Chart of the Day
The US 5-year/5-year inflation-linked swap rate, i.e. market-based inflation expectations for 2025-2030, rose by a further 6 bp yesterday to reach an 18-month high of 2.23%. That is a striking development given how depressed economic activity remains; normally we would expect inflation expectations to remain weak so long as unemployment is high and there is ample spare economic capacity. The development may be a sign that many many investors are convinced that public institutions, most importantly the Federal Reserve, are becoming more accepting of higher inflation.
China’s manufacturing recovery is continuing to gather momentum according to the PMIs, with the unofficial Caixin measure jumping to 54.9 in November.
By contrast, India’s recovery is taking longer than most - GDP remained down by 7.5% YoY in Q3, which is almost twice as bad as the YoY growth rate in the US.
In the UK, the flow of household consumer credit, which is mostly credit card spending, remained negative in October as households continued to hold back from spending. By contrast, mortgage credit continues to flow at near pre-virus rates - it’s been a similar story in many advanced economies.
Japan’s labor market appears to be close to turning. The unemployment rate edged up in October, but the jobs to applicants ratio appears to be plateauing. It still looks consistent with unemployment rising, but to a much lower rate than elsewhere.
US high-yield corporate borrowing costs have remained low despite the latest concerns about short-term damage to the economy as a result of Covid.
By contrast, the Russell 2000 index of small-cap firms dropped sharply yesterday, by almost four times as much as the S&P 500.
That normally signifies growing macro concerns, and that was also evident in the S&P 500 sectoral performance, with the cyclical energy and financial sectors underperforming.
Similarly, after gaining against the S&P 500 in the first half of November, the major equity indices of other advanced economies - which underperformed during the worst of the growth concerns during the peak of the pandemic earlier this year - have again lost ground in the past week.
Crypto was one area of the marketthat registered substantial gains. After the sell-off at the end of last week, bitcoin jumped by 15% and Ethereum by 17% yesterday.
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