Charts of the Week (Mar 17, 2023)

Financial stability The trend toward risk aversion that’s been in vogue over the past few days is neatly evidenced by the ECB’s indicators of systemic stress in financial markets (see chart 1 below). Those indicators had been exhibiting a broadly-based improvement in recent months. But that improving trend abruptly reversed toward the end of last week in the United States which subsequently spilled over to Europe (and China) in the first half of this week.

US banking stress and the Fed As noted already, heightened financial instability and growing concern about its economic consequences, have led to a big re-pricing of Fed policy. In chart 2 below we illustrate this via the expectations for interest rates that are implicit in Fed Funds futures contracts. While these suggest that most investors still expect a 25bps increase in the Fed funds rate at next week’s FOMC meeting, there is now a growing view that this will earmark the end of the tightening cycle. Indeed, markets are now anticipating that the Fed will have begun to cut interest rates by the end of this year and will then extend that easing cycle into 2024. This stands in vivid contrast to the market’s view this time last week, which had envisaged that the Fed would keep lifting rates by nearly 100bps by the end of this year.

Global growth expectations It’s been noteworthy, moreover, against this backdrop of financial instability that the global economic outlook had, on the whole, been improving in recent weeks. The March survey of Blue Chip economic forecasters, for example, revealed that growth expectations for 2023 have been lifted in recent months (see chart 3 below). Falling energy prices and ebbing inflation have been a source of that heightened optimism. But China’s re-opening and its likely impact on world trade has been another.

Data surprises in China and the US It has certainly been of note as well that having disappointed expectations through much of 2022, incoming economic data from China have mostly surprised expectations on the upside so far this year (see chart 4 below). It’s of note too, moreover, that this trend toward more positive dataflow has found an echo in the US.

Labour markets in the US and Europe Still, as this week’s US CPI and PPI reports suggested, incoming data also suggest that inflationary pressures have continued to cool. The same can be said about the labour market from the battery of data that have been published over the past fortnight. The Indeed group’s daily job postings data for the world’s major economies offer a similar message about labour market activity (see chart 5 below).

Airline passenger traffic One of the sectors of the world economy that has elicited more price pressures than most in this post-COVID era is of course the airline industry. Large pockets of pent-up demand have combined with lingering supply-side restrictions (concerning travel routes) to magnify inflation tensions. There are now signs, however, that pent-up demand pressures are starting to cool. Having peaked last October, the data for passenger load factors from IATA (the International Air Transport Association) have come off the boil over the past few months, as evidenced in chart 6 below. A key question now, however, is whether China’s reopening will cause Asia’s - and the broader world economy’s - passenger numbers to start climbing again.