Charts of the Week (Jan 20, 2023)
|in:Economy in Brief
The messaging from this week’s raft of economic data has painted an increasingly familiar picture of the global economic scene. Headline inflation is finally easing off its highs in large part thanks to ebbing energy prices. But last year’s high levels of inflation and the global trend toward a tighter monetary policy that they sparked are now exacting a heavier toll on economic activity. Our charts this week drill into how financial markets have been responding to these themes with a spotlight on the US dollar (chart 1). With the latter in mind, we illustrate too the recent stickiness of core inflation in several advanced economies compared with the United States (chart 2). We also illustrate how US capex has been holding up surprisingly well, at least so far (chart 3). On the policy front and with this week’s unchanged BoJ decision in mind, we highlight the correlation between JGB yields and the central bank’s bond-buying initiatives (chart 4). As for China, and notwithstanding a much firmer-than-expected smattering of Q4 data earlier this week, we highlight how credit growth has continued to decelerate in recent months (chart 5). Finally and with a new energy database from Haver Analytics in mind, we look at the share of renewables in the power generation of several major economies (chart 6).
The US dollar and financial markets Following a peak in its trade-weighted value last October, a trend toward a weak US dollar has now been in vogue for several months. A turn in the US inflation cycle and, more recently, a flurry of weaker-than-expected growth data has reduced the market’s expectations for Fed rate hikes and lowered US bond yields (compared with elsewhere). And these factors – a less aggressive Fed and lower yields - have been a key catalyst for improving sentiment toward global (ex-US) financial markets (see chart 1 below).
Chart 1: The US dollar has been inversely correlated with global (ex-US) equity markets
Core inflation in the US versus elsewhere One reason why there has been heightened optimism that the Fed may proverbially take its foot off the brake a little earlier than elsewhere concerns recent trends in core inflation. While headline CPI inflation is now easing in most major economies thanks to weaker energy prices, core inflation, which excludes energy (and food) prices, has been stickier in the likes of the euro area, UK and Canada in recent months (see chart 2 below). Their respective central banks may therefore be a little more reluctant to take their foot off the brake in the period immediately ahead.
Chart 2: Core CPI inflation in the US, euro area, Canada and the UK
US capex As already noted, this week’s incoming data have – on the whole – suggested that the US economy has been slowing quite sharply in recent weeks. This week’s New York Empire State survey was a case in point insofar as the headline activity index plummeted to its weakest level since the lockdown period of H1 2020 and specifically to -32.9 in January from -11.2 in December. On a brighter note, however, the underlying forward-looking details for capital spending were much more upbeat. Capex intentions and technology spending in particular remained firm matching the relatively upbeat (albeit slowing) messaging from the capex details of the US durable goods orders release (see chart 3).
Chart 3: US capex orders versus survey gauges for technology spending
The Bank of Japan On the policy front, the most notable headline of the week was the Bank of Japan’s decision to leave its yield curve control policy unchanged. While this was in line with most economists’ expectations, some market participants had expected a further shift in that policy. It follows last month’s decision to allow a higher target yield ceiling on 10-year JGBs and a lower floor. That the central bank may still be saddled with a difficult juggling act is evidenced in chart 4 below showing the hefty pace of bond buying in recent months against the recent surge in JGB yields.
Chart 4: Japan’s JGB yields and the BoJ’s JGB purchases
China’s credit growth This week’s dataflow from China sparked greater optimism that the economy could recover strongly in the immediate months ahead and recoup much of the ground that it lost during its COVID lockdown phase. While GDP was unchanged in Q4 and registered year-on-year growth of only 3% in 2022 as whole, higher frequency data (e.g. retail sales) picked up pace. But while a further recovery in the coming weeks seems more or less guaranteed as pent-up demand is vented, there are many factors that are still weighing on the economy including a beleaguered housing sector and high levels of debt. Broad gauges of China’s credit growth moreover – such as social financing – have been slowing in recent months and by more than expected. That’s why our measure of China’s credit impulse moved into negative territory in the final quarter of last year (chart 5).
Chart 5: China’s credit impulse
The energy transition It goes without saying that the transition from fossil-based systems of energy production and consumption to renewable energy sources will have a huge impact on global economic stability in the years ahead. Haver Analytics has been broadening its offering of energy data in recent years and this week we launched a new database - New Energy Data (NED) – from the Energy Intelligence Group. Some of that data are reproduced in our final chart this week showing the share of renewable energy sources in the overall power generation of several major economies.
Chart 6: The share of renewables in power generation
Andrew CatesAuthorMore in Author Profile »
Andy Cates joined Haver Analytics as a Senior Economist in 2020. Andy has more than 25 years of experience forecasting the global economic outlook and in assessing the implications for policy settings and financial markets. He has held various senior positions in London in a number of Investment Banks including as Head of Developed Markets Economics at Nomura and as Chief Eurozone Economist at RBS. These followed a spell of 21 years as Senior International Economist at UBS, 5 of which were spent in Singapore. Prior to his time in financial services Andy was a UK economist at HM Treasury in London holding positions in the domestic forecasting and macroeconomic modelling units. He has a BA in Economics from the University of York and an MSc in Economics and Econometrics from the University of Southampton.