A growing belief that central banks may soon "pivot" toward a more growth-friendly monetary policy strategy and away from fighting inflation has been a catalyst for a rally in risk assets in recent days. As our first three charts this week suggest, there is certainly some compelling evidence to support the idea that monetary policy has become more restrictive and that inflationary pressures from traded goods prices are in retreat. However, as our fourth chart also _ suggests, while additional evidence has emerged to suggest the US labour market is also now cooling off, many metrics still suggest that it remains in "overheating" territory. In the meantime, this week's news from OPEC about forthcoming production cuts might leave oil prices uncomfortably high for many policymakers in the period ahead. This is notwithstanding the evidence in our fifth chart that suggests - from a fiscal perspective - that many OPEC nations could cope with lower prices. It is possible that structural changes in the world economy also played some role in OPEC's recent decision. As our final chart this week suggests, the share of renewables in the world economy's capacity to generate electricity continues to climb, notwithstanding regional variations._
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| Sep 30 2022Charts of the Week (Sep 30, 2022)
Financial instability has risen meaningfully over the past few days as global equity markets have slumped to new lows for this year while US bond yields have spiked to new highs. As our first chart this week underscores, more hawkish rhetoric and policy activism from central banks – and the Fed in particular – have been key triggers for these moves. Another trigger, however, can be traced to the UK, where heightened concerns about debt sustainability and inflation have – as our second chart suggests – perhaps unsurprisingly soured demand for UK assets. Higher US interest rates appear to now be souring the outlook for the housing market too, as evidenced in our third chart this week. As for Europe, our fourth and fifth charts this week underscore how its dependence on Russian energy remains a key source of downside risk for the economy. Finally, Asia’s heavy dependence on world trade and lingering pandemic restrictions are additionally taking their toll on regional GDP growth, as evidenced in our final chart this week.
by:Andrew Cates
|in:Economy in Brief
Global| Sep 23 2022Charts of the Week (Sep 23, 2022)
Against a backdrop this week of enduring geopolitical tensions as well as the Fed's latest decision to lift interest rates the strength of the US dollar remains a key focal point for financial markets. With that in mind our first chart looks at how the dollar has performed in recent months compared with previous Fed tightening cycles. In the meantime the fragility of China's real estate sector and broader economy – a theme in our second chart this week – are generating ramifications for export growth in its key trading partners (e.g. South Korea) - a theme in our third chart. As for Europe the tremendous challenges that confront both the Bank of England and the European Central Bank in setting interest rates at present are underscored in our following two charts concerning energy prices and peripheral bond market spreads. Finally, we look at some lower-frequency economic data that offers some perspective about the potential capacity lurking in global labour markets.
by:Andrew Cates
|in:Economy in Brief
Global| Sep 16 2022Charts of the Week (Sep 16, 2022)
Financial markets were rattled this week following some stronger-than-expected US CPI data for August. With recent data also suggesting the US labour market is still eliciting unexpected vigour, investors are now pricing in an even more aggressive tightening campaign from the Fed in the coming months. Still, not all the news on the US inflation front has been negative. Our first two charts this week, for example, show that consumer and market-based surveys of US inflation expectations have been drifting lower over the past few weeks with weaker oil prices no doubt helping to foster those trends. But while oil prices have been in retreat, natural gas prices in Europe have, until recently, been resurgent, a key reason why our European charts this week are not as reassuring. A broader – and more comforting - message from transportation data, however, is that global trade patterns, having been distorted by the COVID pandemic, are now returning to more-normal levels. Having been choked by the pandemic and then by the war in Ukraine, this suggests supply chain bottlenecks have continued to ease. Longer-term supply-side challenges for the world economy remain acute, however, a message reinforced by our final chart this week on stocks of natural capital.
by:Andrew Cates
|in:Economy in Brief
Global| Sep 09 2022Charts of the Week (Sep 9, 2022)
In our charts this week we look at this week's final composite PMI surveys for August, recent trends in transportation costs, US import growth, and inflation data surprises. A broadly-based weakening in global demand and ebbing cost and price pressures as supply chain bottlenecks ease are some common threads. An additional thread, at least as far as Europe is concerned, is high energy prices and how policymakers – including the UK's new Prime Minister Liz Truss – enact policies designed to fend off their impact. The ECB delivered a 75bps hike in its key interest rates this week in order to fend off inflationary pressures as revised Q2 GDP data suggest the euro area economy has held up quite well in the first half of 2022. But the energy crisis and its likely impact in the months ahead will likely keep European policymakers active in the energy nexus in order to alleviate the inevitable economic strains.
by:Andrew Cates
|in:Economy in Brief
Global| Sep 02 2022Charts of the Week
Haver Analytics is launching today its inaugural ‘Charts of the Week' publication. Every Friday we will publish six charts accompanied by a brief overview and some commentary that showcase our databases (including new data additions) and our analytics. Most of these charts will drill into the latest global economic dataflow and highlight some of their more noteworthy trends and implications. But we will aim to flag other topical data points too from our non-macro offering including, for instance, from our ESG database.
