Charts of the Week (Mar 31, 2023)
|in:Economy in Brief
A more positive mood in financial markets has unfolded so far this week as fears about the health of the world’s banking sector have ebbed. For how long that more positive mood endures is, however, still open to much debate. That investors are still anticipating a looser path for monetary policy over the next 12 months even as many central banks have been lifting interest rates over the past two weeks certainly suggests much anxiety about the economic outlook from here (see chart 1). In our charts this week we highlight latest euro area data for monetary developments which certainly underscore growing vulnerabilities in the financial system (see chart 2). That the pace of broad money growth in advanced economies more generally has been feeble in recent months additionally highlights how restrictive the stance of policy may now be (see chart 3). The impact of this on economic activity will be hard to discern in the immediate weeks ahead but high frequency sentiment data will be some of the key indicators to watch. It was, therefore, notable that this week’s Conference Board data from the US suggest that consumer confidence has held up well, at least so far (see chart 4). A relatively upbeat message is also being signalled about the US (and Switzerland) by the OECD’s high frequency indicators of economic activity (in chart 5). Finally - from a more structurally-rooted perspective - we illustrate this week the great strides that India has made in its technological development in recent years via some data for internet penetration (in chart 6).
US Treasuries and data surprises US Treasury yields and global data surprises are typically linked. A stronger-than-expected raft of economic data usually places upward pressure on yields as investors discount a tighter (than previously expected) path for monetary policy (and vice versa). But recent weeks have seen yields decouple from the incoming dataflow, as evidenced in chart 1 below. Investors, in other words, are now discounting a much looser path for monetary policy relative to the messaging from (backward-looking) economic data. Putting that another way, investors are are now looking for a slew of weaker economic data to emerge in the immediate weeks ahead that will validate their current expectations for Fed policy.
Chart 1: 6 month change in US 10-year Treasury yields versus global data surprises
Euro area credit growth This week’s money supply data from the euro area carried some warning signals too about the economic outlook from here. M3 growth fell to its slowed rate (2.9%y.y) since 2014 in February and arguably well below what might constitute a target-friendly inflation pace for the ECB. Underlying details of this report too were worrisome as they revealed a further slowdown in private sector credit flows (see chart 2 below) and heightened funding stress in the outflows from short-term deposits.
Chart 2: Decomposition of Euro area M3 growth
Broad money growth and equity markets The pace of broad money growth more generally has been slowing in most major economies over the past few months (see chart 3 below) in large part because of tighter monetary policy. The links with financial liquidity are arguably tenous given the huge complexity of global financial markets. Still, our aggregation of broad money growth in the US, Canada, Euro area and the UK has enjoyed a reasonably close correlation with changes in global equity prices in recent years (see chart 3 below). The implication is that looser monetary policy – and a faster pace of broad money growth – may be required before equity markets embark on firmer longer-term trajectory.
Chart 3: Broad money growth in major economies versus a global equity market index
Consumer confidence Along with money and credit flows, sentiment indicators are likely to be monitored closely in the coming weeks. The March consumer confidence data released this week, however, revealed mixed messages. The UK and Euro area gauges, for example, nudged down and up respectively, albeit from very low levels. The US gauge (from the Conference Board), in contrast, rose to a much higher-than-expected level. As chart 4 below equally suggests, US consumer confidence continues to defy the gloom, particularly when contrasted with the Euro area and UK.
Chart 4: Consumer confidence in the US, Euro area and UK
Trackers of economic activity The OECD’s economic activity trackers provide real-time high-frequency indicators of economic activity using machine learning and Google Trends data. So they should also be well suited to assessing activity during periods of turbulence. Those trackers specifically suggest that the US, UK and Switzerland continued to enjoy a respectable pace of growth in the week to March 19. Still, these data are very volatile and may not have yet caught up with the financial instability that unfolded over the last couple of weeks.
Chart 5: OECD economic activity trackers for the US, Switzerland and UK
Internet penetration in India Amidst the gloom there remain, as ever, longer-term macro themes that should have some staying power in the months ahead. India’s ascent of the global economic ladder is arguably one of them. While India’s relatively young – and growing – demographics are a well-known positive, tapping into the productivity potential of those demographics has not always been easy, However, there has been a relatively rapid penetration/adoption of new technology that could help to foster firmer productivity trends. For example, while the data shown in chart 6 below are a little backward looking (the latest data pertain to 2020), India’s internet usage has increased significantly over the last few years and now lie not that far away from global norms.
Chart 6: India’s internet usage versus the rest of the world
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.