions in the US and the extent to which they pose headwinds or tailwinds to economic activity. At present that index suggests big headwinds to US growth. The same message, incidentally, emerged from this week’s Senior Loan Officer Survey for Q3. This showed that credit conditions were mostly tightening in key lending categories and that loan demand was mostly weakening (see chart 2).

Service sector inflation in the US and euro area A key reason in the meantime for why forecasters are not anticipating too much easing from the ECB in the months ahead concerns service sector inflation. Although this week’s flash CPI data for July showed that euro area headline inflation has continued to fall, core CPI inflation remained at 5.5% y/y, the key reason for which was higher service sector inflation, which climbed to 5.6% from a prior 5.4%. This trend incidentally contrasts with the US, where service sector CPI inflation has been falling steadily since last January (see chart 3).

Global economic policy uncertainty Uncertainty surrounding the outlook for inflation and interest rates has significantly impacted the world economy in recent months. However, there are indications that this impact may be starting to ease. Having peaked last October, an index of global economic policy uncertainty has steadily moved off its highs and stood at a 16-month low in June. That global energy prices (and generic inflation concerns) peaked around a year or so ago and have additionally moved steadily lower since then is arguably no coincidence.

South Korea’s export growth and activity in industrial commodity markets Notwithstanding this favourable trend, key bellwethers of global trade conditions have remained weak. For example South Korea's exports declined on a year-on-year basis for the 10th consecutive month in July and were specifically down by 16.5%. Some of this reflects the rotation in global demand away from goods and toward services that has unfolded since the pandemic. But it is rooted too in a more generic interest-rate driven deceleration in global growth and the spillovers from this into commodity markets (see chart 5).

Rice prices Rice prices are currently hovering at decade highs thanks to the impact of unusual weather patterns (spawned by El Nino) and their impact on global rice production. This supply-side squeeze moreover threatens to be further exacerbated by India’s recent announcement that it will ban rice exports in the period ahead. This could be significant given the weight of rice in the dietary make-up of many emerging economies’ populations and the knock-on reverberations for economic, political and social stability.