A common theme from our charts this week is the downside risks that have been accumulating for the world economy in the last few weeks. Forward-looking survey data have fallen, or are closer, to levels that have previously been associated with recessions. Most major central banks, in the meantime, have either continued to lift interest rates and/or communicated – with greater zeal - their intentions to do so not least because labor market activity is still quite strong. Emerging market economies in the meantime have remained under pressure, in part because of a strong US dollar, but also because of ongoing weakness in China. Finally geopolitical tensions have remained intense in Eastern Europe, which is magnifying supply-side bottlenecks, not least in the energy sector, and further disrupting economic activity on the broader European continent.
Global growth Last week's flash PMI data for the US, Euro Area and Japan suggested that aggregate output contracted in August and to a degree that - excluding the first wave of pandemic lockdowns - was the steepest since the global financial crisis in 2009. A similar message emerged from this week's final manufacturing PMI for China.
by:Andrew Cates
|in:Economy in Brief
- Global| Aug 24 2022
Energy, Energy, Energy
Energy is playing a critical role in the cost of living crisis that presently engulfs the world economy. Hardly a day goes by in the UK, for example, without a newspaper carrying headlines that concern spiraling fuel prices and how this is magnifying inflation tensions on the one hand and draining household purchasing power on the other. The latest raft of European inflation releases certainly attest to the outsized role that energy prices have played in driving consumer price inflation to recent highs. The consumer price of energy, for example, specifically accounted for between 40 and 45% of the respective y/y gains in the UK and Eurozone consumer price index in July (see figures 1 and 2 below). Nearly half of Europe's inflation problem, in other words, can be traced to energy.
by:Andrew Cates
|in:Viewpoints
- Global| Jul 14 2022
The Over-shooting Dollar and Some Implications
The strength of the US dollar and by extension the weakness of other major currencies in recent weeks has generated a great deal of comment. Heightened global risk aversion and an investor preference for the relative safety of US assets is one reason for the dollar's ascent. But relative growth and inflation fundamentals and their implications for interest rate differentials have also been key.
The outsized degree to which the dollar has climbed based on relative growth fundamentals alone, however, is noteworthy. As figure 1 below suggests, the US dollar has advanced by much more than the incoming US data-flow would suggest. This could be because US inflation has been more broadly-based compared with other major economies (where higher food and energy prices have been principal drivers). And this has caused the Fed - in the face of a weakening economy – to signal a more active inflation-fighting monetary policy campaign relative to, say, the BoJ or the ECB.
Figure 1: The US dollar is decoupling from relative growth fundamentals
by:Andrew Cates
|in:Viewpoints
- Global| Jul 05 2022
Mid-Summer Stagflation Update
This is a transcript of a brief webinar that we have posted on stagflation risks.
As a reminder we have been recommending that a neat way to keep tabs on those risks would be to look at the spread between global growth surprises and global inflation surprises. If that spread has been in negative territory for some time it would suggest that growth expectations have been ebbing or that inflation expectations have climbing and possibly both and with attendant increased risk of a stagflation combination
So where are we now? As the charts in figures 1 and 2 below suggest we have seen a higher risk of a global stagflation scenario emerge of late insofar as our indicator as plunged into deeper negative territory in the past few weeks. And that in turn can mostly be traced to a steady drumbeat of downbeat news on the global growth front.
Figure 1: An updated stagflation stress indicator
by:Andrew Cates
|in:Viewpoints
- Global| Jun 16 2022
A More Challenging Consensus
The latest June survey of Blue Chip professional forecasters is an uncomfortable read. Further downward revisions to growth expectations for 2022 have been accompanied by further upward revisions to inflation forecasts. That’s an unpleasant combination, suggesting stagflation risks are high and rising. That many policymakers moreover are now more actively engineering a tighter monetary policy in order to check inflation leaves global growth forecasts subject to further downward revision. The still-large - and growing - disconnect between forecasts for consumer spending growth and real household income growth in the meantime offers a stark reminder that the growth portion of the stagflation equation are subject to intense downward pressure at present. In other words, global recession risks are rising sharply.
These conclusions are reinforced in the charts below.
The evolution of consensus GDP growth forecasts for 2022 is shown in figure 1 below. These have been revised sharply lower over the last several months and most notably in large economies such as China, the US and the Euro Area. Their synchronized nature moreover hints that these revisions can be traced to global, not domestic, factors.
