Financial markets have continued to gravitate toward the ‘Goldilocks’ scenario where economic growth is neither “too hot” nor “too cold” and where inflation gradually moderates to more target-friendly levels. Under that scenario central banks could take their proverbial foot off the brake, and sit back and wait for a few months, before gently re-applying the accelerator. But while that view may have appeared overly optimistic a few weeks ago, much of the incoming data more recently appears to support this narrative. GDP data, for example, for most major economies suggest that a recession was averted in Q2 (see chart 1). This is despite the high odds that had been assumed by many economists and financial market participants about that scenario (chart 2). In the meantime, ebbing US labour market activity, firmer productivity growth and more benign unit labour cost pressures (chart 3) have aligned quite convincingly with the Goldilocks narrative, not least given the importance of the latter for inflation outcomes. And this has found an echo in the headline CPI inflation outcomes for June (and July) not just for the US but for other major economies as well (chart 4). Not for the first time, however, the incoming data can still be cut both ways. Much of the good news on the inflation front, for example, can be traced to the weakness of energy prices in recent months. But with oil prices having strengthened again more recently – and core inflationary pressures less benign than the headlines suggest – market-based measures of inflation expectations are now somewhat un-friendly for most central banks (chart 5). Finally – and in the other direction – latest data from China are not all friendly for soft-landing enthusiasts either as downside risks to the growth and inflation outlook have been accumulating (chart 6).
Introducing
Andrew Cates
in:Our Authors
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.
Publications by Andrew Cates
Global| Aug 04 2023Charts of the Week (Aug 4, 2023)
The downgrade of US government debt by a credit rating agency has been a big driver of this week’s financial market gyrations. The decision by the Bank of England to lift policy rates by 25bps (with hints of more to follow) coupled with firmer-than-expected private sector payrolls data (from ADP) also served as a reminder that central banks may not yet have completed their tightening cycles. In our charts this week we look at the latest views on central bank policy that emerged from August’s Blue Chip Financial Forecasts survey (chart 1). That those views remain consistent with the idea that tightening cycles are near completion is, in part, a reflection of tighter financial market conditions, which we offer some perspectives on in our next exhibit (chart 2). It is also, however, a function of inflation, and for many central banks, service sector inflation which we focus on next (in chart 3). The decline in global economic policy uncertainty that’s unfolded in recent months is the takeaway from our next exhibit (chart 4). We then contrast this with the recent weakness of demand and of pricing power in the world’s traded goods sector (in chart 5). Lastly, (in chart 6) we look at the escalation in global rice prices in recent weeks given the threats this is posing for economic, political and social stability in many emerging market economies.
by:Andrew Cates
|in:Economy in Brief
Global| Jul 28 2023Charts of the Week (July 28, 2023)
Central banks have dominated the financial headlines this week but they have spawned few policy surprises so far. Rate hikes of 25bps from the Fed and the ECB were “in the price” as were comments suggesting that their tightening campaigns could be close to fruition. In light of this, our charts this week look at the view that persists among investors that a Fed policy tightening cycle is indeed close to completion (in chart 1). There is arguably less unanimity among investors on this over ECB policy but this week’s euro area money supply data certainly indicate that its monetary tightening campaign is working (chart 2). We then turn to this week’s firmer-than-expected US consumer confidence report from the Conference Board, how this tallies with recent surveys from Europe, and why weaker energy prices may have been a common driver (chart 3). Lower energy prices is a theme in our next two charts as well, firstly via its impact on goods price inflation in advanced economies (chart 4), and then on why the UK’s inflation arithmetic remains an outlier relative to other advanced economies (chart 5). We then stay with energy matters in our final chart this week via some updated data for 2022 for sources of global energy consumption (chart 6).
by:Andrew Cates
|in:Economy in Brief
Global| Jul 21 2023Charts of the Week (July 21, 2023)
The mood in financial markets has remained upbeat over the past few days partly thanks to some stronger-than-expected US earnings reports. Last week’s weaker-than-expected inflation data have also continued to lift hopes that a hard landing scenario can be avoided. As we illustrate in our charts this week, however, the incoming data from elsewhere has not been as auspicious. While US growth and inflation releases have been better-behaved (see chart 1), China’s latest data have been more downbeat (chart 2). And although this week’s UK inflation data were weaker-than-expected, progress toward normalisation remains painfully slow in part due to persistent price pressures in the service sector (see chart 3). Thankfully, tentative evidence has started to emerge to suggest that wage pressures in the US and Europe have begun to cool (chart 4). The sustainability of that trend in the period ahead, however, will partly hinge on competitive forces and global context, which we examine next (in chart 5). Finally this week, and via some data from the World Bank, we look at some refugee numbers in high income economies and the difficult messages these carry for political stability (in chart 6).
