A half-dozen Halloween charts to haunt and horrify investors

{"text":[[{"start":7.26,"text":"Joe Sullivan-Bissett is a fixed income investment director at M&G."}],[{"start":11.56,"text":"The FT Alphaville-M&G Bond Vigilantes Halloween chartsfest is now an annual tradition, so here are six new ones to unnerve and unsettle you as the end of the year draws nigh."}],[{"start":23.32,"text":"From consumption and the price of diesel to the housing market, credit spreads, the capex boom and the recent repricing in France, we hope you agree that some of these are worth keeping a close eye on. Viewer discretion advised (not least because of the multiple Halloween-themed puns)."}],[{"start":null,"text":"

"}],[{"start":39.92,"text":"A gap has surfaced between income and spending, with consumption now being supported by savings rather than income growth."}],[{"start":46.88,"text":"Real spending grew 2.6 per cent over the year on the most recent print, while real disposable income excluding transfers only increased by 0.8 per cent. But this is not a new development. Spending has outgrown income in all months since the middle of 2024, and that gap has to be paid for somehow . . . savings."}],[{"start":67.78,"text":"But savings are finite, and the longer income growth stays below spending growth, the less protection there is left when the skeletons come out of the closet. When income ex-transfers has turned negative in the past, it has often been in or around a recession. That isn’t necessarily proof of anything, but it isn’t a reassuring takeaway either."}],[{"start":null,"text":""}],[{"start":87.64,"text":"This chart splits the price of a barrel of US diesel into two parts: the crude oil that goes into it, and what refiners charge to turn that crude into diesel. Together, they make up the price at the pump before tax and distribution."}],[{"start":101.12,"text":"Oil supply concerns have been top of mind for investors throughout most of this year, but a bottleneck in refining capacity may be the bigger concern. The refining premium has roughly quadrupled this year, and sits well above the period when Russia first invaded Ukraine."}],[{"start":116.14,"text":"The cost has been felt by the consumer, with US pump prices passing $6 per gallon. That causes both economic and political difficulties. Diesel is what moves goods, runs farms and powers machinery, so this could matter more for inflation than the oil price alone suggests."}],[{"start":132.76,"text":"Even if a resolution to the Iran war brings down oil prices, might a persistently higher refining cost become a more entrenched concern for inflation and the broader economy?"}],[{"start":null,"text":""}],[{"start":143.28,"text":"The US housing market has become a bit of a ghost town. Existing home sales as a percentage of owner-occupied homes are running at 4.75 per cent, below the post crisis low of 5.1. per cent in 2010 and about half the 9.6 per cent reached in 2005."}],[{"start":161.9,"text":"This is a story of limited appetite to move, as most homeowners are locked into long-term mortgages at Covid-level suppressed interest rates. Moving would mean taking on a mortgage at a much higher rate, ultimately limiting turnover across the board."}],[{"start":176.86,"text":"As a result, the housing market appears to be stuck in a bit of a rut, and this has a feed-through into fewer dollars being spent on anything from real estate lawyers to sofas. Scary stuff for those associated with the industry or optimistic about broad-based economic growth."}],[{"start":null,"text":""}],[{"start":193.18,"text":"This won’t shock any Alphaville readers, but credit spreads are tight. Very tight. Extremely tight."}],[{"start":199.8,"text":"The reasons for that are heavily debated, but it’s quite interesting to look at the realised excess return for credit (vs governments) at similar periods in the past where the credit spread contributed so little to the overall corporate bond yield."}],[{"start":213.2,"text":"For the US investment-grade bond index, credit spreads now make up about 14 per cent of the yield, the lowest proportion since 1998. Starting points like this have historically been followed by weak or negative excess returns."}],[{"start":227.52,"text":"It won’t necessarily be the same story this time around, but there isn’t much pumpkin spice left to scrape off the top . . ."}],[{"start":null,"text":""}],[{"start":234.36,"text":"The so-called hyperscalers are now spending 82 per cent of their operating cash flow on capex, up from 27 per cent a decade ago and “just” 40 per cent as recently as early 2024."}],[{"start":246.9,"text":"And this spending is expected to increase next year as the capex boom continues. Morgan Stanley analysts estimate that the four largest hyperscalers — Alphabet, Amazon, Meta and Microsoft — will alone jack up investments by another 50 per cent in 2027."}],[{"start":263.46,"text":"These are some of the strongest balance sheets in the world, but with capex taking up this much of cash flow, even more of that spending is going to be funded through the bond market (after what Morgan Stanley predicts will approach $600bn of issuance in 2026). The cauldron is heating up, and the bond market looks set to play a bigger part in keeping it bubbling."}],[{"start":null,"text":""}],[{"start":286.66,"text":"For most of the euro’s history, France has been a member of the currency union’s “core members”, with its government bonds priced somewhere between Germany and the periphery. Not any more."}],[{"start":297.88,"text":"Growing angst over French politics, government borrowing and growth has now lifted France’s 10-year government bond yield comfortably above Italy and Spain’s. In fact, France now pays more to borrow than Portugal, Ireland and even Greece, the other countries that were at the centre of the Eurozone crisis."}],[{"start":316.04,"text":"Some of this is driven by those other countries getting their finances in order, and Italy was back above France as recently as March, so the crossover hasn’t been entirely one way. But the September move in particular was large and spooky."}],[{"start":329.84,"text":"So there it is: consumption propped up by savings, inflation being fed through the refinery rather than the oil well, a US housing market in a rut, credit spreads with little left to give, a debt-fuelled capex boom, and a euro area core that looks less core by the month. Happy Halloween to all."}],[{"start":352.12,"text":""}]],"url":"https://audio.ftcn.net.cn/album/a_1793347606_2856.mp3"}