Charts of the Week (Sep 15, 2023)

Quantitative tightening and real yields Although there has been ample discussion about the impact of higher policy rates on longer-term real (inflation-adjusted) yields of late, arguably insufficient attention has been paid to the role of balance sheet policies. As chart 1 below suggests, the accumulation of financial securities on those balance sheets when central banks were enacting quantitative easing programmes– until recently – has helped to hold US real yields at very subdued (and often negative) levels through much of the past decade. Other factors (e.g. excess global savings) were admittedly also important. Still, with quantitative easing programmes now reversing and morphing into quantitative tightening campaigns it is hardly a surprise that real yields have climbed over the last few months, as evidenced in chart 1 below.

The global growth consensus for 2024 The latest September Blue Chip survey of economic forecasters suggests that soft landing scenarios for the world economy have remained the mainstream consensus view. Although economic growth in many of the major advanced economies (the US, Europe and Japan) is expected to be very subdued next year, outright contractions in output are expected to be avoided (although the UK comes close). China’s projected growth rate, for the record, was marked down to 4.5% for 2024 (from 4.7% in the August survey). India, however, is expected to grow by 5.9% next year, a forecast that’s been little changed over the last 9 months (chart 2).

The inflation consensus for 2024 The inflation consensus for next year is arguably more concerning for central banks. As chart 3 below suggests consensus CPI forecasts have been little-changed in recent months in the US and Europe and on the whole are higher than when these forecasts were pulled together for the first time last January (and particularly for the UK). That lack of progress in pulling these year-ahead inflation expectations back to more target-friendly levels will not have gone unnoticed and could keep monetary policy tighter for longer in the period ahead.

The UK labour market This week’s labour market data from the UK were arguably more helpful for the BoE in its inflation-fighting campaign. The data specifically revealed that wage growth is slowing, that job vacancies are falling, and that employment is contracting. A so-called Beveridge curve analysis - in chart 4 below which shows the relationship between unemployment and vacancies - further suggests that the UK labour market is exhibiting less dysfunction and has taken a further step back toward pre-COVID behaviour.

The impact of a slowing China on South Korea China’s slowdown and its impact on the world economy clearly remains a hot macro topic which is why this week’s trade data from South Korea will not have gone unnoticed. Exports to China declined by than 20% y/y in August which, in turn, was a key reason why total exports were down by 8.4%y/y. As chart 5 also reveals, the healthy surplus position that South Korea ran in its trade accounts for much of the past decade has more-or-less disappeared in more recent months, with China’s slowdown again a key factor that explains why.

The US dollar and FX reserves The potential enlargement of the BRICS (Brazil, Russia, India, China, and South Africa) to encompass the likes of Iran and Saudi Arabia have raised questions about the role of the US dollar, not least because a new currency for those emerging economies is being contemplated at the same time. Notwithstanding the political challenges that the creation of a new currency would bring, it’s worth bearing in mind that threats to the dollar’s role in the global financial system are not new. And despite those threats the US dollar’s status as the world’s reserve currency of choice actually improved in the 10 years from 2010 to 2020 (see chart 6).