The Daily Shot And Data - August 24, 2016

By Walter Kurtz

Wednesday, August 24, 2016 5:11 AM EDT

Greetings,

1. Let's begin with the UK where long-dated bonds rallied (yields fell) as the BoE presses ahead with QE. The central bank is buying bonds at a premium to market levels.

2. Moreover, UK's 10y inflation-linked bond yield, which is the market-implied real rate, hit new lows. This trend tells us that UK's monetary conditions are rapidly easing.

3. Fitch warns that UK's pensions will continue to face headwinds with the bond yields falling to new lows.

Source: Fitch

4. The UK housing market remains vibrant in the first month after the EU referendum vote, with the number of resi transactions holding steady. We will see shortly how prices evolve.

Source: HM Revenue & Customs, h/t @fastFT

5. UK's manufacturing output declines, although the drop was not as bad as expected.

6. A traded UK property fund shows confidence returning to commercial real estate markets.

1. Switching to the Eurozone, some economists now don't see additional easing from the ECB, given the stabilization in the PMI reported on Tuesday. Perhaps we will only get some adjustments to the target amounts of each nation's bond purchases.

2. French composite PMI was surprisingly strong, driven by a jump in the service sector activity.

Source: Markit Economics

3. On the other hand, Eurozone's consumer sentiment weakened again.

4. Italy's UniCredit stock was up over 6% on possible sale of its Polish division (holdings in Bank Pekao).

6. It's hard to tell what the unemployment rate is in Finland. What's 6-7% between friends anyway?

Source: yle .fi

Based on Statistics Finland

7. This last chart shows how many years of QE it would take for the Eurosystem (ECB) to buy up all of the nations' debt if it continues at the current pace.

Source: @Schuldensuehner, @gzibordi, @anders_aslund

1. Turning to emerging markets, the chart below shows PBoC's currency basket that is supposedly used for the renminbi setting. This trend does not bode well for USD/CNY (second chart below).

Further reading at @fastFT; For those who use the Bloomberg Terminal, the ticker is ".CFBBG"

2. Taiwan industrial production showed a surprise decline. It's no wonder that the officials want a weaker currency.

3. Mexican retail sales were stronger than expected with the overall momentum remaining quite solid.

Source: Goldman Sachs

Separately, S&P put Mexico on a negative ratings outlook in response to the rising debt/GDP ratio.

Source: S&P

4. Copper price is still drifting lower with the Chilean peso following.

5. Turkey's central bank cuts rates again, driven in part by political motivations.

Turkey's consumer confidence came in surprisingly strong.

6. South Africa is back in the news as the Finance Minister is told to report to the police. The rand drops nearly 3%, equities trade lower, and the sovereign CDS spread jumps in response.

Source: Twitter, h/t ‏@MattGarrett3

The chart below shows the divergence between eligible and ineligible euro-denominated corporate bonds - another broad market distortion.

7. The final EM chart shows the MSCI Emerging Markets (equities) Index vs. the MSCI World Index. Is this divergence overdone - especially in the face of the Fed's potential rate hike?

Source: Bloomberg Terminal; Function " HMS"; h/t @fastFT

1. Back in the US, the 3-month LIBOR is moving higher again. The latest move, however, is not due to the looming money market funds regulation. Instead, the index is pricing in a higher probability of a rate hike.

One can see the above effect in the 3-month USD overnight index swap (OIS) which is the market's projection of the average Fed Funds rate over the next three months.

2. US new-home sales surged last month to the highest level since 2007 - materially above consensus.

Homebuilders shares jumped in response.

Source: Ycharts.com

We are finally starting to see more new US homes sold in the $200-300k range (as opposed to $300k and above).

The next chart shows new US homes for sale as a proportion of US population since 1963.

Related to the above, here is the US supply of houses (see definition).

3. The Richmond Fed manufacturing index came in way below expectations.

We see the Markit Manufacturing PMI (at the national level) softening as well.

Source: MarketWatch

4. US same-store sales in August look terrible based on the Johnson Redbook Index. Once again, some suggest that this trend has to do with delayed back to school shopping. Perhaps.

1. In fixed income, the CoCo (Contingent Convertible) market recovers as investors chase yield. This market was dislocated when Deutsche Bank came under pressure early this year.

2. The next two charts show how the widening cross-currency basis (discussed previously) is making the purchases of US bonds less attractive after the cost of currency hedging is taken into account.

Source: Deutsche Bank, @joshdigga

1. In commodity markets, crude oil jumped when Iran supposedly said it was positively predisposed to some sort of a production freeze. Analysts remain skeptical.

2. US natural gas jumps 3% on expectations of slower inventory growth (injections into storage seem to be rather low for this time of year).

3. US wheat is getting pummeled again.

Finally, we have a couple of letters to the editor.

1. The first one deals with corporate earnings yield vs. treasury yield relationship.

Dear Editor,

... with regard to your latest letter, I cannot hesitate but to add a comment on paragraph 4:

As this particular chart is getting somewhat frequently redistributed on social media, it might be worth pointing out that the presumed correlation suddenly breaks down as soon the full available historical dataset is taken into consideration. Also, the chosen chart scale is slightly suggestive and misleading: comparably few outliers on the top-right corner (all from years 1975-1985, "Volcker Years", "Rates Peak") suggest a relationship that is hardly justified by the vast majority of the densely clustered data samples in the center.

Not surprisingly, recent data points are spatially closest to other low-rate years. Needless to say that they are in the 1%- and 5%-percentile on each axis, also at extremes when measured as euclidian distance to the historical "center of gravity" of the cluster.

Note that the dense cluster at lower rates in the chart above is due to severely nonlinear distribution of sample points, the log-log plot linearizes and regularizes the distribution to minimize this distortion.

As Earnings Yield is barely more than the inverted P/E ratio and thus just another way to look at the same data, the alternative mirror perspective comes with little surprise and no new information:

Once again my sincere compliments for your insightful letter! With best regards,

Archibald Rust (@archibald_rust)

2. The second letter looks at the economic surprise indices.

In response to yesterday’s chart of the Citi Economic Surprise Index for the UK, which appears to show economic data now decidedly surprising to the upside, James Bianco at Bianco Research recently shared that this is largely the result of economists downgrading their expectations at a faster rate post-Brexit and not due to an improvement in economic data. This applies as well to the Citi Surprise Indexes for the US and the Eurozone, which both give a false sense of positivity when, in fact, we see economists have simply become more pessimistic post-Brexit.

Cris Sheridan