The Daily Shot And Data — Wednesday, Nov. 16
The United States
The global bond rout took a breather on Tuesday as investors saw yields rising "too much, too fast." However, short-term rates in the US continue to increase. Here is the 3-month LIBOR.
The next chart shows the rate implied by the January-2017 Fed Funds futures contract - which has moved above 60 basis points (current Fed Funds rate is 41 bps).
The markets' expectation of a rate hike in December has now risen to 94% in response to the latest economic data.
The primary driver behind the uptick in expectations were US retail sales, which beat consensus. The charts below show the trend without the more volatile components. Combined with wage growth data, this is more the enough for the FOMC to pull the trigger.
• Year-over-year retail sales excluding autos (and auto parts).
• Year-over-year retail sales excluding gasoline.
New-York-area manufacturing activity also surprised to the upside.
Based on the latest results, the Atlanta Fed's GDP Now model is forecasting US growth in the 4th quarter at 3.3% - materially above the sell-side economic consensus.
Source: @AtlantaFed
Another indicator that the Fed has been watching closely is the import price index. While the service sector inflation has been significantly above the Fed's 2% target for some time now, the goods deflation, driven by cheap imports, kept the overall inflation rate low. However, import prices are now stabilizing.
Next, let's take a look at several other economic developments in the US.
1. As discussed yesterday, US financial conditions are gradually tightening, driven by higher long-term rates and a stronger dollar. We are nowhere near the February levels, but the increase suggests that the Fed may be cautious in its forecasts of the rate hike trajectory. We saw what happened to financial conditions the last time the FOMC projected four hikes a year.
Source: Bloomberg
2. Businesses continue to work down elevated inventory levels, gradually pushing the inventories-to-sales ratio lower.
3. An alternative measure of US unemployment (the Hornstein, Kudlyak, Lange method) seems to have stopped declining.
4. The steepening in the longer end of the US government bond curve has been sharper than in other countries. Here is a comparison with Germany (30yr - 10yr spread).
Source: Citi, @NickatFP, @joshdigga
5. US corporate loan balances on banks' balance sheets (as a fraction of the GDP) are now the highest since 2001. This chart does not include loans held by non-bank entities such as credit funds, BDCs, CLOs, etc. Should we be concerned about this trend?
h/t Moody's, @joshdigga
6. With President-elect Trump talking about renegotiating trade agreements, it's worth pointing out that on average the US pays more in tariffs than it charges.
Source: Barclays Research, @NickatFP, @joshdigga
7. Finally, the US Economic Policy Uncertainty index continues to rise. Here is some background on how the index is calculated.
The United Kingdom
1. UK's inflation figures came in below expectations, sending the pound lower.
It's important to note that it will take time for the weak pound to work its way through the economy. Raw materials inflation for businesses has spiked already.
Now, higher prices are working their way into factory outputs and wholesale trade. It's a matter of time before the consumer feels the full impact.
The market is sensing this trend, with inflation expectations still elevated.
2. Separately, the UK government has been and will continue to sell off assets.
Source: Citi, @NickatFP, @joshdigga
The Eurozone
Economic data from the single-currency bloc remains decent (on balance). Here is the latest:
1. German GDP report was disappointing.
However, the nation's expectations of future economic activity (from ZEW Institute) improved more than was forecast.
EconomicCalendar.com: - There was also evidence that confidence dipped after Trump's election victory with a weaker tone in replies received after the election, although it is too early to make a judgment on the overall impact and forthcoming data will be watched closely.
There was a significant increase in expectations that the inflation rate would move higher, a feature also seen across all the major economies for the month.
There were also expectations that long-term interest rates would increase over the next few months.
2. Portugal's GDP growth figure beat economists' consensus by a significant margin.
3. Italy's growth also surprised to the upside.
Italian bonds rallied sharply in response to the GDP report (as well as the stabilization in global bond markets) with the 10yr yield dropping below 2% again.
Separately, polls on the upcoming referendum in Italy suggest the "No" vote remains ahead, as the number of undecided voters drops. Considerable political uncertainty could follow should the voters reject the proposed constitutional changes (see this story for more background).
Source: Citi, @NickatFP, @joshdigga
Europe
1. Elsewhere in Europe, Swedish inflation is waking up. Is Riksbank's super-dovish monetary policy consistent with this inflation trend?
2. Outflows from European equities have finally stopped.
Source: Deutsche Bank, @joshdigga
Emerging Markets
1. Let's start with India where the equity markets remain under pressure.
At the same time, Inda's bonds are rallying, in part helped by the injection of liquidity into the banking system after removing the largest denomination banknotes from circulation. Here is India's 10yr government bond yield.
Credit Suisse pointed out that the removal of this money from circulation has drained liquidity from the "underground" economy and may take some time to replenish. This action by the government could hurt real estate and land prices where transactions are often closed with cash.
Separately, India's wholesale inflation came in below consensus, suggesting that further RBI rate cuts are coming.
