Economics & Growth | Equities | Monetary Policy & Inflation
Charts of the Week: Stuff, Not Services
- By Matthew Tibble
- 2 min read
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Summary
- Consumers are after durables.
- Sharpe ratios are falling (sharply) across most asset classes.
- US workers might be done returning to work.
- Borrowing in the EU is getting more expensive.
We Want Stuff, Not Services
The pandemic has triggered a long-term change in consumption patterns towards a greater share of durables (Chart 1). New production capacities must be built to meet this new demand, which could take years and keep goods price inflation high, even without supply shocks. But with a protracted conflict in Ukraine, supply shocks are likely to keep coming. By contrast, before the pandemic, goods price inflation was negative. We explore more here.
A Sharp Fall for Sharpe Ratios
Nearly all asset classes are suffering from inflation and central bank hiking, and their Sharpe ratios are plummeting. Commodities are the exception. But the YTD Sharpe ratios of crypto have now fallen to similar levels as equities (Chart 2). We published extensively around this unwind and further stablecoin weakness and therefore switched to a neutral position during the month (from overweight). We stick to being neutral. Our full asset allocation report is here.
Are Workers Done Returning to Work?
Friday saw the May NFP figures come out (up 390,000 against 318,000 expected). Thanks to a 10bp increase in total participation, the unemployment rate remained at 3.6%. Prime age (25yr to 54yr) participation increased by 20bp (Chart 3). With prime age participation now only 50bp below its pre-pandemic level, it may well hit a ceiling in Q3. The much stronger recovery in prime age than total participation suggests the latter reflects demographic factors, which will not get reversed soon. Dominique unpacked the full report here.
The Cost of EU Borrowing Rises
In outright yield terms, the cost of European debt is rising fast. Corporate and periphery EGB debt has grown substantially more expensive to issue (Chart 4). For now, this is a flow rather than stock issue. But as time passes, the sustainability of the post-pandemic levels of debt will become more of an issue. The ending of TLTRO attractive terms will add to this rise in funding cost, making bank financing more expensive, and raising the quantity of bank bond issuance. Henry discusses more ahead of the ECB meeting.