Charts of the Week (July 7, 2023)

The central bank policy consensus The latest Blue Chip Financial Forecasts survey suggest a firm consensus that policy rates will continue to climb in the immediate months ahead. A key caveat to this, however, concerns the degree, which is not that marked. Moreover, an easing cycle is generally anticipated to have been initiated by most major central banks within the next 12 months. As chart 1 below suggests, the degree of policy rate easing that’s anticipated beyond the next 3 months is relatively acute in the US, and not that acute in the euro area.

The US yield curve Financial market participants on the whole agree with that assessment concerning the direction of US policy rates. Indeed the steep inversion of the curve beyond the next 3 months suggests that investors are still placing a fairly high probability on a US recession in the period immediately ahead. The steep inversion beyond 3 months equally suggests that Fed policy will be calibrated much more loosely in the coming months in response.

Inflation surprises A further reason for why economists and investors are discounting easier policy relates to inflation. Incoming inflation data have been surprising forecasters’ expectations to the downside far more frequently and far more broadly in the last few months. That’s the message from the steep downward trend in Citigroup’s inflation surprise index – and their now-negative values - for the G10 and emerging economies (see chart 3 below).

Capacity pressures in US manufacturing and underlying inflation The message conveyed by chart 4 below is that inflationary pressures in the US ought to continue easing in the coming months. The chart illustrates two capacity gauges from the US ISM survey: the supplier delivery times index and the order backlogs index. These gauges have been combined and advanced by 8 months, and then plotted against the New York Fed's underlying inflation gauge. The implication of the chart is that supply-side pressures have eased significantly over the last few months, suggesting that underlying inflation is likely to slow down rapidly in the near future.

Inflation expectations in the euro area Inflation concerns in the euro area have also been subsiding in recent months but not as much as in the US. This week’s ECB consumer expectations survey for May, for example, showed that near-term inflation expectations have continued to moderate. Longer-term expectations, have also edged down, but are still arguably elevated compared with the ECB’s 2% inflation objectives.

Japan’s upstream price pressures and consumer price inflation Finally, survey evidence from this week’s Q2 Tankan survey from Japan may additionally quell inflation concerns at the BoJ. The output price expectations balance, for example, within the details of that survey, has moved off its highs. That chimes with the evidence for moderating inflationary pressures from Japan’s recent CPI inflation data as well (see chart 6).