ChartBrief #34 The Leader and The Follower

Emerging markets continue to play a game of "cat and mouse" with developed economies. This actually marks a change from the last couple of years where emerging markets had been diverging from developed economies, but now it seems we're starting to see signs of a synchronized global economic upturn. Or at least a simultaneous surge...

The chart of the day is the economic surprise indexes for G10 (developed economies) and emerging markets. As a reminder an economic surprise index shows how economic data is presenting vs expectations. The index will rise either if economists had become too pessimistic (and even "normal" data will be a surprise), or if the data is simply improving faster than they anticipated. For developed economies it's the strongest reading in years, and the EM indicator looks to be turning; potentially to follow in its footsteps. One caveat would be that these indexes are mean reverting, and just as economists can get too pessimistic they can get too optimistic, so there is a risk that the G10 index rolls over from here.

Either way, this should be another piece of evidence that makes it clear that the bond market bust is based on fundamentals rather than purely a sentiment thing.

Bonus chart: EM vs DM manufacturing PMIs

This chart appeared in last week's edition of the Weekly Macro Themes, and goes to highlight the underlying economic data trends that form part of the forces driving the lift in the economic surprise indexes noted above. The divergence in economic prospects between developed and emerging economies is made clear in this chart, and it's this divergence in the economics that has driven a lot of the under-performance that we saw in emerging market equities. It also posed risks to developed economies and had a global deflationary impact, but that appears to be passing now, so it may be time to prepare for more synchronized growth, more inflation, and better equity performance outside of the US.

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