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Contents
UK stagflation forecast to become realityIndonesian food costs push inflation
higherEmerging markets under stress as higher rates boost debt burdenUS
productivity a negative outlier amid positive economic dataThe ECB is targeting
Southern European asset purchases (again)Could TARGET2 balances suggest stress
in banking systems?Hedge funds providing protection (relatively) in 2022China
trade balance reaches new highTourists return to Thailand
Home  /  Charts of the Week  /  
Inflation worries linger – from the UK to Indonesia



INFLATION WORRIES LINGER – FROM THE UK TO INDONESIA

This week’s charts cover the Bank of England’s gloomy macroeconomic forecasts,
Indonesia’s consumer price index, emerging markets’ growing debt burden, the
drop in US productivity, the ECB’s bond purchases and TARGET2 balances, hedge
funds outperforming the S&P 500, China’s surging trade surplus, and tourism
returning to Thailand.

By 
Julius Probst PhD, with contributions from Arnaud Lieugaut, Patrick Malm and
Karl-Philip Nilsson
on 
August 12, 2022
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‍UK stagflation forecast to become reality

The Bank of England is forecasting a bleak outlook for the UK. This four-year
chart shows the central bank’s forecast for a spike in inflation – which it
expects to top 12% by the end of the year – coupled with negative or flat
economic growth throughout 2023. The unemployment rate is expected to increase
from less than 4% to more than 6% in two years’ time. The aftermath of the
pandemic and the global commodity price shock are contributing to this
stagflationary outlook – with several economists pointing to Brexit’s impact on
the labour market as a contributing factor.


Macrobond users, access the chart here

‍

Indonesian food costs push inflation higher

Consumer prices are surging around the world, but Indonesia has enjoyed
relatively subdued inflation compared with many advanced economies. Until
several months ago, the consumer price index (CPI) remained below the upper
limit of the central bank’s inflation target (which is centered around 3%).
However, the last two months have seen the CPI surge above 4%. This chart shows
how food price inflation is the most notable culprit.


Macrobond users, access the chart here

‍

Emerging markets under stress as higher rates boost debt burden

Emerging markets are often the first casualties when the Federal Reserve starts
a tightening cycle. Rate hikes by the Fed and other central banks are negatively
affecting the fiscal outlook for many such countries. This chart shows interest
payments as a percentage of GDP are surging for nations including Turkey,
Indonesia, Mexico and Brazil.


Macrobond users, access the chart here

‍

US productivity a negative outlier amid positive economic data

In a series of charts last week, we cast doubt on the thesis that the US was in
a recession during the first half of 2022. However, one recent data point
contradicts the other evidence: employees are working more to produce less. This
chart shows one of the largest declines in labour productivity recorded in
recent decades.

According to research from the Peterson Institute for International Economics,
productivity data is very hard to measure, and the recent record divergence
between gross domestic income (GDI) and gross domestic product (GDP) might imply
that productivity has not fallen nearly as much as recent figures suggest. GDI
is a measure of economic activity based on the money earned for goods and
services produced, and hourly compensation spiked during the early stages of the
pandemic (ultimately to be passed on to consumers via price inflation).

It may take six to 12 months, or even longer, for data revisions to confirm
whether we are truly seeing a huge productivity decline, or whether that data
point is an outlier untethered from economic reality.


Macrobond users, access the chart here

 

The ECB is targeting Southern European asset purchases (again)

The European Central Bank’s new Transmission Protection Instrument (TPI) has the
explicit goal of preventing a surge in bond-yield spreads for Southern Europe
akin to the debt crisis of 2011-12. (This is particularly in focus as Italian
government debt is higher as a proportion of GDP than it was during the crisis a
decade ago.)

This chart of net asset purchases from July shows how the ECB is actively buying
Italian and Spanish debt while selling Dutch and German government bonds. This
remains politically very controversial in Northern European countries.


Macrobond users, access the chart here

‍

Could TARGET2 balances suggest stress in banking systems?

This chart shows the expansion of TARGET2 (Trans-European Automated Real-time
Gross settlement Express Transfer system) 2 balances – the net claims and
liabilities of national central banks vis-à-vis the ECB that arise through
cross-border payments settled in the central bank’s funds. They reflect banking
flows between different nations.

For instance, when the Spanish central bank buys government bonds on behalf of
the ECB from investors with a bank account in a different country, either inside
or outside the euro area, that cross-border transfer would show up in the target
balances as a liability for Spain. Conversely, when Germany’s Bundesbank
receives more money than it is sent, it would record a positive target balance.

A significant contributor to higher TARGET2 balances is the ECB’s large-scale
asset purchase programmes – firstly, after the European debt crisis, and now
again following the pandemic. (Note that some of the TARGET2 trends simply
reflect the fact that so many investors have bank accounts in the financial
centres of Frankfurt, Luxembourg and Amsterdam.)  

However, outflows from one national banking system to another could also be a
symptom of increased financial stress.

It’s important not to assume a direct link between TARGET2 balances and
heightened risks to the currency union. Instead, one should unpack the reasons
why cross-border claims and liabilities are increasing.


Macrobond users, access the chart here

‍

Hedge funds providing protection (relatively) in 2022

Hedge funds historically sought to “hedge” market risk, and most strategies have
done just that in 2022 by outperforming equity benchmarks. This chart compares
the returns from various hedge-fund strategies to the performance of the S&P
500. Note the large divergence between different strategies: macro hedge funds
are the only ones that are in positive territory, while fixed income credit
funds have suffered by almost as much as the benchmark equity index  during this
year’s global bond market selloff.


Macrobond users, access the chart here

‍

‍China trade balance reaches new high

This chart shows that China’s trade surplus has surged above USD100 billion for
the first time. This export strength contrasts with the general slowdown in the
economy, as a deflating real-estate market is depressing domestic consumption
and thus imports as well.


Macrobond users, access the chart here

‍

‍Tourists return to Thailand

Thailand experienced rapid tourism growth before Covid-19, with the number of
visitors roughly doubling between 2010 and 2020. The pandemic put a complete
stop to that. This chart of monthly visitors to the southeast Asian nation shows
how the sector is finally recovering: the number is surging back towards one
million – though that’s still just 25% of the pre-pandemic volume of tourists.


Macrobond users, access the chart here

‍

All written and electronic communication from Macrobond Financial AB is for
information or marketing purposes and does not qualify as substantive research

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