by:Andrew Cates
|in:Economy in Brief
Global| Jul 14 2023Charts of the Week (July 14, 2023)
Incoming economic data that concern inflation and labour market activity have continued to dominate the financial headlines over the past few days with Wednesday’s weaker-than-expected US CPI report a notable highlight. And this, coupled with evidence suggesting that labour markets may be cooling down, has driven soft landing scenarios into the ascendancy once again. In our charts this week we illustrate how the Blue Chip consensus for GDP growth and inflation in 2023 for some of the world’s major economies appears to have decoupled from global influences in recent months (charts 1 and 2). Domestic drivers of the economic cycle, in other words, are taking on more importance compared with global drivers, such as energy prices (chart 3). Our second chart additionally suggests that UK inflation is unexpectedly high relative to global norms but, as suggested above, there was some helpful evidence of a slowdown in the labour market in this week’s batch of economic data (chart 4). Calibrating monetary policy at present, however, remains hazardous, not least given acute uncertainties about prospective demand and supply patterns. Latest estimates from the New York Fed suggest the final destination for short-term interest rates is little different to where it used to be (chart 5). The same analysis, however, equally suggests that this destination could still be a long way off and with the road in between somewhat rocky and hazardous to say the very least (chart 6).
by:Andrew Cates
|in:Economy in Brief
Global| Jul 07 2023Charts of the Week (July 7, 2023)
Communications from central banks together with firmer-than-expected US labour market data have continued to suggest that monetary policy could remain tighter for longer in the period ahead. This, coupled with disappointing survey evidence this week, has magnified growth concerns in recent days in financial markets. In this week’s charts we focus on the expectations for central bank policy that can be derived from the July Blue Chip Financial Forecasts survey (in chart 1). We then delve into the specifics for Fed policy with a look at the shape of the US yield curve (in chart 2). Next, we shift our attention to inflation matters and specifically the negative surprises that characterise the incoming data from major developed and developing economies (in chart 3). That diminishing inflation threat finds an echo too in the underlying details of this week’s June ISM survey (in chart 4). It finds an echo as well, albeit not as loud, in the latest consumer expectations survey from the ECB (in chart 5) as well as the latest Q2 Tankan survey from Japan (in chart 6).
by:Andrew Cates
|in:Economy in Brief
Global| Jun 30 2023Charts of the Week (June 30, 2023)
Financial markets have been a little more unsettled in recent days as recession fears have resurfaced again in several major economies. Those fears have been amplified by some remarks from central bankers at the ECB’s conference in Sintra this week suggesting that further monetary policy restriction is likely. Still, most gauges of financial market stress have not signalled any significant instability in recent weeks. This can be partly attributed to relatively sturdy US dataflow (see chart 1). That core CPI inflation appears to have turned a corner in many major economies is arguably another reason for the absence of financial instability (see chart 2). A key exception to this, however, is the UK where core inflation has deviated from global norms with consequences for the gilt market and sterling (see chart 3). Tight labour markets, in the meantime, are one of the factors that’s compelling central banks to keep monetary policy on a restrictive path but there are some suggestions in higher-frequency data that employment activity is beginning to ebb (see chart 4). Recent business surveys from the euro area certainly support the notion that activity in that region is now weakening quite sharply (chart 5). A broader and more pronounced global slowdown will arguably now depend on how consumers respond to a tightening of monetary policy, which we explore further in our final exhibit this week (in chart 6).
by:Andrew Cates
|in:Economy in Brief
Global| Jun 23 2023Charts of the Week (June 23, 2023)
A recurring theme in the dataflow over the past week, and reinforced in recent communications from policymakers, concerns the potency of monetary policy. In our charts this week, for example, we illustrate how activity in the US housing market appears to have picked up again in recent weeks (in chart 1), notwithstanding the Fed’s hitherto successful efforts to marshal a slowdown. We then turn to the UK’s still-troublesome inflation picture – and the BoE’s policy rate hike of 50bps this week - with some perspectives on its mortgage market, wage pressures and food and energy prices (in charts 2 and 3). The power of policy to curb liquidity in the euro area banking sector is our next port of call (in chart 4). However, the diminishing power of monetary policy in China to boost liquidity is evidenced in our next exhibit (in chart 5). Finally, and chiming with the sobering messages for the global economic outlook implied by most of our exhibits this week, we focus on the weakness of traded goods prices and South Korea’s export growth (in chart 6).
