The Daily Shot And Data - September 28, 2016

By Staff

Wednesday, September 28, 2016 3:41 AM EDT

Greetings,

1. We begin with emerging markets where the declines in Argentina's economic activity have accelerated. The timing of this turn of events is quite unfortunate because the new government has a limited "honeymoon" window to enact the necessary reforms.

On the other hand, Argentina's trade balance seems to have stabilized - in part as a result of the peso weakness.

2. We see more "green shoots" in Brazil where consumer confidence, though extremely weak, is gradually recovering. There are more signs that Brazil's inflationary pressures are easing, which should result in rate cuts by the nation's central bank.

In part as a result of the above, but also driven by external demand for yield, Brazil's bond yields have resumed their declines.

3. The Mexican peso jumped 2% in response to Monday's presidential debates in the United States. One of the reasons for such a sharp reversal was the fact that speculative accounts have been heavily short the peso (discussed in Monday's Daily Shot).

4. The Philippine sovereign CDS spread continues to widen. While the absolute level is still relatively low, the spread has moved from 85bp in early September to 120bp now.

5. More signs are emerging of Taiwan's industrial recovery.

6. Saudi shares dropped sharply as a result of new austerity measures. Bank stocks hit new multi-year lows. The summary below from BBC gives a good overview of the situation.

Source: BBC, Read full article

1. Since we are on the topic of Saudi Arabia, let's look at the energy markets. As expected, the oil producers' meeting seems to be going nowhere fast. The can got kicked down the road.

Source: Reuters; Read full article

2. Goldman unexpectedly lowered its near-term oil price forecast.

Source: Goldman Sachs

3. Oil prices remain volatile from day to day but have become range bound. Time for a breakout?

Source: barchart.com

4. A Daily Shot reader asked an interesting question. Is some of the US drilling activity simply a way for oil producers to maintain their leases.

While some exceptions have been made, typically oil production - not just drilling - is required to maintain leases. Whether oil companies are completely honest with the landowners is another story (thanks to @andersonjustinr, @MikeEnglund2, and others for their input).

Now, a quick note on Japan. The chart below suggests that Abenomics created significant new demand for labor. A more likely explanation is that the aging population is bringing more women into the workforce. Whether that will necessarily generate wage inflation remains to be seen.

Source: @wef, @Tmp_Research; Read full article

1. Next, we go to the Eurozone, where Deutsche Bank (DB) share price stabilized in the afternoon. On the other hand, Commerzbank continued to sell off.

2. Also, Deutsche Bank's subordinated CDS spread remains elevated.

3. Italian banks remain under pressure, with Unicredit taking a hit.

4. Italy's industrial orders saw the largest decline since 2009. Is the country facing another recession?

5. One of the uncertainties around Italy is the upcoming referendum that will decide on a major revamp of the nation's government structure. Matteo Renzi said he would resign if the vote is "no," resulting in a further political impasse. The polls suggest the referendum could go either way.

Source: Goldman Sachs, @joshdigga

Source: WSJ; Read full article

6. In part as a result of the above, the Spain-Italy bond spread moves deeper into negative territory.

7. Nonetheless, Italy's 2yr government bonds were auctioned at record low yields.

8. Speaking of bond spreads, the Portugal - Germany yield spread is grinding higher.

9. Finland's 10yr government bond yield went into negative territory for the first time.

10. In other economic developments, Germany continues to "import" disinflation.

11. The Eurozone broad money supply growth beat consensus.

On the other hand, loan growth has stalled. The charts below show loan growth to households and businesses (adjusted for sales and securitization). These are critical indicators that tell us if the banking system begins retreating - which could spell disaster for the area's fragile recovery.

12. The final chart on the Eurozone shows the Target 2 imbalances within the Eurosystem. Basically, the Bank of Italy, the Bank of Spain, and the Bank of Greece (bottom chart) owe hundreds of billions to the Deutsche Bundesbank, the Central Bank of Luxemburg and De Nederlandsche Bank (top chart). It's all consolidated at the ECB (Eurosystem) level and shouldn't matter assuming the system stays intact (no Grexit for example).

Source: ECB

1. Elsewhere in Europe, loan growth in Sweden continues to ease as a result of the recent mortgage regulations.

2. Sweden's trade went sharply into deficit last month - driven by trade with the EU.

1. In the UK, the CBI retail sales survey suggests that consumers may be retreating after all.

Source: @FastFT; Read full article

2. The UK government sold a long-dated inflation-linked bond at record low (negative) yield.

1. Now on to the US where consumer confidence hit the highest level since 2007. This report is a bit surprising given the uncertainty around the presidential elections and softer jobs data in recent months.

2. Markit US service sector PMI showed a slight improvement. The figures from Markit suggest a 1% GDP growth in Q3 and a 120k payrolls increase in September.

Source: @MarkitEconomics

3. Housing price increases took a breather last month but the 5% year-over-year growth is pricing many people out of the market.

Source: @fastFT; Read full article

4. US auto debt delinquency rates remain elevated relative to pre-crisis levels.

Source: @FloatPath, @joshdigga

With the auto loan volumes hitting new highs, lenders have tightened credit standards. At the same time, demand for autos has eased, resulting is stalling sales growth.

Source: Goldman Sachs, @joshdigga

Source: @FloatPath, @joshdigga

5. We see more "green shoots" from Texas as retail (chart below) and service sector (second chart below) businesses both show improvement.

In the funding markets, short-term lenders in the repo market (secured lending) are shifting out of the private market and into the Fed's RRP. The private repo market continues to tighten as a result of this reallocation. Lenders are willing to take 25bp from the Fed's RRP rather than 70-80bp in the private markets as the quarter-end approaches.

Source: Bloomberg

In global developments, the WTO's latest report shows trade growing slower than the GDP for the first time since 2001. Trade volume and real GDP are growing at the slowest pace since 2009.

Source: WTO

Finally, both private and public pensions in the US are struggling. As an example, there seems to be a "run" on the Dallas Police and Fire Pension as employees try to claim benefits before the system becomes insolvent.