The Eurozone

Once again, we start with the Eurozone where economic activity has picked up momentum (based on Markit PMI reports).

German manufacturing sector is expanding at the fastest pace since early 2014.

Source: @MarkitEconomics, @tEconomics

Moreover, German service business activity unexpectedly bounced from a three-year low.

Source: @MarkitEconomics, @tEconomics

At the Eurozone level, the composite PMI (both manufacturing and services) also surprised to the upside.

It's worth noting that the ECB pays close attention to these reports, which would suggest that the next major policy announcement from Mr. Draghi will be some details of the QE taper. 

Even if the ECB wanted to change the securities purchases strategy from the capital key ratio to the amount outstanding by country, the deficit of QE-eligible German bonds would persist. Balance sheet expansion at the current pace can not be sustained for much longer.

Source: Deutsche Bank, @joshdigga

Source: Deutsche Bank, @joshdigga

1. In other Eurozone developments, DBRS' maintaining of Portugal's rating not only brought down bond yields but also resulted in a lower sovereign CDS spread.

Source: Bloomberg 

2. Meanwhile, here is Portugal's banking system nonperforming loan ratio by sector.

Source: DBRS, @joshdigga

3. As Banca Monte dei Paschi's management prepares to announce the "plan" to save the bank, shares continue to rally. That "+31%" is not a typo. Seems a bit overdone.

In fact, banks across Europe continue to rally - up seven days in a row.
 

4. Is the euro too weak? The 2yr real rate differential between the US and the Eurozone is close to zero, while the euro continues to move lower against the dollar. 

Source: @auaurelija

The United Kingdom

1. The UK's industrial orders index came in well below consensus. 

2. On the other hand, UK exporters are becoming more hopeful that the weak pound will give them an edge.

3. Speaking of pound weakness, here are the projections from Credit Suisse ("Cable" = GBP/USD exchange rate). 

Source: Credit Suisse, @joshdigga

Below is the forecast for the UK's inflation trajectory based on various British pound scenarios.

Source: Credit Suisse, @joshdigga

4. The UK house price survey suggests that property values are still rising, a trend that is expected to continue but at a slower pace. 

Source: Knight Frank/IHS Markit

Emerging Markets

1. The Brazilian real rally has resumed as the nation continues to attract foreign capital.

2. Chile's mining investment outlook keeps getting downgraded. 

Source: HSBC, @joshdigga

3. Venezuela's oil output continues to decline. 

Source: HSBC, @joshdigga

Related to the above, the nation's state oil firm (PDVSA), facing an untenable debt burden, has in effect "scared" investors into a debt swap, the type that credit analysts often call "extend and pretend."

Source: Bloomberg.com; Read full article

The PDVSA and sovereign bonds rallied on the news of the transaction which will give Venezuela a bit more breathing room.

China

1. China's stock market continues to grind higher.

2. At the same time, the renminbi keeps falling vs. the dollar.

In fact, the offshore yuan exchange rate vs. the dollar just hit a record low.

Source: @fastFT; Read full article

Canada

All is well.

Source: @business; Read full article
 

The United States

1. According to Markit Economics, US manufacturing is finally improving. However, job declines in the sector as well falling exports remain a major concern. The summary below is worth reading.

Source: @MarkitEconomics

Source: @MarkitEconomics

2. US 2016 rate hike probability has risen above 70%. More on this topic shortly.

3. Holiday hiring in the US is running above what we saw in recent years. This trend may push up wages in Q4 as retailers compete for workers - giving the FOMC hawks more ammunition. 

Source: @NickTimiraos , @Tmp_Research; Read full article

Japan

The latest Markit Economics report shows Japan's manufacturing beating expectations.

Source: Nikkei, IHS Markit

Global Developments

1. As discussed yesterday, global manufacturing activity has picked up some momentum. Here is the manufacturing PMI vs. the GDP for the US, Eurozone, and Japan.

Source: @notayesmansecon, @topdowncharts, @Callum_Thomas, @CapEconGlobal

2. While the above suggests a pickup in global growth, there is a natural cap on how fast the GDP can expand. Output growth can be improved either via a larger workforce or higher productivity. Both trends, however, are pointing in the wrong direction.

Source: Morgan Stanley, @joshdigga

Source: Morgan Stanley, @joshdigga

Volatility Trends

Volatility across global markets is moving lower again. The MOVE index and the US swaption vol both show rate volatility being compressed.

 

Currency volatility is falling as well.

Source: @business; Read full article

As discussed before, the Fed (including some dovish members of the FOMC) get uneasy when they see market risk premia shrinking. These trends could indicate higher levels of risk taking. One way to address this before the problem worsens is by raising rates.

Credit

1. The above situation of shrinking volatility becomes even more worrisome from the Fed's perspective when combined with falling credit spreads.

2. Separately, the rating agencies are uneasy with the increased debt in the combined AT&T - Time Warner entity (the new debt will be used to finance the Time Warner acquisition). AT&T's bond yields rose.

Also, the Time Warner purchase price seems quite high relative to other media firms.

Source: @business; Read full article

Commodities

Some commodities, especially several that trade in China, are making new highs. The speculative fervor in China's futures markets is alive and well.

1. Aluminum futures in Shanghai: 

2. Iron ore futures on the DaLian exchange:

3. Zinc futures in Shanghai:

4. Palm oil on the DaLian exchange:

While China's economic growth seems stable, it may be tough to justify some of these rallies, especially when the spot raw materials prices in the US have been trending lower.

One US commodity that is rallying again is soybean oil (also to some extent driven by China).

Finally, US natural gas takes another leg down. 

Food for Thought

1. Let's begin the Food for Thought^™ section with this chart on US student debt by race.

Source: @business , @Tmp_Research; Read full article

2. It seems that almost everything we eat both causes and prevents cancer. That's why weighing multiple studies is important.

Source: @voxdotcom, @Tmp_Research; Read full article

3. The global "Free Expression Index." 

Source: @FactTank; Read full article

4. How many times is one expected to move to a different home in their lifetime (by age)?

Source: @paul1kirby, @FiveThirtyEight, @Tmp_Research; Read full article

5. The largest national space budgets (unfortunately this doesn't show the EU as a whole). 

Source: @wef, @Tmp_Research; Read full article