Charts of the Week: Following the Leader

Oil prices and yields Concerns about the global growth outlook, spurred by cuts from the International Energy Agency to their forecasts for demand, have driven oil prices sharply lower over the past few days. Fears about supply disruptions stemming from geopolitical instability in the Middle East have additionally faded, at least for now. Since oil prices have been a key driver of the market’s inflation expectations, as evidenced in chart 1 below, this has been significant in buoying risk appetite in broader financial markets as well.

UK inflation There was good news on the UK inflation front this week too thanks to a slew of weaker-than-expected data for wages and prices. For example, private sector regular pay growth rose by just 0.2% m/m August, its lowest monthly growth rate for seven months. The September data for both headline and core CPI inflation additionally dropped quite sharply, partly thanks to a big drop in service sector inflation (see chart 2). The Bank of England will almost certainly take comfort in these numbers, given concerns about how a tight labour market had previously been stoking wage inflation and fuelling price pressures in the service sector.

China’s PPI inflation Recent data from China also revealed that inflation outcomes for September were lower than expected, with PPI inflation sliding further into deflationary territory, specifically dropping to -2.8% y/y from -1.8% in the previous month. This intensifying pace of deflation might magnify concerns about excess capacity in China's economy, which could potentially spill over into global markets as China seeks to export this surplus. Notably, China’s PPI has historically led global PPI trends, amplifying worries that this deflationary pressure might influence global inflation dynamics in the near future (chart 3).

EM portfolio flows Recent policy initiatives from China designed to shore up its economy initially generated much enthusiasm from investors. This can be seen in chart 4 below showing a surge in portfolio inflows to emerging markets, and to Asia in particular, in September. The specific spark for this was the introduction of a range of monetary stimulus measures on September 24th which included lower interest rates and cuts in reserve requirement ratios. However, that initial euphoria has since dissipated as the announcement of a number of fiscal policies designed to address local government debt risks and property market instability, have not meet expectations.

Banking conditions in the euro area On a brighter note the latest ECB bank lending survey suggested that the wheels of credit in the euro area may now be turning more quickly. The latest survey, for example, revealed that euro area banks reported unchanged credit standards for loans to companies in Q3. That follows more than two years of successive tightening. Banks also reported a further net easing of credit standards for loans to households for house purchases. In the meantime net demand for loans by companies increased moderately in Q3 while demand for housing loans rebounded strongly.

Global equity sector performance Global equity markets have had a good year so far in large part, as noted above, because the world economy appears to be on course for a soft landing and central banks have now begun to ease monetary policy. Structural factors, however, have also been influential, and most notably investor optimism about AI. As chart 6 below suggests, technology stocks have delivered the strongest returns so far in 2024. That’s striking because the technology sector is often perceived to be cyclical. Yet defensive sectors, such as utilities and consumer services, have also performed relatively well so far this year while other cyclical sectors, such as basic materials and consumer goods, have under-performed.