The Daily Shot And Data - May 6, 2016

By Walter Kurtz

Friday, May 6, 2016 6:00 AM EDT

Greetings,

We begin with China where a part of the fiscal stimulus has been orchestrated via the state-controlled China Development Bank (CDB). The bank is known for financing large infrastructure projects.

Source: Macquarie

As discussed yesterday, China's recent growth has been fueled by credit. With increased liquidity (injected via stimulus - for example above) and low interest rates the demand for wealth management products (WMPs) has risen sharply, which in turn created demand for corporate debt. The chart below shows financing for WMPs by banks (banks providing liquidity to the "shadow banking" system).

Source: Nomur

The rising debt and leverage levels are making the authorities nervous. Nomura expects the current credit-fueled China growth burst to be short-lived as regulators' concerns should cap credit expansion.

Source: Nomura

This next item is quite important for policy considerations both in China and in the US. As discussed before, a further dollar rally is likely to result in rapidly tightening financial conditions. Here is one of the key reasons investors should be very concerned about a significantly stronger US dollar.

Source: Macquarie

Let's continue with emerging markets.

1. Polish debt could be downgraded shortly by Moody’s due to some populist government policies. Debt spreads continue to widen.

Source: @fastFT

Back in December, the Polish government removed a tax on government bonds held by banks in order to finance its rising deficit (taxes are generally levied on bank assets, but the government bond holdings became exempt). It worked. This is what happened to government bond holdings at banks. That's why the spread widening hasn't been as severe as it could have been.

Source: HSBC

2. It's hard to see how Venezuela can make it through 2016 without a default. Most of the government revenue comes from energy.

Source: Barclays

3. Israel's FX reserves hit record high.

4. Turkish bonds and stocks have been hit as the ruling party gets ready to replace the prime minister.

5. Russia is rebuilding its rebuilding foreign reserves.

Russian CPI moderates as the effect of the ruble decline wanes while domestic demand remains weak.

Russia's service sector seems to be recovering.

6. We've had quite a rally in emerging market bonds since February as fund inflows continue.

Source: Ycharts.com

Source: ‏@RBS_Economics

7. Rising emerging markets debt and higher old-age dependency don't go well together. Over time, something will have to give.

Source: BofAML

Source: @FT

Next, we have a couple of slides on Japan.

1. This chart of coincident and leading indices of business conditions looks quite ominous.

Source: @CapEconomics

2. Japanese insurance firms have been stepping up foreign bond purchases.

Source: @CapEconomics

1. Now on to Europe where according to Markit, "the UK All-sector PMI points to 0.1% GDP growth rate at the start of the second quarter". The nation is experiencing a broad slowdown, confirmed on Thursday by a weaker-than-expected service PMI.

Source: ‏@MarkitEconomics

Separately, according to FT/Moody's, "UK banks face funding fears ahead of the Brexit vote". The chart below shows elevated CDS spreads on financials relative to the rest of the EU.

Source: @fastFT

2. European ETF flows turn sharply negative.

Source: Deutsche Bank

3. Italian banks remain under pressure as capital buffers become thinner and shares continue to sell off.

Source: bloom.bg/26T1y1l

4. The ECB ended the issuance of the €500 banknote to limit "illicit activities". Of course negative rates and banking problems (such as the one above) also helped create demand for such notes. But Mario Draghi doesn't want people to stash too much cash under the mattress.

Source: ECB

Now we have a couple of items covering the global economy.

1. If oil price remains at $45/bbl, here are the projections for headline CPI in select developed economies.

Source: Nomura

2. Earnings per share consensus (forecasts) for global stock markets seem to have a similar pattern each year ...

Source: BofAML

1. Back in the United States, here are the 2016 rate hike probabilities.

Source: CME

2. Railcar loadings in the US continue to fall - in part driven by coal, metals, and chemicals.The US is a service economy and the impact of this should be limited, but it's an important indicator nonetheless.

Source: Yardeni Research

3. US job cuts rose to 65k in April, putting the 2016 layoffs number at a 7-year high. Energy and to some extent the computer industry and retail dominate the layoff announcements.

4. Speaking of labor, BofAML says the decline in profits could spell trouble for payrolls growth in the US. Most economists still expect just over 200k jobs created in April (to be reported today).

Source: BofAML

5. US credit continues to expand as evidenced by an over 6.5% year-over-year growth in the broad money supply (note that in a fractional-reserve system, the money supply is created by bank loans).

6. US commercial paper balances show a sustained climb. More on this later.

Switching to US markets ...

1. HY default rate is rising to levels not seen since 2010. The bulk of the problem is still in natural resource names.

2. Puerto Rico bonds are getting hammered as the yield breaches 13%.

Source: ‏@MktOutperform

3. Ironically, the broad average of 30y muni bond yields is now below 2.5% - a cycle low.

Source: ‏@Garth_Friesen

3. Looking at speculative positioning in oil and equities, it's "risk-on" time. The unwind could be painful however.

4. Crude oil production spare capacity growth is actually slowing, but the slowdown is being masked by bloated inventories. Longer-term this is bullish for oil.

Source: ‏Barclays

Here is how energy firms are cutting spending - by slashing the most complex projects.

Source: ‏‏@georgikantchev, @SarahKentWSJ, @WSJ

5. In other commodities markets, sugar futures got hammered.

6. This next chart comes from a Daily Shot reader and shows biotechs overlaid on top of the dot-com bubble.

Source: Andrew

Finally, here is why fund managers change their service providers (administrators, prime brokers, IT support, etc.)

Source: @Preqin

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

1. Merrill Lynch argues that the increases in minimum wage are likely to accelerate automation. This does not bode well for payrolls growth in the long run. "Long robots, short humans ...".