Greetings,

This morning we want to start with the energy markets where the latest US Department of Energy report confirmed yesterday's API data regarding another large oil inventory build.

1. US total crude oil inventory reached a new post-1939 high. The second chart shows the inventory level in terms of days of supply. This increase was materially larger than expected.

 

2. Oil inventories at Cushing, OK (WTI futures settlement hub) hit another record. The increase was also higher than forecast.

The markets shrugged off this development, as WTI futures approach $35/bbl.

Source: Investing.com

3. One development that was a bit surprising is the selloff in crude oil storage futures - especially given all the inventory build. Are the markets betting on US production falling off quickly?

Source: barchart

4. Indeed, US oil production is finally declining, albeit very gradually.

5. US crude oil imports remain elevated relative to last year. This has to be frustrating for US oil producers as some refiners tap foreign cargos rather than drawing on domestic supplies.

6. US distillates inventories (heating oil, diesel) are above the 5-year range. The inventory level is also shown in terms of days of supply.

 

Distillates demand remains quite weak relative to last year. There is some debate as to how much of this is weather-related vs. economic weakness.

While many dismiss the weather as a factor, it's important to note that the El Nino driven warm weather patterns have significantly cut demand for heating fuel. Apparently February has been the warmest month on record relative to historical averages.

Source: Anthony Watts

7. Warmer temperature is in fact the main reason why the US natural gas gave up another 4.25% on the day. The last time we saw natural gas prices this low, Bill Clinton was in the White House.

Source: barchart

8. US coal carloadings fell to the lowest level on record - very few firms are shipping coal via rail these days. Of course given the cheap natural gas (above) why would you?

Source: Yardeni, h/t @merrillmatter 

It's worth noting that while the US coal industry has imploded, we are seeing some minor improvement in China.  The next chart shows coal futures on the DaLian Commodity Exchange (China). Fiscal stimulus boosting demand?

Source: barchart

One final energy-related item worth mentioning is the divergence between investments in energy equities and investing directly in oil. The USO ETN shown below has underperformed dramatically, in large part due to contango (steep positively sloping forward curve).  

Source: Ycharts.com

Continuing with commodities, cash metal prices seem to have bottomed. Some have suggested that this bottoming coincides with a number of trading groups getting out of the metals business.

Source: barchart

Here is the spot aluminum price for example.

Metals and mining shares went vertical in response (up 8% on the day) as investors sensed a turnaround in commodities.

As discussed yesterday, grain prices have been under pressure (we showed wheat futures falling). Here is a 5-year chart of soy futures.

Source: barchart

Weak grain prices have made their way into Monsanto's P&L. Ouch.

Source: Google

In equity markets the high-beta shares popped on improved risk appetite (related to the mining shares rally above).

Source: Ycharts.com

US equity investors remain quite bearish - often a good contrarian indicator.

Source: Yardeni Research

In credit markets, the latest US retail HY bond fund inflow has been impressive indeed, explaining some of the HY market outperformance recently.

Source: Credit Suisse

Hard currency EM bond issuance started weakening in late 2014 as oil prices fell. The 2015 issuance was a fraction of what we saw in recent years.

Source: BAML, h/t Josh

Now let's shift to the Eurozone where we have a few items to cover.

1. Germany issued 5-year bonds at record lows. Interest expense is now a revenue item...

In fact the volume of bonds with negative yields hit $6.4 trillion last week.

Source: @ReutersJamie

2. Eurozone's PPI deflation, which started in 2013 continues through today. 

3. As the Eurozone inflation expectations fall to record lows, it's worth pointing out the divergence from oil prices as well as equity markets. Markets remain highly skeptical of Draghi's ability to reignite inflation.

Source: @Schuldensuehner, RBC

Source: @Schuldensuehner, RBC

Market expectations for the first rate hike by the Bank of England have pushed out dramatically. It's amazing to see expectations of the BoE to hike around the time the ECB is expected to do so - some 50 months out. That's amazing. This tells us that the Fed now stands alone in its quixotic quest to raise rates.

Source: @fastFT

One other item worth mentioning on the UK economy is what looks like a slowdown in construction. To be sure there is still growth in the sector but it's not as feverish as it was a year ago.

Source: ‏@MarkitEconomics

Speaking of the Fed, the probability of 2016 rate hikes in the US is creeping up again (discussed on Monday). Bloomberg says the probability is now 65% by the December FOMC meeting. The second chart below shows the Jan 2017 Fed Funds futures declining (expected rate rising).

Source: ‏Credit Suisse

Source: barchart

One data point that is adding the this hike probability is the better-than-expected increase in private payrolls - as reported by ADP.

Source: ADP

It's worth pointing out that ADP shows US manufacturing still shedding jobs.

Source:  ADP

One indicator pointing to the Fed potentially staying put on rates for the next few months is the increased focus on "uncertainty" - particularly as it relates to other major economies and the dollar. Is that enough to keep the FOMC from pulling the trigger again this year?

Source:  ‏@bySamRo

As discussed before, the shelter component of the US CPI has dramatically outpaced the headline CPI. Given weak wage growth, this is a worsening problem.

Source: @sobata416 @ConnectedWealth

Now we have a couple of notes on China.

1. China's services PMI report came in at 51.2 vs. 52.6 expected. Here is the composite output PMI. Once again the main concern is the worsening employment situation - something Beijing is extremely concerned about.

Source: Markit

2. As discussed yesterday, Moody's is focused on China to a large extent because of the chart below. In order to stabilize the employment situation (above) as well as keep banks afloat (with bad loan balances rising), China's government will need to borrow more money.

Source: @nicoleusinclair 

Finally, the so-called "frontier markets" which got clobbered last year, are outperforming in 2016. 

Source: @markets, h/t Jake

Turning to Food for Thought, we have 5 items this morning:

1. US land prices are under pressure in most states except in Wisconsin, where apparently some high-tech farming and the dairy industry have been keeping farms (relatively) profitable. Given the agricultural commodities implosion, is this trend about to end even for Wisconsin?

Source: @ChicagoFed, h/t Jake

2. A history of global health epidemics in one chart. A good time to become an epidemiologist.

Source:  @FastCompany, h/t Jake

3. Video games aren't just for younger generations.

Source: ‏@pewinternet, h/y Jake

4. Designers (especially those focused on user experience) at online firms are starting to earn salaries comparable to engineers.

Source: @PitchBook, h/t Jake

5. Google search frequency for "how to move to Canada". Hmmm...

Source: Google Trends, h/t @smfrogers