Dwindling oil reserves, India’s economy, and Jackson Hole

This week’s charts cover the following data:

• The oil market and the US SPR
• A closer look at India’s buoyant economy
• Modeling more market momentum strategies
• Germany’s lower confidence (and inflation)
• The Jackson Hole effect
• US job cuts are slowing and less tech-heavy; more sectors are hiring again
• A PPP model says the Swedish krona should be worth even less vs the euro

The oil market and the US SPR

Oil has been in the news as Saudi Arabia and Russia decided to extend production cuts for the rest of the year. There is another noteworthy government player when it comes to this critical commodity: the US Strategic Petroleum Reserve. Famously, President Biden ordered that oil be released from the SPR in 2022 to cushion consumers against the Ukraine war’s impact on gasoline prices.

This visualisation’s top pane tracks the year-on-year change in the price of Brent crude (in blue) against the year-on-year change in total US oil inventories (in green, on an inverted axis).

As the chart shows, historically, these variables are negatively correlated and the lines move in unison: when inventories go down, prices go up, and vice versa. (The post-pandemic demand snap-back is notable in late 2020: inventories plunged and prices rebounded.)

However, the 2022 SPR episode is clearly visible as a gap opened up between the two lines. The second “inventory breakdown” pane shows why this occurred: the SPR (in purple) kept releasing oil while commercial oil companies rebuilt inventory.

A closer look at India’s buoyant economy

The world’s eyes are on New Delhi, where Indian Prime Minister Narendra Modi is hosting the G-20 summit. He is presiding over a hot stock market (as we wrote about recently) and an economy whose growth has defied regional headwinds, including China’s slowdown and a spike in food prices over the past year. Amid a government infrastructure push, GDP growth in the second quarter was 7.8 percent compared with a year earlier.

This table examines key economic indicators for various aspects of the Indian economy, with darker blue and red squares indicating readings that are notably statistically deviant from the rolling three-year average.

PMI for both services and manufacturing stand out – showing how executives in these sectors are notably optimistic about demand.

Modeling more market momentum strategies

Note: This chart’s ICE/BAML indices require our premium data sets.

We’re modeling another investment strategy, following the “vigilant asset allocation” you might remember from last month.

This chart tracks the long-term results of a strategy called Composite Dual Momentum (CDM). It divides a portfolio in four, with each portion targeting a different part of the markets: equities, credit, real estate and “economic stress” (which means the safe-haven assets of gold and long-term US government bonds).

CDM selects the best performing asset within each asset class (relative momentum) but only if their recent returns are positive (absolute momentum). If neither of these criteria is met, it invests in cash.

When comparing the 25-year performance of CDM to the traditional 60-percent-stocks, 40-percent-bonds allocation, the momentum play usually did better, especially during the GFC and the early 2010s. However, the strategy’s performance gradually eroded.

The second pane shows CDM returns as a multiple of the 60/40 since 1998, as well as the drawdown from the peak returns of both strategies.

CDM has much smaller drawdowns, thanks to its high sensitivity to risk, but the “cash default” option has probably held back its performance lately.

Macrobond News

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We’re proud to announce that Data Management Insight, from A-Team Group awards has named us a finalist for two awards – Best Data Provider to the Buy Side, and Best Data Provider to the Sell Side.

If you’re an enthusiastic member of the Macrobond community – or just enjoy the insights we publish in our Charts of the Week – we would be honoured if you cast a ballot for us.

Voting closes on Oct. 6. (You can find us – and the other shortlisted nominees – at sections 10 and 11 in this link.)

CLICK HERE TO VOTE

Will markets force the BOJ to finally abandon negative rates?

Our expert consultant and strategist Harry Ishihara examines how a resilient economy and higher-for-longer rates in the US have created implications for Japan: with the yen under pressure, the nation might be considering abandoning the world’s last negative interest rate policy as inflation surges.

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