investment viewpoints

What our macro indicators say about this cycle

What our indicators say about this cycle
Florian Ielpo - Head of Macro, Multi asset

Florian Ielpo

Head of Macro, Multi asset

This week, Simply put canvasses key messages from our proprietary indicators for global growth, inflation and surprises in monetary policy. What do the data say about conditions at this stage of the cycle – and which variable is likely to be the pivotal macro driver at present?

 

Need to know

  • Economic growth shows stabilisation, probably linked to China’s recovery. However, the world economy is expected to continue slowing down
  • Inflation should increasingly slow more than expected, as long as the labour market continues to normalise
  • Central bankers in the Eurozone and the US should show some moderation: it is no longer time for a surprise rate hike and not yet time for a rate cut

 

Three views on the economy

Uncertainty at the macro level is high. While there is always a tendency to think that current times are more complex than the past – a well-known behavioural bias – the multiplicity of scenarios that we now face helps distinguish today from previous episodes.

These situations are precisely why we designed our LOIM ‘nowcasting indicators’: they aim to provide an estimate of the current scenario (the ‘now’ in ‘nowcasting’) in terms of (1) growth, (2) inflation surprises and (3) monetary policy surprises. The indicators reflect a detailed econometric research process that allowed us to list 350 out of 10,000 economic data series that provide robust signals, as measured over past cycles, to track those three dimensions.

Where are we in the cycle, at least from the perspective of recent macro data? The answer comes via three points.

 

1. Growth is undeniably lower

Doubt must be dispelled: yes, Christine Lagarde, President of the European Central Bank (ECB), has complained about the slow relay of monetary policy to the real economy. This means that growth is not slowing fast enough, and that inflation remains too high. But real growth today is weaker than it was a year ago. Whether we trust our nowcasting indicators or not, real US growth is declining, and it is clearly visible in the manufacturing sector. The slowdown is harder to see on the services side, probably due to the intensity of the fiscal stimulus from 2020 to 2021 (for more, please see our quarterly Simply put).

If we set this services effect aside, what is left? These key elements:

  • In both the Eurozone and the US economies, one sector remains highly resilient for the time being: the labour market (see the decomposition of our nowcasting signals in figure 1). This is one of the key components of our growth indicators, because of its historical role in detecting recessions. The one element that should be at the heart of any macro analysis today is employment –  the moment it shows signs of weakness should correspond to the low point of the current cycle

  • The Chinese rebound is not a myth: the country's reopening can be read in our Chinese growth nowcasting indicator beyond any shadow of a doubt. Figure 1 shows the breakdown of this signal by sector, and consumption is very clearly driving the indicator's rebound. Beware of the component that is not rising – the housing sector. It remains subdued for the moment, according to the latest data collected

  • Finally, current growth is undergoing a remarkable stabilisation phase: 38% of the data collected for the construction of our growth indicator showed an improvement in December, and this has recently risen to 48% with the reopening of China. China in 2023 is not China in 2008: its reopening is now a support factor for global growth, especially in the Eurozone. But the transition from recovery driver to support factor remains challenging for the moment

Global growth therefore continues to show signs of weakness, despite a period of stabilisation. The expected decline in bank lending to the economy is likely to weigh on the macro figures due in the second and third quarters, so the slowdown will probably continue.

 

FIG 1. Decomposition of our growth nowcaster for the US (left), Eurozone (centre) and China (right)

Multi-Asset-simply-put-Decomposition growth nowcaster-01.svg

Source : Bloomberg, LOIM

 

2. Inflation is not the problem anymore

The growth slowdown is the work of our central bankers: inflation in 2021-2022 was not a sustainable situation for them – far from it. The fact that interest rates were hiked in 2022 without growth figures turning negative is proof of the urgency of the situation back then. Central bankers have been able to change their tune in the space of a few months, which is remarkable.

Among the sources of inflation that are shaking up our inflation nowcaster, and within the zones where inflation is a problem (the US and Europe), most of the data collected reflects a decline. Two exceptions remain, as shown in figure 2:

  • In the US, cost-push inflation has already retreated, as have housing and economic activity (part of demand-push inflation). The only inflation beacon that continues to flash red is employment – the same usual suspect for the growth nowcaster

  • In the Eurozone, of the two historical sources of inflation – economic activity and costs – the latter has already receded, leaving economic activity as the sole driver

Thus, if we consult our indicators for the origin of inflation viscosity, the answer is simple: employment in the US and demand in the Eurozone. Both are explicit practice targets for their respective central banks.

 

FIG 2. Decomposition of our inflation nowcaster for the US (left), the Eurozone (centre) and China (right)

Multi-Asset-simply-put-Decomposition inflation nowcaster-01.svg

Source: LOIM, Bloomberg.

 

3. The great moderation of monetary policy

With growth slowing but still resilient, and with inflation expected to surprise on the downside in the coming months while remaining sticky, where does this leave our central bankers?

The answer from our monetary policy surprise nowcasting indicator is clear: central banks should no longer surprise us with rate hikes (at least not by the proportions of 2022) without being able to lower those same rates. This lack of surprise leads us to conclude that moderation should be the only central bank attitude reflected in the economic data today. Rates should remain high and, more importantly, an expected rate hike should be delivered.

Here again, the analysis of the decomposition of our signal brings an essential granularity to the message of our indicators. If anyone expects a ‘pivot’ from the Federal Reserve or the ECB soon, the reason for it will not be found in the data behind our indicators, which are sending out two key messages:

  • In both the US and Eurozone, consumption is slowing – our central bankers’ objective – but not yet enough to spur a pivot

  • Employment, real estate and realised inflation are not yet consistent with a change in monetary policy

Here again, employment stands out as a key variable at this stage of the cycle: if investors seek macro signals, our nowcasting indicators suggest looking to the labour markets in the US and Europe.

 

FIG 3. Decomposition of our monetary policy surprise nowcaster in the US (left), Eurozone (centre) and China (right)

Multi-Asset-simply-put-Decomposition monetary nowcaster-01.svg

Source : Bloomberg, LOIM

 

  Simply put, growth is slowing, inflation should surprise on the downside and central banks should act in line with market expectations – but the strength of the labour market should determine the next steps  
 

Macro/nowcasting corner

The most recent evolution of our proprietary nowcasting indicators for global growth, global inflation surprises and global monetary policy surprises are designed to track the recent progression of macroeconomic factors driving the markets. 

Our nowcasting indicators currently show:

• Growth is slowing worldwide, but the percentage of improving data in our indicator has increased to 48%: this is a sign of stabilisation that looks temporary
• Inflation surprises should still be negative, and only in China are we seeing signs of increasing price pressures
• Monetary policy should continue to reflect a certain moderation: central banks should deliver their expected hikes from the perspective of the macro data we are collecting

 

World growth nowcaster: long-term (left) and recent evolution (right)

Multi-Asset-simply-put-Growth nowcaster-17 Apr-01.svg

World inflation nowcaster: long-term (left) and recent evolution (right)

Multi-Asset-simply-put-Inflation nowcaster-17 Apr-01.svg

World monetary policy nowcaster: long-term (left) and recent evolution (right)

Multi-Asset-simply-put-Monetary Policy nowcaster-17 Apr-01.svg

Reading note: LOIM’s nowcasting indicator gather economic indicators in a point-in-time manner in order to measure the likelihood of a given macro risk – growth, inflation surprises and monetary policy surprises. The Nowcaster varies between 0% (low growth, low inflation surprises and dovish monetary policy) and 100% (the high growth, high inflation surprises and hawkish monetary policy).

 

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