2. The emerging market rout was tough on Malaysia and Indonesia. The currencies of these nations are particularly vulnerable to higher rates in the United States.
Source: Deutsche Bank, @MattGarrett4
These are also the countries that benefited from the largest foreign inflows this year.
Source: Deutsche Bank, @MattGarrett3
Moreover, according to Deutsche Bank, these countries have the weakest FX reserves coverage in the region.
Source: Deutsche Bank, @MattGarrett3, @joshdigga
Malaysia and Indonesia (along with Mexico and South Africa) have some of the highest foreign ownership of domestic bonds.
Source: Goldman Sachs, @joshdigga
That's why despite a halt in the global fixed-income selloff, these nations' government bond yields continue to rise.
Indonesia's bond yield has been climbing for 13 days straight.
3. Brazilian government bonds remain under pressure.
4. The Mexican peso has finally found a bid - for now.
5. Nigeria's oil production has declined sharply, creating a significant drag on economic growth.
Source: Barclays Research, @NickatFP, @joshdigga
6. Russia's economic decline has been halted, but recovery remains fleeting.
Source: Barclays Research, @NickatFP, @joshdigga
7. Ukrainian currency has taken another hit as the central bank complains about political uncertainty.
Source: Kyiv Post; Read full article
8. Latvia's CDS spread has widened again as investors become more concerned about the US "looking the other way" should Russia decide to turn the nation into another Ukraine.
9. Finally, this chart shows the various nations' exposure to US demand.
Source: Goldman Sachs, @joshdigga
China
1. Beijing set the midpoint for the renminbi trading band at the lowest level since 2008.
h/t @fastFT
Also, the renminbi F/X forwards continue to point to further devaluation.
2. HSBC points out that US financial conditions (discussed above) have tightened in the past in response to a weakening yuan (and risks of "competitive devaluation").
Source: HSBC, @NickatFP, @joshdigga
3. China's private investment growth may have bottomed.
Source: @WSJ; Read full article
4. Given the recent political discussions in the US, here are the top items that PRC imports from and exports to the United States.
Source: HSBC, @NickatFP, @joshdigga
Source: HSBC, @NickatFP, @joshdigga
5. China's R&D expenditures are expected to exceed that of the US as the nation moves up the value chain.
Source: @economics, @DeanDijour; Read full article
Japan
1. The yen fell further on Tuesday, driven by a higher rate differential between the US and Japan.
2. As a result of this yen weakness, Japanese stock market continues to rally.
3. The global bond selloff didn't bypass Japan - the 10yr JGBs has moved into positive territory.
Source: Bloomberg
Global Developments
1. Here is how dividend yields in select economies compare to the corresponding government bond yields.
Source: HSBC, @NickatFP, @joshdigga
2. This chart shows international trade growth and the number of protectionist measures implemented globally over time.
Source: Citi, @NickatFP, @joshdigga
Commodities
1. China's iron ore bubble seems to be deflating.
2. On the other hand, lead and zinc prices in London continue to climb.
3. It's worth noting that China's growth in raw materials' use is slowing, making it harder to justify some of the sharp price increases.
Source: HSBC, @NickatFP, @joshdigga
4. While Trump's infrastructure push is certainly a positive for industrial metals, is it enough to justify the price increases? The US is a relatively minor user of copper and steel for example.
Source: Goldman Sachs, @joshdigga
Source: Goldman Sachs, @joshdigga
Energy
1. It seems that OPEC is finally putting something together that could amount to a production cut. Perhaps. Oil rallied on the news.
Source: Reuters; Read full article
2. Separately, the Permian Basin accounts for a rising share of operating oil rigs in the US (many Permian operators have been drilling great distances horizontally, reducing costs).
Source: Barclays Research, @NickatFP, @joshdigga
Food for Thought
1. Let's begin with the breakdown of Latino vote in the latest election. It turns out that Cubans like Trump.
Source: @FactTank, @Tmp_Research; Read full article
2. Which industries employ undocumented immigrants and what is their economic contribution?
Source: @washingtonpost, @Wonkblog, @paul1kirby, @Tmp_Research; Read full article
Source: @washingtonpost, @Wonkblog, @paul1kirby, @Tmp_Research; Read full article
3. Will the Trump administration address the uneven financial contributions of NATO members (shown as percent of GDP)?
Source: @StatistaCharts, @Tmp_Research; Read full article
4. Citizens of most countries believe their nation is on the wrong track.
Source: @IpsosMORI, @Tmp_Research; Read full article
5. The publishing business is expected to be good after Trump's victory.
Source: @business, @Tmp_Research; Read full article
6. The digital share of US retail sales continues to rise.
Source: @businessinsider, @DeanDijour; Read full article
7. Europeans don't like working long hours (some don't have to while others can't).
Source: @wef, @Tmp_Research; Read full article
8. The global fertility rate is now half what it was 60 years ago.
Source: @MaxCRoser, @Tmp_Research; Read full article
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thanks for your confused graph