Greetings,

We begin with China where Deutsche Bank forecasts a rather different GDP growth path than the consensus projection.

Source: Deutsche Bank

As discussed before, the bump in the second quarter will come from the new government stimulus. As China's private fixed asset investment (FAI) growth declines, state-owned enterprises (SOE) step in. 

Source: Morgan Stanley

However, as the Deutsche Bank's forecast shows, the impact of the stimulus will be short-lived. It takes ever-increasing amounts of debt to generate the same amount of GDP growth. There is only so much the central government can do without massively increasing public debt levels.

Note that this curve (below) is not unique to China.

Source: Morgan Stanley

Speaking of debt levels, Deutsche Bank's China analysts worry about rising leverage in "shadow" banking.

Source: Deutsche Bank

There is also concern about the nation's corporate debt market. China's corporate bond demand is in part driven by short-term wealth management products (WMPs). Losses could result in panic WMP redemptions, leading to more losses.

Source: Deutsche Bank

Related to the above, China's companies are significantly more levered than their peers in other emerging markets.

Source: Morgan Stanley​Separately, China's crude oil imports remain robust.

Jefferies invokes Led Zeppelin in describing the country's crude import growth.

Source: Jefferies

Source: Jefferies

In the final comment on China, we note the increasing trade tensions with the United States. Political pressures, especially during the presidential election year, are likely to exacerbate this trend. 

Source: @WSJ

Turning to Japan, here are a couple of updates from Credit Suisse.

1. Japan's labor markets continue to tighten. Without adjustments to the extremely restrictive immigration policy, the demographics-driven labor shortages will cap GDP growth. A lesson for the US perhaps?

Source: Credit Suisse, @joshdigga

Source: Credit Suisse, @joshdigga

2. The Bank of Japan owns the JGB (Japanese government bonds) market, buying the bulk of new issuance. The central bank is also raising the duration of its holdings, thus increasing demand for duration in the market. It's hard to see how insurance firms (who need long-term assets to match long-term liabilities) will stay in business in this environment without drastically shifting their investment strategies.

Source: Credit Suisse, @joshdigga

Source: Credit Suisse, @joshdigga

Australian consumer confidence rose in response to the RBA rate cut. It's interesting to see consumers this focused on central bank activities.

Source: Goldman Sachs

Next, we have a couple of updates on emerging markets.

1. Investors in the Philippines decide that the newly elected government is OK for business, sending shares sharply higher. 

2. Brazil's currency and shares rally as the Rousseff impeachment effort picks up momentum again. The first graph below shows the number of Brazilian real one dollar buys (the lower the number, the stronger the real). The second chart shows a 3.4% pop in the stock market. Will the replacement government do any better in stabilizing Brazil's economy? Is this enthusiasm justified?

Source: barchart

Now let's go to the Eurozone for the following updates.

1. According to Morgan Stanley, Greek banks could rise 90% in a favorable bailout scenario. The country's bank index was up 6.7% on the day.

2. Ireland 3yr government bond yield is deep in negative territory. Amazing.

3. German trade surplus hits a new record, rising much faster than expected. This leaves some analysts puzzled. Domestic spending needs to rise sharply in Germany to stabilize this growing imbalance.

 

Source:Goldman Sachs 

4. The French government is pushing ahead with the much-needed labor reforms (bypassing the National Assembly). It's a politically perilous move and the Hollande Administration should be applauded for this effort.

Turning to the UK, the population growth continues to outpace housing construction. Housing shortages will continue.

Source: Deutsche Bank, ‏@joshdigga 

Separately, the March-2017 sterling LIBOR futures imply 59 basis points for the GBP LIBOR. This rate is roughly the same as that implied by the June-2016 futures. The curve is extremely flat in the short-term (and even slightly inverted ahead of the Brexit referendum). Markets see the Bank of England on hold for a while.

Next, we have a number of updates for the United States.

1. US job openings were stronger than expected.

2. The US Beveridge curve shows that the skills gap in the US persists. Based on the pre-recession experience, the elevated job openings should be soaking up more unemployed and underemployed workers than it does.

Source: @SoberLook

The ratio of hires to job openings is another way to look at the issue.

3. One area where hiring has been quite strong in the first quarter is retail.

Source: Deutsche Bank, @joshdigga

4. The next 3 charts point to renewed strength in the US housing market.

• Construction job openings

• US inventories-to-sales ratio for lumber & construction materials

• Lumber futures continue to rise

5. While housing remains a bright spot in the US economy, autos & parts inventories-to-sales ratio shows a potential issue ahead. Dealers may be forced to do significant discounting to move this rising inventory of vehicles.

6. An even more acute problem is developing in apparel where the inventories-to-sales ratio spikes to multi-decade high. There is quite a bit of unsold clothing sitting out there. As a result, we see apparel retailers underperform sharply.

 

Source: Ycharts.com

7. In general, US inventories remain elevated relative to final sales.

Source: Deutsche Bank, @joshdigga

8. US small businesses are forced to pay higher wages while having to cut prices. This was fine in the 90s when margins were high but is becoming problematic in the current environment (as margins are getting squeezed).

Source: NFIB

9. According to Deutsche Bank, "temp hiring has been a leading indicator of the overall labor market". Does this mean weaker payrolls growth ahead?

Source: Deutsche Bank, @joshdigga

In the commodities markets, US soy and soy meal futures rise to an 18-month high as the USDA tightens inventories outlook.

Source: barchart

Source: barchart

Switching to the equities markets, Disney results disappoint. This sent US stock futures lower in after-hours trading (after a broad rally on Tuesday).

Source: NASDAQ

Solar shares have been decimated, even relative to coal. This is not good news for alternative energy investment.

Source: @business

LendingClub shares got hammered again on Tuesday. As discussed before, is this a temporary issue with the CEO or a deeper problem with the business model? Below is a comment from Strategic Streams on the topic.

Source: Google

Source: Michael Fox-Rabinovitz, Strategic Streams 

In credit markets, we see large ($1bn+) defaults rise to the highest level since 2009 (driven by natural resources). 

Source: @BloombergBrief 

The Halliburton/Baker Hughes marriage annulment last month added to the number of busted M&A deals.

Source:  ‏@pdacosta 

Companies are increasingly doing M&A deals on their own, cutting out the "middleman". This trend is a nightmare for investment banking.

Source: ‏@WSJmarkets

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

1. A spike in far-right parties in Europe.

Source: ‏@wef 

2. Globally people view their country's media losing its freedom, a troubling development.

Source: ‏@RichardWike, @GallupNews

3. What kills Americans at every age (broken out for men and women).

Source: @voxdotcom

Source: @voxdotcom

4. How did the US equity market perform under different presidential administrations?

Source:‏ @FTMarkets

5.  Who believes that technology will soon be replacing workers?

Source:‏  ‏@wef