The Daily Shot And Data - February 22, 2016

By Walter Kurtz

Monday, February 22, 2016 9:55 AM EDT

Greetings,

We begin with the United States where inflation in January surprised to the upside, with the core CPI now firmly above 2%.

Source: Investing.com

Here is the month-over-month change in the core CPI.

Additionally, the so-called "sticky" CPI, representing the less volatile components of the CPI index, is at the highest level since 2009.

Cost of shelter continues to grow at over 3% per year - an unwelcome development given the modest wage growth.

Also, the medical care component of the CPI rate is on the rise again.

This tells us that so far there is no evidence of deflation which some have been predicting for quite some time. Moreover, this puts the Federal Reserve in a bit of a bind as this CPI stabilization coincides with sharp declines in inflation expectations. Here is a quote from James Bullard (FRB-St. Louis) on inflation expectations. He is clearly not comfortable raising rates for now.

Source: FRB - St. Louis

In other US economic news, here is the Economic Cycle Research Institute (ECRI) leading index. A number of economists track this index closely and thus far it's not painting a good picture for the US economy.

Source: ECRI

Turning to US credit markets, ...

1. ... it is interesting to see that in spite of the diminishing rate hike expectations in 2016, credit spreads remain near multi-year highs.

Source: BNP Paribas

2. Here is how the BBB corporate spreads have risen during this credit bear market cycle vs. a number of the previous ones.

Source: Morgan Stanley

3. So far we don't have a great deal of evidence of tighter bank lending in the United States, as loans on banks' balance sheets grow at 8.5% per year.

Source: barchart

US corporate loans are growing at 11% per year. Most expect this to slow, but at this point it doesn't look much like a credit crunch.

There has been some slowdown in corporate loan growth for small banks (which presumably lend mostly to smaller firms), but even those balance are growing at 8% per year. This is an important indicator to monitor for signs of credit tightening (small businesses generate a significant proportion of jobs in the US).

4. A potential concern recently has been the slowdown in deposit growth. One of the reasons why this is another important indicator to track is that in a fractional-reserve system new deposits are created by new loans. A weaker deposit growth could mean a slowdown in bank credit expansion.

US muni markets have enjoyed an unprecedented rally since the 80s. Are we near the bottom for muni yields?

Source: @business

Switching to the treasury markets, banks now hold record amounts of treasury and agency securities.

Moreover, dealers are holding longer duration treasuries, resulting in a multi-year high in treasury risk (-DV01). This has been quite a profitable position - for now.

‏Source: Morgan Stanley

Now let's look at a few updates in the energy markets.

1. WTI crude gave up some 4.5% on rising inventories on Friday. The volatility in crude remains elevated, with 4-5% moves quite common these days.

Source: barchart

2. US oil rig count decline accelerates again.

Source: Investing.com

3. US Crude oil storage futures came off the highs as markets weigh new capacity coming online. Prices are still elevated as storage remains limited.

Source: barchart

4. Here is a summary of the production freeze deal - it's a bit like herding cats.

Source: @Schuldensuehnerm, @business

5. Sovereign funds of a number of energy producing states have seen outflows. This has been one of the reasons for the pressure on the equity markets, especially financials (usually some of the largest equity holdings for a number of SWFs are financial firms' shares).

Source: @FT, @Schuldensuehner

Source: ‏@business

6. US natural gas remains under pressure.

Source: barchart

In emerging markets here are some of the trends we are tracking.

1. The clock is ticking for Venezuela as large debt service payments are due. This brings back memories of Greece except there is no Eurozone to come to the rescue here.

Source: @EMgist, The Economist, BAML

2. The daily FX interventions by Mexico's central bank have been completely ineffective in halting the peso's declines. The bank will attempt to change its approach.

Source: BNP Paribas

3. Colombia's imports collapse as the weak peso makes foreign goods unaffordable.

Source: Investing.com

Source: barchart

4. China's investment as a percentage of the GDP is turning lower but still way above peaks reached by many other economies. This is not sustainable.

Source: BAML, h/t Cedric

Mortgage borrowing in China hit a new record. Credit in China is flowing again and should cushion the decline - for now...

Source: @Schuldensuehner, @business

In the Eurozone trade surplus has been offset by domestic investors chasing yield abroad. Presumably that's what the ECB wanted since such activity puts downward pressure on the euro.

Source: BNP Paribas

Eurozone inflation expectations remain near record lows, a clear sign that the ECB is planning to expand its easing program. The latest minutes from the central bank support that thesis.

Source: @acemaxx, @MorganStanley

Related to the above, German producer prices (PPI) have been declining on a year-over-year basis since 2013.

Source: Investing.com

German sovereign CDS spread, while still extremely low, continues to be correlated to Deutsche Bank's CDS. Once again, the market is pricing in some (very low) probability of a bank bailout by the German government.

Source: ‏@Schuldensuehner

Based on one measure, the negative rates experiment has not had the desired effect for some of the larger economies.

Source: @business

Speaking of the euro, speculative accounts are cutting back their short euro exposure while remaining net long the yen.

Source: Investing.com

The London mayor Boris Johnson has joined a number of other prominent Britons demanding UK's exit from the EU. This is making the currency markets a bit jittery, with the pound losing some ground in early trading.

Source: barchart

Canadian inflation was higher than expected as the the loonie weakness raises import costs.

Source: Investing.com

One place we haven't seen much of the commodity deflation is lithium traded in China. Interestingly this is one of the signs of "economic rebalancing", with demand for steel and lithium going in opposite directions.

Source: @PlanMaestro, @business

Bitcoin rallied some 4.5% on Saturday - impressive volatility.

Finally, we are seeing venture-backed valuations returning to more reasonable levels. This is a rough outcome for the entrepreneurs/management of firms who sold preferred return instruments to VCs at high valuations (upon a sale, VCs need to get their money back before the management gets paid).