by:Andrew Cates
|in:Economy in Brief
Global| Jun 16 2023Charts of the Week (June 16, 2023)
Central banks have stolen the limelight over the past few days but with policy shifts that reveal stark differences – and perhaps greater disagreement among policymakers - about the outlook for their respective economies. For example, the decision by the US Federal Reserve to pause its tightening campaign, while simultaneously hinting at future rate hikes in the coming months, undoubtedly raised a few eyebrows. Meanwhile, China's decision this week to reduce its 7-day reverse repo rate by 10bps, lowering it from 2% to 1.9%, was also noteworthy but not entirely surprising given a series of disappointing data releases. As for the ECB, this week’s decision to lift its key policy rates by a further 25bps came as no surprise even though the incoming growth data from the euro area have been equally underwhelming (compared with China). Against this backdrop, our charts this week focus on the Fed’s tightening campaign (in chart 1), the recent strength of global equity markets (in chart 2), and US and broader global inflation issues (in charts 3 and 4). We then turn to the growing inflexibility of the UK labour market (in chart 5) and finally focus on China’s disappointing reopening phase (in chart 6).
by:Andrew Cates
|in:Economy in Brief
Global| Jun 09 2023Charts of the Week (June 9, 2023)
Financial market sentiment has continued to improve in recent days despite conflicting signals from the economic data flow. This improvement can be traced, in part, to the removal of uncertainty surrounding the US debt ceiling. However, as indicated by our first two charts this week, there is now growing evidence to suggest that headline inflationary pressures are receding in most major economies, which could have been a further contributing factor. Nevertheless, as our next three charts this week also suggest, the world economy is not yet out of danger. Among other potential negatives, this week's data flow signalled a big slowdown in export growth in China (chart 3), still-fragile growth expectations from the global investor community (chart 4), and increasing inventory imbalances in the US economy (chart 5). Lastly, and on a completely different and more structurally-rooted note, our final chart this week looks at some of the challenges Asian economies face in their transition to a Green economy (chart 6).
by:Andrew Cates
|in:Economy in Brief
Global| Jun 02 2023Charts of the Week (June 2, 2023)
The world economy’s underlying vulnerabilities have been in sharp focus over the past few weeks, but more deep-seated wounds with longer-lasting scars have been avoided, at least for now. This applies specifically to the anxiety that had surfaced about the health of the US banking sector and more recently to the willingness of politicians to lift the US debt ceiling. But it applies more generally to the outlook for the world economy, partly thanks to the relief that’s been provided by weaker energy prices. Still, as most of our charts this week suggest, while deeper wounds have been avoided for now, this does not mean that underlying vulnerabilities have been erased. We illustrate, for example, the heightened tendency of incoming data for global growth to disappoint expectations to the downside (in chart 1). Inasmuch as that trend toward disappointment has been rooted in a deteriorating outlook in Europe and Asia (compared with the US) we look next at the renewed upward pressure on the US dollar (in chart 2). The downward pressure on European inflation and on bank credit growth (in Europe and the US) is our next focus (in charts 3 and 4). Then, on labour market issues, we home in on the mixed messages that were conveyed about employment activity in the US from this week’s April JOLTs report (in chart 5). And finally we turn to the worrying trend toward higher youth unemployment that’s established itself in China over the last few months (in chart 6).
by:Andrew Cates
|in:Economy in Brief
Global| May 26 2023Charts of the Week (May 26, 2023)
Lingering concerns about US debt ceiling negotiations have left financial markets on the back foot over the past few days. But incoming economic data this week have not helped. May’s flash PMIs, for example, disappointed to the downside in Europe with the details revealing stubbornly high price pressures in the service sector. Those details found an echo in a much stronger-than-expected UK inflation print for April as well. Against this backdrop our charts this week firstly home in on market expectations for Fed policy (in chart 1). We then contrast these with the more downbeat messages for global growth that are being signalled by falling copper prices and negative global growth surprises (in chart 2). We turn next to the sobering messages from the stalling pace of GDP growth in Asia’s more developed economies (in chart 3) and one reason for this (in chart 4), namely soggier world trade growth and rising inventories. Our last two charts then return to inflation issues and examine the relatively high level of energy price inflation in the UK compared with the US and to a lesser extent the euro area (in chart 5). This is then contrasted with the firming trend for core inflation in the UK and the ebbing trend in the US and euro area (in chart 6).
by:Andrew Cates
|in:Economy in Brief
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