Five charts that matter for investors

03 May 2024

Julien Lafargue, CFA, London UK, Chief Market Strategist

No inflation problem

Concerns over sticky prices have resurfaced in recent months, as US disinflation appears to have stalled. It may be true that the yearly change (Y/Y) in the US consumer price index (CPI) headed up to 3.5% in March, versus 3.1% in January. But on closer inspection, it’s clear that only a few key elements – oil prices being one – have been responsible for this rebound.

The inflationary concerns really come from services prices, excluding housing, which continue to run hot (up 4.8% Y/Y in March). Again, the reality is that these represent only a minority of the overall index. Similarly, the 22% Y/Y increase in car insurance prices in March should not be extrapolated.

In the end, for inflation to truly be sticky, salaries probably need to go up in tandem with prices. And they are not, at least according to the data provided by companies like recruiter Indeed. Based on their employment website, average wage growth has actually returned to pre-pandemic levels at around 3% (see chart). This suggests that although it may take time for the US CPI to hit target, the disinflationary process is still underway.

US wages growth falls back to pre-pandemic levels

The year-on-year average growth in US advertised job postings has descended to pre-pandemic levels

Sources: Indeed, Barclays Private Bank, April 2024

Not all gold is created equal

Gold prices chalked up all-time highs on a regular basis in April. Some would point to heightened geopolitical tensions and investors desire to hedge against high inflation, elevated debt levels and much uncertainty. While these factors may have mattered, they don’t explain why the performance of gold miners from the East and the West has diverged.

Indeed, there has been an unprecedented divergence in the performance of US versus Chinese miners this year (see chart). If gold prices are going up, they should be doing so for everybody. Well, that’s the theory at least. In reality, Asian investors appear to be much more attracted to gold than their American counterparts.

We’ve discussed previously how the Chinese central bank has ramped up its gold purchases, but it’s not alone. Investors who have lost their preferred store of value, as the domestic real estate market remains under pressure, are also turning to the shiny metal and bumping up prices of anything gold-related, including miners. Maybe investors in the West should pay attention.

Chinese gold miners outperform their US peers

As the gold price surges, Chinese-based Shandong Gold Mining's share price has shot ahead of US peers in 2024

Source: Bloomberg, Barclays Private Bank, April 2024

Now hiring

The US job market has been incredibly resilient to higher interest rates of late. However, once again, the devil is in the detail and the apparent strength may mask some weaknesses.

In the six months between October and March, the economy added almost 1.5 million new jobs, according to the US Bureau of Labor Statistics (BLS). However, more than a third of these additional jobs occurred in education and health services, both of which are closely linked to the state. The government itself has created some 300,000 jobs in the same period. Add these two sectors together and more than 60% of the jobs created since October were driven by the US administration.

Sceptics would point to the upcoming presidential election as a key factor. Whether this is a true or not, it’s worth noting that most local industries have only seen modest – if any – job growth in recent months, suggesting that the US job market may be weaker than it seems.

US job creations have been fairly concentrated

Almost two-thirds of new US jobs since October have been created in three sectors - government, education or health services

Sources: BLS, Barclays Private Bank, April 2024

Expecting the unexpected

Although there is no clear one-for-one relation between US inflation and the S&P 500, history suggests that frothy equity valuations often rhyme with moderate inflation. That is except for the current cycle, where unusually high and even increasing share prices are occurring along with stubbornly elevated price increases (right hand top corner in the chart).

In addition, this unstable relationship highlights that valuations can either become very rich or very cheap when inflation is well behaved. However, when it lies around long-term extremes, valuations tend to compress, likely reflecting the added macroeconomic uncertainty.

For investors, this means that a return to the Fed’s inflation target would be a very welcome development. However, until then, and given the strange nature of this market cycle, it’s better to expect the unexpected.

The relationship between equity valuations and inflation in this market cycle stands out

The relationship between the US consumer prices index and the Shiller cyclically adjusted price-earnings ratio over various time periods

Sources: Robert Shiller, BLS, Barclays Private Bank, April 2024

Homes need jobs

UK house prices have been fairly resilient in recent years. Since the Bank of England started to hike interest rates in December 2021, the Nationwide house price index is up by close to 2.5%. This strength may be surprising, given that the average UK mortgage rate (5-year fixed) went from 1.6% to 4.4% in the same period.

While limited transactional activity could distort house price indices, (December’s Land Registry sales were almost a third of what they were two years earlier), the strength of the domestic job market may be another contributing factor. Indeed, history suggests that there has been a close inverse relationship between house prices and unemployment rate.

If this relationship holds and a soft economic landing can be engineered by policymakers (ie perhaps reflected by only a very limited increase in the unemployment rate), then home prices should remain well supported.

UK unemployment and house prices have moved in tandem

The relationship between the UK unemployment rate and subsequent house prices shows how important the former is to setting the latter

Sources: Nationwide, ONS, Barclays Private Bank, April 2024

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