The Daily Shot And Data - February 10, 2016
We begin with Japan where the recent Abenomics efforts are about to face some headwinds after the yen has risen to 2014 levels (chart below shows the dollar falling vs. the yen). As a result, the two-day drop in the equity markets resembles what we saw after the Fukushima Accident in 2011.
The 10-year Japanese government bond yield pushed deeper into negative territory.
As expected, the negative 10y JGB yield takes us to $6 trillion of total negative-yielding government bonds outstanding. Amazing.
Source: @fastFT
Switching to the Eurozone, here are several developments we are tracking.
1. German industrial production disappointed, with the decline that was larger than expected. This gives Draghi another reason to pull the trigger on increased stimulus.
2. The euro continues to grind higher, presenting significant challenges for the ECB. Once again, Mario Draghi will attempt to jawbone the euro lower but given the recent unease with the US economy, talking the euro lower may no longer be as effective.
Separately, there is also some concern that the banking sector profitability could be damaged by deeper negative rates on reserves (which is likely the next step in ECB's easing program).
Source: barchart
Note that the decline in US short-term rates in recent weeks is a major driver behind this euro recovery.
Source: @CapEconEurope
3. Greek government bond yields rose again on questions around the viability of the nation's financial system (even after restructuring). How long before Greek banks will be able to raise equity in the private markets?
4. Deutsche Bank shares continued to fall even as the management tried to convince the markets that the bank's balance sheet is solid. CDS spreads remain elevated.
Source: barchart (US-listed shares shown here).
Source: @Ian_Fraser
DB needs to focus on improving its returns on capital, which may require shedding some large businesses.
Source: @FT
DB's CoCo prices (discussed yesterday) declined as well. Deutsche is threatening to buy back some of its bonds to shake out short-sellers. Whatever happens, the CoCo market has been severely damaged and raising capital for European institutions may be more challenging going forward.
Source: @Schuldensuehner, @FT
Source: CNBC
5. As discussed yesterday, the recent pressure on European banks is likely to harm loan growth, creating further headwinds for the Eurozone.
Source: @LJKawa
6. The euro LIBOR is moving deeper into negative territory. There certainly doesn't seem to be any funding pressures in the banking system.
As an aside, many smaller banks are leaving the EU as regulation costs soar. Europe will be increasingly dominated by very large banks - exactly what the regulators don't want. Welcome to the world of unintended consequences.
Source: @MatsGlettenberg
Source: @MatsGlettenberg
Now let's take a look at emerging markets.
1. The Mexican peso hit another record low, approaching 19 pesos to the dollar. That Mexico vacation is getting cheaper by the minute.
2. According to the IIF, "January 2016 marked the 22nd consecutive month of net outflows from China".
Source: @IIF
Continuing with China for a moment, the living standards in that nation are still significantly worse than its key trading partners. Pressure on Beijing to improve this will continue to build.
Source: HSBC, h/t Josh
3. Investors remain concerned about elevated corporate debt levels in emerging markets. Dollar-denominated debt is especially risky. That's why the drop in the dollar in the last few days should be helpful.
Source: @SLI_Global
4. Rumors are circulating that Russian warplanes in Syria continue to fly close to the Turkish border. If true, this is a dangerous development that could further escalate tensions in the region.
Source: @HadiAlabdallah
Turning to commodities markets, here is the latest.
1. Crude oil came under pressure again, with WTI down over 6% and Brent down 7% during trading in New York. Time for another bounce?
Source: barchart
2. Copper prices fell 3% in NY trading as the recent rally fizzles.
Source: barchart
3. US wholesale gasoline is now at 91 cents a gallon; amazing.
Source: barchart
4. The CRB Commodity Index is at the lows not seen since 2002 - a spectacular bubble.
5. Related to the above, the Baltic Dry shipping index continues to fall and is now just a couple of percent of its 2008 peak value.
Source: stockcharts.com
6. We received a note from a Daily Shot reader regarding this spooky chart of the ratio between gold futures and physical gold at COMEX.
Source: @sobata416, Zero Hedge
Apparently this is not the whole story. Here is the comment.
Source: David
Source: Dundee Economics
Now let us review some developments in the United States.
1. This first item is quite surprising. The Atlanta Fed's GDPNow model forecast for US GDP growth in the first quarter of this year is 2.5%. That's above the median forecast by sell-side economists and is not what the markets are telling us.
Source: @AtlantaFed
2. The US Johnson Redbook Retail Sales Index grows the least since 2009.
Source: Investing.com
Related to the above, here are the shares of Sears. How long can this business survive?
Source: Google
3. US small businesses are paying more in compensation but fewer firms now expect to increase pay later this year.
Source: NIFB
Related to the above, small businesses are preparing for weaker sales ahead.
Source: NIFB
4. In the US labor markets we had a sharp increase in the number of Americans quitting their jobs. In theory this is an indication of improved confidence in the job market.
Related to the above, US December job openings count was stronger than expected. It's not clear however if this continued into January as economic uncertainty rose.
Source: Investing.com
5. The US Beveridge Curve continues to show the skills mismatch in the labor force as broader unemployment measures remain elevated relative to the level of job openings (above).
Source: @SoberLook
Here is another way to look at this situation: job openings vs. hires.
6. US wholesalers sales declined on a year-over-year basis. Inventories fell as well.
In spite of lower inventories, weak sales keep US inventory-to-sales ratio elevated. That's generally not a good sign.
7. The above is clearly related to stalled manufacturing activity in the US. While manufacturing is a relatively small part of the economy, it is a large contributor to earnings.
Source: @sobata416, Zero Hedge
8. The Cleveland Financial Stress Index is grinding higher. Hopefully the recent selloff in the dollar should ease financial conditions somewhat.
9. US household formation started improving when "doubling up" slowed.
h/t Josh
10. It's good to see one industry doing well. According to the Fed (and US Bureau of the Census), growth in the sale of alcoholic beverages by wholesalers continues to rise at a healthy clip.
11. Here is another Daily Shot letter to the editor discussing the relationship between low unemployment and recessions.
Source: Asanka
Source: Asanka
Finally, we take a look at a couple of items in the credit markets.
1. Here is the 3-month LIBOR vs. 3-month CD rate. Someone is getting ripped off.
Source: @SoberLook
2. High yield bonds remain under severe pressure (in addition to extremely poor liquidity in bond trading). The first chart below shows the Merrill Lynch HY Index spread and the second is the CCC (and below) bond yield.
Turning to Food for Thought, we have 4 items this morning:
1. Americans have higher death rates. Too angry?
Source: @business
2. The New Hampshire primaries have reshuffled the GOP nomination odds in the betting markets. Rubio has given up his first place status.
Source: @pivt
3. It's interesting to see teens preferring reading to TV. That can't be right ...
Source: @StatistaCharts, h/t Jake
4. Interesting commentary on Moore's law.
Source: @erikbryn
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