The Daily Shot And Data - May 9, 2016

By Walter Kurtz

Monday, May 9, 2016 9:10 AM EDT

Greetings,

We begin with the United States, where weaker than expected jobs report resulted in Barclays, Merrill Lynch, and others to revise forecasts for the number of Fed rate hikes in 2016. Most economists now expect only one hike in 2016 (in September) - down from two.

Below are a few other observations on the payrolls report that weren't covered by the financial media.

1. The percentage of Americans employed in residential construction is rising but remains at pre-recession lows.

2. Coal mining jobs in the United States are quickly disappearing.

3. Americans are still leaving the labor force in large numbers. Much of this is retirement and stay-home parents. It is important to point out that many Americans who have the ability to leave the labor force find that salaries and small business earnings are too low to make it worthwhile for them to stay.

Next, we look at some developments in US credit.

1. According to the Fed, "outstanding US consumer credit rises by almost $30 billion in a month to $3.59 trillion".

2. Some of this spike in consumer credit comes from rising credit card debt which now far exceeds growth in US wages (year-over-year).

3. Of course the pace of US student debt growth continues on its unsustainable path.

4. Corporate loans on US banks' balance sheets are still hitting new records. Once again, as of now there doesn't seem to be much of an impact (broadly) from tighter corporate lending conditions.

Below are two other interesting trends in the US.

1. Has the US hotel occupancy peaked?

Source: @PlanMaestro, h/t Jake

2. The ECRI US index of leading indicators is rising, suggesting that Q2 growth should be materially stronger than Q1.

Source: ECRI

The last item on the US economy comes from Goldman Sachs who has cut its forecast for rate hikes by two. GS expects the next hike to be in July rather than September. The explanation for the change in the forecast is important. It has to do with the increased sensitivity of the financial conditions index to rate hikes.

Source: Goldman Sachs

Here is the comment on financial conditions being highly sensitive to the rate hike trajectory.

Source: Goldman Sachs

The heightened Financial Conditions Index (FCI) sensitivity means tightening will proceed much more slowly. This answers the question "What's the big deal if Fed Funds rise by 25 bp?" Indeed, the US economy will feel only a minor direct impact from such an increase. Instead, the impact will come from tightening financial conditions.

Source: Goldman Sachs

Some suggest that the Fed painted itself into a corner by creating an economic and financial "addiction" to stimulus - thus the painful withdrawal symptoms. However, at this point looking at the US in isolation is not prudent, since the trajectory of the US monetary policy has to be managed relative to other major central banks. The "addiction" is global.

Switching to China, the nation export growth disappointed.

Source: @WSJ

As before, China's import growth from Hong Kong shows ongoing fake import receipts, indicating capital outflows.

Source: @TomOrlik

This next chart suggests that given the stabilization in the renminbi, we may see future improvements in exports. Perhaps...

Source: @Callum_Thomas

Separately, here is China's bond market growth broken down by different debt types (note, this does not include loans).

Source: Barclays (LG = local government)

China's steel, iron ore rally fizzles out as iron ore has the biggest weekly loss in 5 years. Beijing has been trying to reign in all the speculative activity in the commodity futures markets by increasing margins, raising transaction costs, and cutting back trading hours for some commodities. It's working.

Source: barchart

Now we have a couple of updates on Australia and New Zealand.

1. The New Zealand 10yr government bond yield hit a record low.

2. The Australian dollar was slammed by a sharply lower inflation outlook (after the lowflation shocker and the RBA cut). Bond yields fall sharply, and more rate cuts could be in the works.

Next we have a couple of developments in emerging markets.

1. As oil prices begin to recover, the Middle East is tapping the debt capital markets.

Source: @business

2. The Polish zloty dropped as the Moody's downgrade looms. The Polish finance minister's attempt to keep the court quiet about the court's conflict with the government (before Moody's finds out) didn't work out too well.

3. Speaking of debt downgrades, South Africa could lose its investment-grade status.

Source: ‏@business

Now let's go to the Eurozone where (thanks Merrill Lynch) we have a few interesting observations to share.

1. The German population is aging rapidly.

Source: BofAML

2. Aging German households increasingly rely on pensions and life insurance guaranteed-return accounts.

Source: BofAML

3. In fact, Germans hold much less real estate than other Eurozone nations.

Source: BofAML

4. The over-reliance on these guaranteed rate accounts is becoming increasingly problematic as life insurance firms operate in the negative-rate environment. With an overwhelming focus on fixed income by these insurance companies, providing a sustainable investment product for German households is now a serious challenge.

Source: BofAML

Separately, according to BofAML, the Eurozone inflation rate (which has been disappointingly low) has more downside before stabilizing.

Source: BofAML

With a more dovish Fed, asset managers are going long the euro. Will Draghi tolerate a much stronger euro? Some suggest that he is basically out of ammunition to push the euro lower.