The Daily Shot And Data - October 27, 2016

By Staff

Thursday, October 27, 2016 2:37 AM EDT

The United States

Let's start with the US where we apparently had a surprisingly sharp recovery in the service sector this month. Here is the PMI chart from Markit Economics.

It's worth reading the comment from Markit below. The chart on the bottom shows the composite PMI (including manufacturing).

Source: Markit Economics

Combining the above with rising wage growth, higher inflation expectations, tightening credit spreads, etc. and we got ourselves a rate hike coming up.

The probability that the Fed will move by year-end is now 74%.

Source: CME

1. In other US developments, mortgage applications for house purchase declined to the lowest level since January. Part of the issue is the ongoing tightness in the mortgage market.

Another problem is that many first-time home buyers are getting priced out of the market as house prices rise much faster than wages.

2. Related to the above, US new home sales remain tepid. The trend, however, shows ongoing gradual improvement.

3. Separately, US prime-age labor force participation is finally rising.

Source: Goldman Sachs, @joshdigga

Here are the sources of the new entrants into the labor force. Some of the "disabled" folks got better all of a sudden. Also, many of those who "didn't want a job" now want one.

Source: Goldman Sachs, @joshdigga

The United Kingdom

1. Global bond yields are on the rise again (more on this shortly). Here are the 10yr gilts.

2. UK mortgage approvals unexpectedly picked up as consumers take advantage of historically low rates.

Source: Reuters; Read full article

The Eurozone

1. Italian bond yields rose, leading European debt price declines. New Eurozone issuance as well as Tuesday's Austria's first 70yr bond hitting the market created a bit of a supply overhang.

Source: Bloomberg.com; Read full article

2. Here are the French and Irish 30yr yields.

3. Nonetheless, Bunds still trade with yields below the ECB deposit rate.

Source: UBS, @NickatFP, @joshdigga

4. German disinflationary pressures seem to be easing as the PPI, while still in negative territory, has been consistently climbing.

5. French consumer confidence surprises to the upside.

6. This next trend is a mystery. HSBC took all the member banks' short-term borrowing rate submissions that are used to come up with the Euribor index. They noticed that the borrowing rate volatility for the "core" banks is higher than for the "periphery" banks. Moreover, the volatility spread is widening.

Source: HSBC, @NickatFP, @joshdigga

Emerging Markets

1. Let's begin with Brazil where consumer confidence is gradually recovering.

Inflation figures continue to improve as the manufacturing PPI drops to the lowest level in years.

On the other hand, Brazil's labor market is struggling, with the nation losing more jobs than expected.

Also, the country's credit crunch persists as total loan balances decline.

2. Mexico's economic activity increases more than expected while retail sales growth remains robust.

Source: Goldman Sachs, @joshdigga

3. Hot money is once again going after some less-trafficked and beaten down equity markets - this time chasing Eastern European shares. Here are the Ukrainian and Bosnian stock market indices.

4. Speaking of Eastern Europe, the massive long-ruble positioning by speculative accounts (discussed Monday) didn't work out well as the currency moved sharply lower with oil prices. The unwind of this crowded trade has more room to go.

5. Mozambique is attempting to restructure its debt, and it's not going well. The nation's dollar-denominated bonds take a hit (second chart below shows the yield on these bonds). Back in April, the bondholders discovered that the country secretly borrowed billions, making the debt load untenable.

Source: @WSJ; Read full article

6. China's private sector credit cycle has been in play for years. Now it's the public sector's turn? (SOE = state-owned enterprise, NPL = non-performing loan).

Source: Deutsche Bank, @joshdigga

Japan

1. Cross-currency basis remains high, especially for the yen. It means that anyone who tries to borrow dollars by first borrowing yen and converting the loan into dollars (synthetically) will pay a hefty premium.

Source: Citi, Steve Kang, @NickatFP, @joshdigga

On the other hand, those who need a yen loan and can borrow in dollars (going the other way on the above trade) will lock in extremely cheap financing. That's why Japanese banks that can issue dollar-denominated bonds have been doing quite a bit of that.

Source: Citi, Steve Kang, @NickatFP, @joshdigga

As an aside, the Eurozone banks have also been taking advantage of the cross-currency swap basis, although not to the same extent.

Source: Citi, Steve Kang, @NickatFP, @joshdigga

Asia

1. Singapore's industrial production surprised (it was more of a shock) to the upside.

Source: RTT News; Read full article

2. New Zealand's trade deficit unexpectedly worsens (on aircraft purchases).

Energy

Switching to crude oil markets, here is the latest.

1. The report from the Department of Energy shows that the crude stockpiles at Cushing, OK (settlement hub for NYMEX WTI futures) continue to drop.

2. Oil prices jumped initially but the sold off after digesting the full report.

3. There are some bearish indicators such as high gasoline inventories and falling demand.

4. Moreover, US crude oil production remains stable as oil rig numbers creep up. Production could start increasing.

5. And Iraq is ramping up crude oil sales.

Source: Credit Suisse, @NickatFP, @joshdigga

6. US natural gas remains under pressure on mild weather forecasts and high stockpiles.

7. Separately, according to the US government, the global fuel tanker fleet is expected to shrink significantly in the next few years.

Commodities

In other commodity developments, China's traders continue to push metal futures higher. Here are some examples:

1. DaLian Commodity Exchange iron ore.

2. Shanghai Futures Exchange lead futures.

3. Shanghai Futures Exchange tin futures.

Just to put the situation into perspective, here are the hot-rolled coil futures (steel) in China and the US over the past six months.

While speculation remains the primary reason for some of these price moves, there are "stories" behind the bullish bets. Here is an overview of the situation with aluminum (discussed yesterday).

From SMM: -

1. Rising costs: Alumina prices in China entered the upward track from mid-August, increasing nearly 50% up to now. Steam coal prices have moved all the way up this year, up as much as 108% so far this year, pushing up power costs.

2. Market fundamentals show no obvious signs of weakening: The amount of aluminum capacity in operation has increased as rising aluminum prices triggered release of new capacity and restarts of idled capacity. Operational aluminum capacity is expected to increase another 300,000 tonnes in October, and output will grow to 2.81 million tonnes.

Downstream demand remains positive. Aluminum stocks in domestic five major markets hit a record low of 234,000 tonnes as of October 24, SMM data showed.

3. Impact from crackdowns on vehicle overloading: Crackdowns on vehicle overloading have slowed aluminum ingots shipments in some regions, reducing supply in major markets.

4. Capital side: Investors raised bullish bets while shorts pulled out, given these positive factors.

In the US, grain prices are coming back to life. Here are the soybean futures.

Bitcoin

With more than 80% of speculative bitcoin accounts going long, the crypto currency continues to rally, as liquidity flows in. It will be interesting to see what happens when some of these folks decide to take profit.