The Daily Shot And Data - November 3, 2016

By Staff

Thursday, November 3, 2016 5:56 AM EDT

The United States

We begin with the US where the FOMC introduced one new word into its statement: "some."

Source: FRB

In effect, the Fed is saying that barring a major negative payrolls surprise this Friday, expect a rate hike in December. The primary reason we didn't see this move in November is the upcoming presidential election which has introduced a considerable level of uncertainty (as Trump victory odds grind higher).

Source: @PredictIt

Will the payrolls report disappoint (economists expect 175k)? The figure would need to be rally bad for the Fed to be on hold in December. The private payrolls report from ADP was, in fact, weaker than expected. However, that's probably not enough to dissuade the Fed.

One of the areas of weakness in the ADP figures was construction, where private payrolls once again declined. Some analysts suggest that part of the reason for this slowdown is the construction labor pool tightness, with skilled workers increasingly difficult to source. From the Fed's perspective, this is certainly not a good reason to hold back on raising rates.

The Gallup job creation index has remained stable in recent weeks, suggesting no disruptions in the labor market growth thus far.

The FOMC statement sent the 2016 rate hike probability close to 80%.

Source: Bloomberg

Separately, US mortgage activity for home purchase has moved lower recently. Some think the trend is driven not only by higher home prices and tight mortgage market but also the elections uncertainty.

The Eurozone

1. Manufacturing sector improvement in the euro area has been quite broad. Once again, this "restart" in factory activity has been a global trend. Note the comment about higher prices.

Source: @MarkitEconomics

As an example here is the French manufacturing PMI (see definition)

Moreover, the German manufacturing activity has picked up as well.

Here is a comment from Markit Economics on the German manufacturing PMI report. Note the comment about higher prices. Also, Germany continues to create jobs with employment expected to increase at the "fastest pace in over five years."

Source: @MarkitEconomics, Oliver Kolodseike

2. Indeed, German unemployment rate hit the lowest level in decades. As the nation's population ages, labor shortages could limit economic growth going forward.

3. Greek government bond yields fell further on debt relief hopes, with the 10yr yield falling below 8%.

4. Italian bank shares have reversed a great deal of the October rally - a pattern similar to September. The volatility in the sector has been tremendous.

5. Barclays points out that the sharp decline in Portugal's household savings was the reason for the consumption recovery.

Source: Barclays, ‏@joshdigga

The United Kingdom

1. UK's construction activity recovers from the dip following the EU Referendum vote. Note the comment on input price inflation (raw materials).

Source: HIS Markit, CIPC

2. The nation's home prices increases have slowed more than expected. Given the relatively soft wage growth in the UK, the 4.6% per year appreciation is still too fast.

Emerging Markets

1. One country where manufacturing activity bucked the trend was Poland. The Markit PMI surprised to the downside.

Source: @MarkitEconomics

2. The Mexican peso continues to fall in response to the US political uncertainty.

At the same time, Mexican government bond yields are grinding higher.

3. Speaking of higher yields, here is the Turkish 10yr government bond.

Separately, the post-coup Turkish government continues to become even more authoritarian.

Source: The Christian Science Monitor; Read full article

4. It seems that China's central bank, satisfied with the economic stabilization, is moving to tighten monetary conditions in order to curb speculative activity and excessive leverage. Will it work?

Source: @Phatjet; Read full article

Speaking of China's speculative activity, here are the reasons people are buying properties.

Source: UBS, @NickatFP, ‏@joshdigga

Asia

1. South Korean shares took a hit recently in response to the global selloff and also in part driven by the government scandal.

2. Here is a good summary on the Bank of Japan's policy direction.

Source: Natixis, ‏@joshdigga

3. The New Zealand dollar has been ripping higher.

Global Developments

1. Next is the global manufacturing activity summary - the improvement is unmistakable.

Source: JPMorgan, @MarkitEconomics

2. Related to the above, this chart shows new export orders for major developed economies.

Source: Deutsche Bank, ‏@joshdigga

Energy

1. The US oil stockpiles report was incredibly bearish. More on this tomorrow.

Source: @WSJ; Read full article

Oil prices continued to fall in response to this inventory shocker from the US Department of Energy.

2. The spike in Russian oil production is not helping matters. Russia continues to agree with OPEC about the need to "cut" production while sharply raising its own output.

3. Separately, US natural gas prices keep falling on warmer-than-normal weather (and forecasts).

Source: NOAA/ National Weather Service

Commodities

Precious metals continued to move higher on political uncertainty in the US.

Credit

US yield products remain under pressure from higher long-term rates. Moreover, assets that have (or perceived to have) energy exposure continue to sell off (in response to weaker oil prices). Here is the recent performance of BDCs and MLPs (see definition).

Equities

1. US small cap year-to-date outperformance comes to an end.

2. Those who follow the Dow Theory may view the current outperformance of transport shares as bullish.

3. Growth companies are underperforming again on risk-off sentiment.

Funding Markets

The Fed's RRP facility (see overview) usage remains elevated relative to recent levels. This trend suggests a level of uncertainty as institutional depositors give up return for the safety of keeping money with the Fed.