Figure 1: The evolution of Blue Chip forecasts for GDP growth in 2022
by:Andrew Cates
|in:Viewpoints
- Global| May 27 2022
The Blame Game
Bank of England policymakers have been slammed by UK newspapers in recent days for 'being asleep at the wheel'. Spiralling inflation, a 'cost-of-living crisis', a borrowing binge and an overheating labour market are being specifically pinned on lax UK monetary policy. And last week's UK data flow showing a further big jump in inflation, a steeper than expected drop in the unemployment rate and a record high for job vacancies have added more grease to the media's wheels.
But are these criticisms really justified? Well the answer is not quite, and for a number of reasons. The most straightforward reason being that these criticisms are not just being levelled at the BoE. They're also directed at the Fed, the BoC, RBA, ECB, and at many other central banks besides. In other words, many of these issues are globally-rooted and don't have their origins in lax domestic monetary policy.
Global roots
On the other hand, perhaps all of these central banks have been similarly asleep at the wheel during this period? Global monetary policy settings may have been far too loose for too long, particularly during the pandemic period. This could have generated too much money, excessive private sector leverage, and soaring demand. This could have now yielded outsized price pressures, wage price spirals thanks to overheating labour markets and dislodged inflation expectations to boot. If this isn't a wake-up call for policymakers to tighten monetary policy swiftly and aggressively and squeeze these excesses out of the system, then what is?
However, this global narrative and policy prescription doesn't quite hit the nail on the head either. There's no evidence – at the global level – for rampant money supply growth, for excess private sector leverage, or for economic activity more generally that's overheating. Price pressures have been, and still are, emerging due to acute supply side shortages that can mostly be traced to the pandemic or, more recently, to the conflict in Ukraine and China's zero COVID policy. And while a recovery in global demand has admittedly amplified these pressures, it has been fiscal policy – not monetary policy – that's been playing the supporting role.
All things considered, if that analysis is accurate, shouldn't monetary policy now play a bigger role in ameliorating these price pressures and, at the very least, preventing a bad situation from getting worse? This scribe is dubious. If loose and unorthodox monetary policies throughout the post-financial-crisis era failed to generate any consumer price inflation, and isn't really responsible for high inflation levels at present, why on earth should we expect tighter monetary policy to play a restraining role now?
More appropriate policy tools
Fighting the current combination of weak growth and high inflation with higher interest rates will not restore the supply fabric of the world economy not least now that most governments are tightening their fiscal stance at the same time. Surely a far more apt policy response (which admittedly the UK government is leaning toward) would be to use the levers of fiscal policy to alleviate supply-side shortages (e.g. in energy markets), increase an economy's production capacity and shore up the purchasing power of households and companies. By raising the cost of borrowing, tighter monetary policy will impede a supply side investment drive and further derail private sector purchasing power. As such, central banks may well make a bad situation even worse if they were to more actively respond to the pressures facing them from so many opinion formers in the media.
In what follows, we take a look at a few charts accompanied with (mostly) brief commentary reinforcing these messages.
The first chart in figure 1 below shows the strong link between commodity prices and consumer price inflation in the advanced economies over recent years. In short, consumer prices have been rising because input cost pressures have been rising.
Figure 1: Higher commodity costs have pushed up consumer price inflation
by:Andrew Cates
|in:Viewpoints
- Global| Apr 28 2022
Some Global Inflation Perspectives
Central bankers would be the first to admit that domestic monetary policy is a blunt tool for steering economic growth and inflation. Alan Greenspan famously observed that setting policy can be like driving a car while looking in the rear-view mirror. He noted too that arriving sufficiently early “in order to take to away the punch bowl just as the party gets going” is often equally, if not more, challenging.
To extend these metaphors a little further a big problem at present concerns the image in that rear view which is shrouded in fog. In the meantime there is much uncertainty about how many guests have arrived at the party. Even more debatable is whether the punch bowl that's been provided actually contains any punch!
To elaborate on this let's look at a few charts. The first of these suggest the world economy's current inflation tensions are mainly rooted in global supply-side factors. Specifically figures 1 and 2 below show that higher commodity prices in recent months have been mostly responsible for the burst of positive global inflation surprises. That's incidentally as true in the US as it is in, say, Australia. Insofar as higher commodity prices are rooted in global supply-chain bottlenecks that have been choked by both the COVID pandemic and the Russia/Ukraine crisis combatting these inflation tensions via tighter domestic monetary policy will be challenging to say the least.
Figure 1: Inflation surprises in the G10 have been heavily driven by moves in commodity prices
by:Andrew Cates
|in:Viewpoints
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