The Daily Shot And Data - March 30, 2016

By Walter Kurtz

Wednesday, March 30, 2016 10:30 AM EDT

Greetings,

Once again we begin with the United States where the Fed Chair Janet Yellen struck a decisively dovish tone. Here is the key paragraph from her speech on Tuesday.

Source: FRB

She is basically saying that there is no rush to raise rates because the Fed has plenty of room to hike if inflation picks up but little room to cut if things go "pear shaped". She is clearly not convinced by the FOMC's own forecasts (especially with respect to inflation) and views significant risks to the downside.

The futures-implied probability of a rate hike in April dropped from 11.5% to 4.6% in response to her statement.

Source: CME

Here are the reactions across several major markets to the speech.

1. The 5-year treasury note futures jumped sharply.

Source: barchart

2. The 2-year treasury yield fell below 0.8% again.

3. Precious metals rallied. Here is gold and platinum.

Source: ‏barchart

4. The euro rose above 1.13 again (a frustrating situation for Mario Draghi).

The Kiwi dollar rose 2%.

Source: ‏barchart

And the dollar index (DXY) is approaching the 95 level again.

Source: ‏barchart

5. Inflation expectations jumped in response to the speech, with TIPS outperforming treasuries.

Source: Ycharts.com

6. In the equity markets, US small caps (Russell 2000) rose almost 3% on the day.

Source: Ycharts.com

7. With the risk-on sentiment returning, VIX fell back below 14.

Source: barchart

It took the Fed a couple of years to realize that US monetary policy can't be managed in isolation. Global risks and the dollar are becoming increasingly important. While the Fed doesn't have a formal target with respect to the strength of the US dollar, informally the dollar has become a third mandate (employment, inflation, and to some extent the dollar exchange rate).

Source: Deutsche Bank, h/t Stan

The dilemma, of course, is how one ultimately exits the easy monetary policy.

Source: Alex

In other economic news in the United States, Lennar, a large homebuilder, had a surprisingly strong quarter. Demand for housing remains robust.

Source: @YahooFinance

The key trend is a low inventory of housing, which should keep Lennar busy. Also, many developers continue to be hampered by the lack of skilled workers.

Source: @YahooFinance

Lumber prices are still moving higher as demand picks up both domestically and abroad. A stronger Canadian dollar helps as well.

Source: barchart

In the equity markets, homebuilders rose sharply this week. Housing could provide a boost to the US economy in the near-term.

Source: Ycharts.com

US home prices continue to grow at over 5% per year nationally. Here is one market that stands out: San Francisco home prices are above the pre-recession peak.

Source: Ycharts.com

Bank shares underperformance worsened in response to Yellen's speech as rate hike expectations decline.

Source: Ycharts.com

Here are the Fed Funds futures vs. the banking ETF. Lower rates (and a flatter curve) mean lower interest margins for banks. Banks have been hoping for higher rates by now.

Source: barchart

Not all "risk-on" markets rallied in response to Yellen's dovish comments. Here is copper for example.

Source: barchart

Barclays published a report showing managed money accounts now quite long copper and oil - which of course could reverse rapidly.

Source: @NickatFP

Moreover, another report suggested that Chinese demand for copper has been significantly overestimated. A great deal of copper inventory in China has been used as collateral for speculative activity (especially carry trades) rather than by the end users.

Source: Bloomberg.com

There was also some bearish news regarding crude oil.

Source: Gulf News

What happened to "freezing" production?

In other commodity markets, soy futures rose to a 7-month high on slower selling by farmers in Brazil and a rally in soybean oil.

Source: barchart

Switching to the Eurozone, here are a few observations.

1. Credit conditions continue to improve, as the broad money supply grows at 5% per year.

Loan growth to both households and corporations keeps improving. If there was some negative effect from the massive banking selloff (both equity and credit) in February, it hasn't yet shown up in these figures.

Source: ECB (loan balances adjusted for sales and securitization)

2. Eurozone's overnight interbank rate (similar to the Fed Funds rate) hits record low (deeper into negative territory) -

Source: ECB

3. Spain's 5y government bond yield hit new lows on the ECB-driven demand.

4. Deutsche Bank's CDS spread is still elevated and remains correlated to the German sovereign CDS spread.

Source: @Schuldensuehner

5. As discussed before, France needs to focus on restructuring its labor markets. French corporations have a significant tax burden and French workers also pay taxes that are much larger than the OECD average. This hurts the incentive structure in the labor markets. It's also not helpful that the unemployment benefits are very generous.

Source: HSBC, h/t Josh

Japan's industrial production fell sharply and some are concerned that the nation may slip into recession again.

Source: Reuters

Next we have a few developments in China.

1. Corporate defaults in China are picking up. Here is one headline.

Source: Reuters

China's AAA - AA corporate spread spikes as a result of the Dongbei Special's fiasco. It will be interesting to see how this impacts China's wealth management products (WMP) businesses who hold (and leverage) corporate bonds.

Source: @Umesh_Desai

2. Shanghai's housing market is hot as transactions spike (both volume and value) ...

Source: GS, h/t Josh

Source: GS h/t Josh

3. Based on the latest IMF methodology for "risk-adjusted" minimum reserve requirements, China's reserves have declined dramatically. This should give the PBoC some pause in further devaluing the RMB because such action could trigger more capital outflows and declines in reserves.

Source: Deutsche Bank, h/t Josh

4. Who is selling crude oil to China? Here is the breakdown over time.

Source: Barclays, h/t Josh

Now let us review several developments in other emerging markets.

1. Emerging markets portfolio inflows jump as investors look for value - and desperately hope that the dollar does not begin to rally again.

Source: ‏@RBS_Economics

2. Here is the external debt as a percentage of the GDP for select nations in the Middle East. More on this later.

Source: HSBC, h/t Josh

3. Saudi Arabia's broad money supply is declining. Is the nation experiencing tighter credit conditions?

4. Hong Kong's exports decline much more than expected.

5. Hungarian unemployment hits the lowest level in over a decade.

6. Brazil's consumer confidence remains near record lows.

Brazill is also seeing tighter credit conditions as banks struggle with bad loans.

Next we have Pimco's global growth projections. Note that India should really be separated because its growth rate is above that of China.

Source: @PIMCO

In credit markets, it seems that the leveraged loan businesses will be forced to shorten settlement periods for secondary loan trades. More loan settlement jobs are likely to be created by this, especially if trading volumes pick up.