Charts of the Week (Mar 24, 2023)
|in:Economy in Brief
Financial market sentiment has improved over the last few days thanks to reassuring communications and targeted policy support from central banks together with a high profile acquisition of a troubled institution in the Swiss banking sector. Although the Fed has subsequently enacted a 25bps rate hike, Chairman Powell has further assuaged market fears by suggesting the US tightening cycle is nearly complete. Against that backdrop our first three charts this week dwell on financial instability and how this can be traced, in part, to central banks’ tightening campaigns. The trade-offs for policymakers, however, are now far more challenging, not least as inflation is proving to be far more sticky in some major economies (e.g. the UK) than expected (see chart 4). In the meantime, there remains little evidence yet of a revival in the world economy, notwithstanding the pick-up that might have been expected in some areas by now from China’s re-opening (see charts 5 and 6).
US banks and the Fed Recent instability in the global banking sector has some regional and national nuances but the roots lie in the tightening campaigns that have been enacted by the world’s major central banks. Higher levels of policy rates, for example, have placed downward pressure on deposits as banks now need to compete for funds against the higher rates that are offered in money markets (see chart 1 below). These campaigns, however, have also raised funding difficulties from the heightened risk of losses on banks’ financial assets (e.g., government bonds and other securities) that also stem from higher rates.
Chart 1: US bank deposit flows versus the Federal Funds rate
US lending standards and private savings Fed Chairman Powell made a nod to the broader macroeconomic contagion this week from these issues by citing the recent tightening in bank lending standards. The Fed’s senior loan officer survey, that was published for Q1 in early February, had already revealed that a marked tightening in those standards has been underway in recent months. As chart 2 below further suggests, a tightening on this scale has typically invoked a de-leveraging phase in the US private sector, which stifles capital market activity, hampers consumption and investment growth, and often hastens the arrival of a recession as well.
Chart 2: US bank lending standards versus the private sector savings (capital) balance
Profitability in the German banking sector Another factor that’s magnified the latest spate of financial instability concerns the banking sector’s potential profitability. The flattening (and, in some cases, the inversion) of yield curves from the trend toward tighter monetary policy tends to increase bank funding costs relative to revenues that stem from longer-term lending. But while it was notable in the March ZEW survey of investment professionals this week that expectations for the banks (and the economy more generally) were marked down, the majority of respondents still expected an improvement in banking profitability over the next 6 months (see chart 3 below).
Chart 3: The ZEW survey: expectations for banks’ profits and inflation expectations
UK inflation relative to other major economies A key concern for policymakers now of course stems from the trade-off between bearing down on inflation on the one hand and preserving financial stability on the other. That trade-off is clearly easier to manage if a trend toward lower inflation has already become established. But while that may be true for some major economies it is not as obvious for others. And this was neatly demonstrated by this week’s much firmer-than-expected CPI inflation data for February from the UK (see chart 4 below) and the subsequent hike of 25bps in policy rates from the BoE - that was not universally voted for - that this positive surprise helped to cement.
Chart 4: Headline CPI inflation in the UK, US, Euro area and Canada
Asia’s trade Aside from banking stress and the policy response another big theme that’s being closely monitored concerns China’s re-opening. At present, however, there is only patchy evidence to suggest this is generating a big impact. This week’s trade data from Asia, for example, and specifically from South Korea and Taiwan painted a still-bleak picture about the pace of global trade growth (see chart 5 below). Haver’s new seasonally-adjusted and working-day adjusted data for South Korea, for example, suggest that exports fell by 18.5% y/y in the first 20 days of March, after -6.5% y/y in February. Taiwan’s export orders, in the meantime, fell by 20.5% in February, after -1.7% y/y in January.
Chart 5: South Korea’s exports and Taiwan’s export orders
China’s air passenger traffic As for China itself, latest data for air passenger traffic suggest that domestic airline routes saw much larger passenger numbers in February following `a highly volatile phase from the periodic lockdowns over the last few years as well as the Lunar New Year holidays. International passenger numbers, in contrast, while recovering, are still some 90% below pre-pandemic levels.
Chart 6: Air passenger traffic in China
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.