Charts of the Week: It’s the Economy, Stupid!

Financial markets are still dancing with economic data Financial markets have continued to dance with the incoming economic data over the last few months. Chart 1 below specifically suggests that equity investors have responded favourably to positive global growth surprises and negative inflation surprises, while negative growth and higher inflation have dampened their enthusiasm. Given this pattern, the bullish momentum seen in equity markets during the first half of 2024 seems increasingly at odds with the recent slew of disappointing global growth data.

Households have started to rebuild savings buffers Digging into the numbers reveals that incoming data for labour market activity have been disappointing expectations much more frequently in recent weeks, most notably in the US. Unemployment rates, for instance, have been climbing, job vacancies have been falling and employment growth has been slowing. And this, in turn, has coincided with a greater desire by households in several economies to rebuild their savings buffers (see chart 2).

Credit impulses are negative It is arguably no coincidence that at the same time as this, evidence has been accumulating to suggest that higher interest rates and less accommodative fiscal policy settings are taking a toll. Haver’s calculations for the impulse that’s being provided to the world economy from credit growth to the private sector, for example, has now been waning since the end of 2022 and negative in the 4 quarters to Q1 2024 (see chart 3).

Still-high service sector inflation There are, nevertheless, no guarantees that this restraint will now generate a more coordinated response from the world’s central banks to ease monetary policy in the immediate weeks ahead. Service sector inflation in many major economies is still worryingly high for example (see chart 4). And notwithstanding looser labour markets, wage inflation is still pretty high as well.

Firming global shipping costs There are also now heightened concerns that goods price inflation could start climbing more forcibly. Measured with respect to the Drewry Container Index, global shipping rates have nearly doubled since late April. The main reason concerns some further disruption in the Red Sea, which has stretched global shipping capacity, with more shipping needed to service European and Asian routes. As chart 5 below suggests, this could now generate more upward pressure on producer price inflation in the period ahead.

Roaring semiconductor trade in South Korea Global traded goods price inflation has already begun to stir, however, partly thanks to stronger global demand for some goods in some economies. As this final chart suggests, this week’s data from South Korea revealed still-firm demand for semiconductors, and firmer pricing power in that sector as well.