The Daily Shot And Data - June 16, 2016

By Walter Kurtz

Thursday, June 16, 2016 11:00 AM EDT

Greetings,

We begin with the United States where the Fed left the rates unchanged and struck a dovish tone. The charts below show the "dot plot" representing the members' projection of the Fed Funds rate by the end of each year. The first dot plot is from March and the second from this week's meeting.

Source: @FT, ‏@EricGPlatt

Here are some observations.

1. Six FOMC members (vs. only one in March) see just one rate hike in 2016.

2. There is a Narayana Kocherlakota copycat on the FOMC, projecting no rate hikes for three years (red arrows above).

3. The median projected pace of rate increases shifted lower from March.

4. The FOMC's median rate path remains significantly steeper than the Fed Funds futures imply.

Source: ‏@jbjakobsen

Below is Goldman's summary of the FOMC statement.

Source: Goldman Sachs

Once again, the FOMC downgraded the longer-term GDP growth forecast. It's interesting that with all the political rhetoric out there about improving growth, the Federal Reserve does not believe that in the long run, the US will grow faster than 2% per year.

1. In other economic news from the US, the core PPI increased more than forecast.

2. The Empire State (NY area) manufacturing gauge beat expectations in June.

3. The US 30yr mortgage rate is back below 3.8% which should provide some tailwind for the housing sector.

4. US corporate federal income tax receipts/deposits seem to have peaked. Is this something to be concerned about? Note that the slowdown followed the strengthening of the dollar.

Source: Yaedeni Research

5. Higher labor costs are putting pressure on corporate margins.

Source: BNP Paribas, ‏@vexmark

6. Industrial production and capacity utilization were materially weaker than forecast.

7. US auto production slowed.

8. US O&G drilling activity slowed to the lowest level in recent history.

Similarly, here is capacity utilization in the mining sector. Unprecedented.

Now let's look at how markets reacted to the FOMC statement.

1. The Fed Funds futures now imply less than a 50% chance of any rate hikes this year.

Source: @barchart

Source: CME

2. The US dollar took a hit in response to the Fed's announcement.

3. Treasury yields dropped.

In fact, this was the lowest 10yr treasury yield close since late 2012 (intraday the yield dropped lower, including the flash crash).

4. The 10yr - 2yr treasury spread remains near multiyear lows (flatter yield curve).

5. The gold rally continues amid falling real rates.

Source: @barchart

6. Oil had a rough few days (down 2% on the day), with the Fed statement and softer US dollar having little effect.

Source: @barchart

7. Equities pushed higher in response to the FOMC but then sold off sharply into the close.

Now on to Canada, where employment data in May shows further imbalances. Remember yesterday's chart showing record residential property investment?

Source: Credit Suisse, @joshdigga

Moreover, Canadian wage growth seems to be slowing.

Source: Credit Suisse, @joshdigga

Turning to the UK, here is a comprehensive list of Brexit polls/odds. The PredictWise aggregate is also shown.

Source: @Stifel

Source: @PredictWise

Why is everyone so concerned about the EU referendum? As an example, here is the Brexit impact on the currency markets (trade-weighted currency moves shown), which is similar in size to the Lehman disaster. Given the extraordinary tightening in financial conditions in such an eventuality and the inability of central banks to react, a global recession is quite possible.

Source: @ReutersJamie, Goldman Sachs

On a brighter note, the UK unemployment rate fell to 5% for the first time in over a decade.

The UK's nominal wage growth is relatively strong, given near-zero inflation. Will the voters take the view that the economy will perform even better outside of the EU?

1. In the Eurozone, the 10 yr Bund yield is holding in negative territory.

Source: Investing.com

Here is Deutsche Bank's comment on negative Bund yields.

Source: Deutsche Bank, @NickatFP

Staying with negative rates, consider the following facts:

1. In the Eurozone, about 11% of the government debt no longer qualifies for the ECB purchases because the yield is below 0.4%. And the ECB has much more debt to buy in order to meet its target.

2. Almost half of the Eurozone's government debt now has a negative yield.

3. 16% of Europe's investment-grade corporate debt has a negative yield.

Source: @fastFT

Source: Reuters

Separately, the eurozone's trade surplus is now at a record high.

Source: @fastFT

France reports its first positive inflation reading in 7 months.

In Switzerland, the 10yr yield dips below negative 50 basis points.

It seems that these increasingly negative bond yields are not helping to bring down mortgage rates in Switzerland.

"Mortgage markup" is the difference between the (fixed) 10-yr mortgage rate and the 10-yr government bond yield.

Source: @auaurelija

The 10yr JGB yield is also drifting lower into uncharted territory.

Turning to China, the nation's M2 (broad money supply) growth declined despite higher than expected loan growth. Loans are no longer the only source of liquidity in China.

The overall credit growth is slowing (which is why M2 growth declined). From Goldman: China's "total social financing after adjusting for local government bond issuance slowed down in May."

Source: Goldman Sachs

As discussed on Tuesday, the overall fixed asset investment decelerated further last month. While the government's push into project finance represented an injection of liquidity, the funds haven't made their way into the broader economy (M2). Moreover, this investment growth is not sustainable without Beijing's support.

Source: Natixis, @joshdigga

1. In other emerging markets, Venezuela is desperately trying to delay the inevitable. The FX reserves continue to dwindle.

Source: Reuters

2. Argentina's new government is finally reporting a more accurate inflation measure - over 4% per month. This improved transparency is a step in the right direction.

3. As discussed earlier, Nigeria is indeed about to abandon the currency peg. It will be interesting to see where the naira will find a bid next week.

Source: Daily Mail

This next graph shows the divergence between corporate and financial debt after the financial crisis. While banks were forced to delever, corporations kept piling on more debt (especially in emerging markets).

Source: ‏@IIF

In commodities markets, here are the crude oil managed money long and short positions. The market certainly looks extended.

Source: Macquarie, ‏@joshdigga

Take a look at the CME milk futures which were up 3% on the day. The bottom chart shows the volume in all the CME milk contracts.

Source: @barchart

In the equity markets, Synchrony Financial spooked the markets by showing an unexpected rise in credit card charge-offs. Is the US consumer (or a segment) under strain again? That's why many regional banks sold off sharply on Tuesday.

Source: @WSJ

Finally, the shares of Chipotle keep falling (despite no new cases of E. coli) as the market absorbs the full extent of the reputational damage and the resulting hit to earnings.