Yesterday I had a good look at various currency pairs. Real interest rate differentials have been even better predictors than I thought in recent years. One issue with getting clear on just how good they are is that measures of inflation expectations are only patchily available around the world, especially at the 2-year point. I plan to do some more work on this, in order to construct sensible time series for 2-year real interest rates for the major currencies.

Tim Duy says that, following the TMT and housing bubbles, we have a pretty good idea of what a bubble looks like. He presents a chart of household net worth as a multiple of GDP, which shows two pretty clear humps at those two times. This could be an indicator to bear in mind. Here is a chart:

The global PMI’s have been reasonably strong so far. China’s official PMI fell back, but the HSBC version rose and the latter is the one I tend to look at. The UK, the Eurozone, Spain and Italy all showed a broadly rising trend. The exception was Australia, whose AIG manufacturing index fell pretty sharply after a run of weak months.

In the US, the personal income and outlays report was released. Disposable personal income was up 0.4% in December, adjusting for special factors like accelerated and special dividend and accelerated bonus payments ahead of the fiscal cliff and lump-sum social security payments; the headline number for personal income was 2.6% in a month! Thanks to the strong headline number, the saving rate increased to 6.5%. Personal spending disappointed expectations at 0.2% MOM, but spending on durable goods, which is a half-reasonable leading indicator for the economy, rose 1.3%.