The Daily Shot And Data - June 13, 2016
Greetings,
We begin with the labor markets in the United States. As the total unemployment claims chart shows, the US is certainly not experiencing any significant layoffs - yet.
However, hiring has apparently slowed. The recruiting firm Heidrick & Struggles, for example, has been underperforming. Typically headhunters' earnings serve as a leading indicator for US labor markets.
Source: Ycharts.com
Moreover, public US shares that have recently outperformed did so as a result of lower costs rather than top-line growth.
And corporate cost-cutting has resulted in a hiring slowdown - as shown by the Morgan Stanley Hiring Plans Index. Therefore, the disappointing May payrolls report may not be a one-off occurrence as some have suggested.
Separately, here is the demographic component of the declining labor force participation: rising retirement rates.
Source: Barclays, @joshdigga
By the way, Canadian labor force participation has been falling as well.
While the hiring slowdown in the US is concerning, some indicators still point to improvements in economic growth.
1. The ECRI index of leading indicators continues to rise.
Source: @businesscycle
2. US consumer sentiment has been somewhat better than expected, with the Current Conditions Index particularly strong.
3. Economists' consensus GDP growth for 2016 is no longer declining.
Source: @Not_Jim_Cramer
In other economic developments in the US, the U Michigan long-term consumer inflation expectations hit a record low. This report is not going to be helpful for the FOMC hawks.
By the way, just the opposite is happening in the UK with respect to consumer inflation expectations.
Source: @RBS_Economics
The TIPS-implied US inflation expectations (breakeven) curve has been flattening rapidly. The chart below shows the spread between the 10yr and the 5yr breakeven rate. Inflation is expected to be "lower for longer."
The weak payrolls report on the 3d of June and Friday's market jitters have dramatically changed the implied probability of rate hikes in 2016.
Source: CME Group
1. Treasuries continue to rally as the 10yr yield falls to 1.62%. For technicians, this pattern looks quite interesting.
2. Dealers are holding record amounts of long-dated treasuries. They are short futures and swaps against this position.
Source: Deutsche Bank
3. US 5yr real rates are in negative territory, which indicates easier monetary conditions.
4. This next chart shows the US 10yr real rate (inflation adjusted yield based on TIPS) vs. gold. Gold has been very sensitive to real rates recently.
1. In the energy markets, US rig count increased for the second week in a row. While these increases were small, this tells us that the decline in rig count may have bottomed for now. Higher prices are starting to have an impact. Will production bottom as well?
2. Crude oil fell over 3% on Friday and is lower again in Sunday trading. The rig count situation above and a strengthening dollar have not helped.
Source: @barchart
1. Turning to currency markets, the US dollar bounce is indeed spoiling the party for risk assets (commodities, equities, EM).
Source:@barchart
2. Euro-yen is at a 3-year low, driven in part by Brexit risks as well as the BOJ's refusal to accelerate bond purchases. This creates a real problem for Abenomics, making Japan's exports less competitive relative to Germany.
Source: @barchart
3. We've had a sizeable rally in the Swiss franc (a "safe-haven" currency) on Brexit fears (chart shows the euro declining against the Swiss franc). This trend does not help Switzerland's fight with deflation.
Source:@barchart
3. The British pound implied volatility index just keeps moving higher on Brexit risks.
4. The British pound has declined sharply in the past couple of days.
Source:@barchart
Continuing with Brexit risks, the latest polls seem to indicate a shift toward the "leave" camp. The German Finance Minister Schäuble warned of the "Brexit domino effect," with referendums like the one in the UK potentially popping up all over the EU.
Source: The Independent
The FT poll average now shows the "Stay" percentage falling below the one for "Leave".
Source: @FT
The betting markets still have the "Leave" probability at about a third - but rising. For most analysts the base case is that "Stay" will prevail but everyone agrees that the situation is fluid.
Source: @predictwise
Continuing with the UK, the 10-year and 30-year gilt yields hit fresh lows on Friday.
Source: @FT
To put the situation into perspective here is the UK 10yr gilt yield since 1729. That's right, bond yield history is available that far back.
Source: Deutsche Bank
Elsewhere in Europe, Norwegian CPI rose more than expected, hitting the highest yearly increase since 2010. Not all of Europe is in deflation.
Source: UBS
1. In the Eurozone, the ECB continues to lower the core inflation forecast for 2016.
Source: Deutsche Bank
2. Greek banks are close to being allowed to post Greek government bonds as collateral with the ECB. This will tremendously improve their liquidity conditions. Nevertheless, the nation's bank shares were down 10% on Friday.
3. Italian bank shares were also down significantly (5%) on Friday, hitting the lowest level in 2 years.
Source: Investing.com
4. The 10yr Bund yield is below 2 basis points - touching zero at some point on Friday. This is just amazing.
The Swiss 30yr government bond yield is now 7 basis points.
The 10yr JGB yield also hit a record low, going deeper into negative territory.
It's important to note that while the volume of bonds with a negative yield hits a record, bonds with a negative real yield has been declining. This trend underscores the central banks' challenge in pushing up inflation (and inflation expectations).
Source: @WSJGraphics, @JmBadalamenti
1. Turning to emerging markets, the economic situation in Venezuela continues to deteriorate as social unrest worsens. Very sad.
Source: Reuters
2. The Russian central bank cut the benchmark interest rate to 10.5% as expected (discussed here a few days ago). More cuts are likely to follow if the ruble remains stable.
Separately, the Russian trade surplus continues to decline - which will be a drag on the GDP growth.
Source: @barchart
3. The Mexican peso reversed its recent rally - down over 2% on Friday. Will it hit 19 to the dollar again?
Chart shows the number of pesos one dollar buys.
1. In the equity markets, the S&P500 vol curve indicates increasing market jitters over the past week. The chart shows the "3-month VIX" minus VIX.
Source: Ycharts.com
2. The latest UBS report shows crowded long and short stocks globally (note that much of the S&P500 short is hedging).
Source: UBS
Puerto Rico's bonds continue to move higher in response to the House plan.
Source: @SoberLook, S&P
Finally, we've had numerous questions regarding the recent guest contribution from Sam DeRosa-Farag. In particular, many Daily Shot readers were interested in the "illiquidity premium" estimation (below). For more information on the topic, please see Sam's presentation here. If you are unable to download this because your paranoid network administrator is blocking it, please email us to get your copy.
Source: Sam DeRosa-Farag
Turning to Food for Thought, we have 6 items this morning:
1. The most expensive cities in the world for residence and for work.
Source: @wef
2. Health insurance coverage by income level ("FPL" = Federal Poverty Level)
Source: KaiserFamFound
3. According to VOX, light pollution is preventing 80% of Americans from seeing the Milky Way.
Source: @voxdotcom
4. Highest-paid degrees on Wall Street.
Source: @wef, Business Insider
5. The "Economic Freedom" Index.
Source: @MaxCRoser
6. Goldman's projection of the UEFA Euro 2016 outcome.
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