The Daily Shot And Data - October 19, 2016

By Staff

Wednesday, October 19, 2016 5:30 AM EDT

The United States

Let's begin by taking a look at the latest signals on US inflation. Overall, the CPI growth remains benign with a gradual upward trend. There are, however, several developments behind the headline figures.

1. Driven by higher fuel prices (among other factors), the headline CPI came in line with expectations, showing a trend that could get us to 2% reasonably quickly.

2. On the other hand, the core CPI came in a bit below consensus, showing no signs of acceleration.

3. The spread between goods and services inflation continues to widen.

Source: Natixis, @joshdigga

4. One of the most persistent trends in US services inflation continues to be shelter CPI as the nation faces a housing shortage (which is expected to worsen in the next few years).

Rising rental costs have been the driver of shelter CPI, as rents outpace the overall core inflation (second chart below) since the start of the housing crisis in 2005.

However, homeowners are now also facing higher costs as "owners' equivalent rent" accelerates.

5. Ex-shelter prices are now rising as well, albeit slowly.

6. The "sticky CPI" (the less volatile component of inflation), while still on an upward trend, had paused in September.

7. Medical care is one area we've seen a sudden jump in inflation. In September the prices on "medical care commodities," which are mostly prescription and non-prescription medications, rose sharply.

8. The so-called "Experimental CPI," which measures consumer prices for Americans that are 62 and older, is approaching 2% again.

And as expected, medical care is the primary driver behind this increase.

9. Several Fed officials have indicated that they want to let inflation run a bit hotter before removing stimulus. It means that the Fed's rate hike trajectory slope may get downgraded again. The December hike, however, is still very much on the table. Here is a good summary.

Source: @WSJ; Read full article

Canada

The number of tourists visiting Canada is near a decade high. A softer loonie has been helpful.

Source: Scotiabank, @joshdigga

The United Kingdom

1. Inflation rose above consensus in the UK as analysts point to the pound weakness. However, this particular increase had more to do with some specific products, mainly clothing and shoes. The full impact of Britain's weak currency and higher import prices (second chart below) will make its way through the economy in the months to come.

Source: Natixis, @joshdigga

2. UK house prices are rising faster than economists had expected. Higher inflation may end up providing some tailwinds to the nation's housing markets.

Emerging Markets

1. Switching to emerging economies, Brazil continues to face headwinds as retail sales miss expectations.

Source: Goldman Sachs, @joshdigga

At the same time, the nation is facing tighter credit as household debt burden rises.

Source: Goldman Sachs, @joshdigga

Nonetheless, Brazil's stock market is rocketing higher.

The country's bond market is also going strong (first chart below) as inflation expectations decline (second chart).

2. Brazil is not the only economy with some very happy stock investors. Argentina's market is seeing tremendous gains. Here is Chile's stock market index.

3. Colombia's industrial production unexpectedly recovered.

4. The Mexican peso has had a great week on firmer oil prices and Mr. Trump's presidential election odds stuck below 20% in the betting markets.

5. The Philippine stock market popped on the news that Rodrigo Duterte is reaching out to China.

Source: Bloomberg.com; Read full article

6. Debt fund inflows into South Africa are picking up pace. Equities, on the other hand, not so much.

Source: Deutsche Bank, @joshdigga

China

1. The renminbi continues to drift lower against the dollar and yet remains elevated vs. several other exporters such as Mexico.

2. China's stock market is attempting another rally.

3. Medium and long term loans to households in China rise to new highs, suggesting that home sales were quite strong in September.

Source: Goldman Sachs, @joshdigga

4. The narrow and broad money supply growth divergence persists. According to some, this indicates that the latest round of fiscal stimulus (via government-owned lenders) has not made it into the broader economy (which may have been by design).

Source: Bloomberg

5. China's GDP growth remains at 6.7% (with suspiciously low GDP volatility). Industrial production was a bit softer than expected but remains above 6%.

Japan

According to Bloomberg, Japanese equities are on track for the biggest annual outflow since 1987.

Source: @markets;Read full article

Global Trends

1. According to the chart below, there is a strong relationship between tariffs and GDP per capita. Does the shift toward protectionism mean even slower global growth?

Source: Scotiabank, @joshdigga

2. According to the latest Merrill Lynch investor survey, bond markets now represent the second largest "tail risk".

Source: BofAML, @fasFT; Read full article

3. The same survey also shows investor cash positions continue to build. The second chart below gives the overall global investor positioning.

Source: BofAML, @GemmaActon

Credit

1. In credit-land, US HY continues to outperform the S&P500 on a total return basis (year-to-date).

2. US middle-market senior loan volume is picking up steam again on demand from leveraged funds and CLOs.

Source: @LCDNews, @joshdigga

Equities

1. In US equity markets, stocks have been more vulnerable to earnings surprises since the financial crisis.

Source: Bloomberg, @joshdigga; Read full article

2. The next chart shows index funds (including ETFs) continuing to increase their ownership percentage of the S&P500 shares. What does this mean for shareholder activism going forward?

Source: @WSJ; Read full article

Commodities

1. Coffee futures go vertical.

2. Yesterday, we had a chart showing the spectacular rise in coking coal prices. While not nearly as dramatic, thermal coal prices are moving higher as well (the graph below shows thermal coal futures in China).

3. Finally, we have a letter to the editor regarding palm oil vs. soybean oil.

As a commodities trader (commercial) I am continually humbled by money flows in/out of commodities which seem to bear no connection to the fundamentals of the underlying assets.

In today's Daily Shot, however, you seem to imply a causal relationship between the rally in Soybean Oil futures and the rally in Malaysian Palm Oil prices. I would assert that the causation runs in the other direction: high Palm Oil prices are (have been) causing the Soybean Oil rally.

A quick look at USDA data for Major Vegetable Oils shows that Palm Oil is the 800-pound gorilla of the Vegetable Oils market:

When translating the trade numbers (imports) into percentages, it becomes quite clear:

With (relatively) recent El Nino disruptions to Palm Oil production in Indonesia and Malaysia (who together represent 85% of the world's Palm Oil production), the world is going down the list of substitutes.

Not an important distinction, but I thought you might find it interesting.

Thank you and best regards.

Food for Thought

1. We begin the Food for Thought^™ section with the global fertility history and projections (number of children per woman).