The Daily Shot And Data - February 11, 2016

By Walter Kurtz

Thursday, February 11, 2016 10:42 AM EDT

We start with the United States where Janet Yellen's testimony suggests that the Fed is becoming more concerned about tight financial conditions, the RMB devaluation, and global economic uncertainty.

Source: FRB

Strangely, Yellen left the door open for a March rate hike, disappointing those who expected her to take near-term hikes off the table. In that sense the testimony was not as dovish as some had hoped - in spite of the concerns expressed above.

The January 2018 Fed Funds futures now imply a rate of 62.5bp by the end of next year. That's only 25bp above the current level.

Source: barchart

Here are a number of other economic/market developments in the US.

1. Options on Dec-2017 LIBOR futures are pricing in a rising probability of negative rates in the United States. The markets are questioning the Fed's credibility.

Source: BAML

By the way, here is the relative search frequency on Google for the term "negative rates" over time.

h/t @ReutersJamie

2. As discussed before, the treasury curve continues to flatten. The 10y-2y spread is now around 100bp, the lowest in 8 years. This shows diminishing expectations for longer-term US economic growth.

Source: @FT

Related to the above, betting against treasuries once again turned into a nightmare for some (speculative accounts were net short treasuries going into 2016). Here are the 10-year note futures.

Source: barchart

3. US federal corporate income tax receipts turned lower. Some suggest this is a sign of a recession. Perhaps.

Source: ‏Yardeni Research

4. Are the ISM manufacturing and non-manufacturing indices showing the "wrong way" convergence (service sector activity following manufacturing lower)?

h/t @GoldmanSachs

5. This next trend is one of several reasons that HSBC has downgraded their US 2016 GDP forecast to 2.0% from 2.3%. It shows new orders for non-IT equipment.

Source: HSBC

Next let's take a look at some developments in the energy space.

1. Mining and exploration investment has fallen sharply as a share of total private investment. A portion of the decline in orders (above) is impacted by this trend.

2. Related to the situation above, US total drilling rig count is collapsing.

Source: HSBC

3. The amount of US gasoline in storage hit another record last week.

4. After months of gradual increases, is US crude oil production about to turn lower?

Source: @SoberLook

5. Crude oil implied volatility levels are the highest since 2009 due to huge demand for crude options. Here is the OVX index (oil VIX-equivalent). Are we going to see $20 or $40/bbl first?

Source: barchart

6. Big contango is back (crude oil curve is very steep now). Everyone is looking for storage, including floating storage to take advantage of the "cash & carry" trade. That's why storage has become expensive and in some markets very limited as well. Anyone has a spare oil tanker?

Source: ‏@markets

This mess in the energy space takes us right to US credit markets.

1. The pressure on US HY bonds has been relentless. Spreads continue to rise and weaker HY names (CCC and below) now yield over 21% on average.

Note that some weak credits just need to get restructured. The longer they linger around, the more uncertainty remains in the market. Here is the yield on one of Chesapeake's short-term bonds.

Source: @JavierBlas2

2. The BDC market has practically imploded. Ironically, now would be the best time to launch a BDC given tightening conditions in private credit markets.

Source: ‏Google

3. US auto debt outstanding exceeded $1 trillion, generating record auto sales. Is the party over?

h/t @historysquared

4. It's not just the banks that are feeling the pressure. Here is CIT share price and CDS spread. The market is pricing in weak demand for credit and rising loan defaults.

Source: @pierpont_morgan

5. Related to the above, here is the default rate projection in the leveraged loan market (excluding TXU).

Source: ‏@lcdnews

Leveraged loans have sold off over the past year (with tremendous fund outflows). Are the declines overdone? This could be an interesting opportunity.

Source: ‏Google

Switching to US equity markets, we have a few developments to cover.

1. Investor sentiment is now the worst since 2009. This sure feels like a good contrarian indicator.

Source: Yardeni Research

2. While we generally don't focus too much on specific companies, Twitter is important for the Daily Shot. And it's struggling as user growth stalls.

Source: @fastFT

3. But it's not all doom and gloom in the stock market. Here is Tesla and Cisco after hours.

Source: Google

In other markets, the Topix Banks Index (in Japan) is down some 26% since the BOJ announced negative rates. As discussed before, large bank reserves at negative rates hurt the banking system's profitability. The BOJ is trying to mitigate some of this effect, but the markets are not buying it.

Source: Topix, h/t Stan

Of course the situation above is not helped by the massive yen rally (dollar decline) as dollar-yen drops below 113. The yen is back being the "safe-haven" currency. This has to be extremely frustrating for the BoJ who needs to see a much weaker yen in order to improve growth and generate some inflation (reduce deflationary pressures).

Next let's look at a few developments in the Eurozone.

1. While still minuscule, the CDS-implied German probability of default rose together with Deutsche Bank's troubles. This is pricing in some probability of a major government bailout of DB and possibly other banks - putting fiscal pressures on German government. Again, the probability of this is extremely low, but the markets are obviously not ignoring it.

Source: Deutsche Bank (ironically)

By the way, Deutsche Bank's market cap is now below Danske Bank's (a major Danish bank). Amazing.

Source: @AlasdairPal

2. German government increasingly generates revenue by issuing bonds at negative rates (investors pay Germany to hold their money).

Source: Investing.com

3. Wage growth in the Eurozone these days is all driven by Germany.

4. Greek 5y government bond yield is grinding higher. Kicking the can down the road only goes so far in this jittery market environment.

Elsewhere in the EU, the UK industrial production disappoints. This trend is global, as we've seen industrial output slow in the US, Germany (discussed yesterday), China and numerous other economies.

Source: Investing.com

Now on to emerging markets, where we start with China.

1. Here is Goldman's China GDP tracker.

2. Goldman expects more yuan depreciation after the New Year holidays.

Source: Goldman Sachs

3. Speaking of New Year holidays, the Year of the Monkey kicks off with a 4% plunge in the Hang Seng index (Hong Kong).

Source: Investing.com

4. The Mexican peso futures are hitting new lows. The central bank will be forced to raise rates even if the Fed doesn't.

Source: barchart

5. One US dollar now costs more than 1000 Venezuelan bolívares as the nation's currency collapse continues. This is not going to end well.

Source: @SoberLook

A nation with the largest oil reserves can't generate enough electricity... incredible.

Source: WSJ

Now let's cover a couple of items in commodity markets.

1. The commodities implosion hits oats prices as oats futures fall to the lowest level since 2010. That oatmeal breakfast should be getting cheaper.