Charts of the Week: Goldeneyes

US manufacturing investment The unexpected resilience of the US economy in the face of much tighter domestic monetary policy has been a key factor driving equity markets to new highs in recent months. There are several reasons for this resilience but some key pieces of US legislation arguably played a pivotal role. With their focus on re-building infrastructure, advancing clean energy initiatives, and expanding the domestic semiconductor industry, this legislation helped shore up private sector investment across various manufacturing sectors, including semiconductors, clean energy components, electric vehicles, and batteries. Manufacturing investment accordingly contributed heavily to the broader resilience of aggregate business investment in the US economy last year (see chart 1 below).

Semiconductor trade The semiconductor sector has more generally seen a renaissance in recent months, spurred in part by optimism about the benefits from harnessing AI. Semiconductor exports in South Korea, for instance, jumped by nearly 75%y/y in February (see chart 2). Japan’s semiconductor exports, in the meantime, advanced by 8.4%y/y in January. These developments have been underpinned by increased global demand for high-performance semiconductors, in particular, which are a key component of AI infrastructure.

Growth surprises Broader optimism about the global growth outlook has additionally buoyed financial market sentiment. Incoming data from the euro area, for example, have surprised consensus forecasts on the upside far more frequently in recent weeks. That contrasts with much of last year when incoming data had surprised consensus expectations on the downside.

The US labour market One of the more striking features of those observations above is that equity markets appear to be now more driven by growth expectations, not inflation (or interest rate) expectations. The past few weeks, for example, have seen firmer-than-expected US inflation data and reduced optimism about the scope for a swift pivot from the Fed (and other central banks) toward looser monetary policy. That being said, inflation – and its fundamental drivers – are arguably still heading the right way. This week’s JOLTS report, for instance, suggested fewer job vacancies and reduced quit rates in the US labour market in January. And that supports the idea, in turn, that wage (and broader) inflation pressures ought to ease in the immediate months ahead (see chart 4).

Japan’s foreign investor flows Japan has seen the best performing major stock market so far this year. And one reason for this is that foreign investors have been largely supportive of Japanese equities, with net inflows of about JPY 3.6 trillion (see chart 4). The attractiveness of Japanese equities to overseas investors has likely been boosted by currency effects, as a weakening yen made the market attractive. Other reasons, however, concern corporate sector reforms, the market’s exposure to technology, and reasonable valuations.

Cryptocurrencies Another notable feature of the rally in equity markets in recent weeks has been broader rally in other financial assets, including cryptocurrencies such as Bitcoin (see chart 6). That can also be attributed to several factors that collectively contribute to its increasing price, including limited supply and more significant investment from institutional and retail investors. Still, the phenomenon of 'fear of missing out' (FOMO) among retail investors may have also played a significant role in the current rally, against an underlying backdrop where global financial conditions arguably remain relatively accommodative.