Greetings,

1. We begin with the energy markets where US gasoline inventories declined more than expected for the third week in a row. Gasoline and crude oil futures rose in response.

 

 

  2. The US crude oil production seems to be stabilizing (for now) while imports rise.

 

  Nonetheless, crude oil inventories are finally declining, pushing crude prices higher again.

1. In other commodity markets, Credit Suisse tells us that gold is inversely correlated to real rates (TIPS yield), not inflation expectations. While this is not a new concept, it's nice to see the relationship hold (most of the time).

Source: Credit Suisse

Source: Credit Suisse

2. Silver continues to test the $19.60/oz support level (in a descending triangle). Long silver remains a crowded trade, vulnerable to a breakout to the downside.

  3. Aluminum prices are grinding higher (supposedly) due to demand from China's auto industry as well as relatively tight inventories.

  4. New Zealand milk futures are undergoing a massive rally - also supposedly due to China's demand for dairy products. By the way, the Kiwi dollar is grinding higher as well (second chart below).

 

5. Palm oil futures spike on short-covering and tight supplies.

 6. Coffee futures were down sharply Wednesday morning.

7. The final commodities chart is this polished diamond index. Buyers are pushing for deeper discounts while inventory continues to increase. 

1. Switching to emerging markets, the South Korean won got hammered Wednesday morning. A source on one of the dealer's EM trading desk is saying this is in response to William Dudley's hawkish comments.

  2. According to Bloomberg, China is cracking down on "illegal" money movements out of the country. A free-floating renminbi is years (if not decades) away.

Source:  ‏@EMgist

3. Russia's consumer continues to struggle, as disposable income shrinks more than expected.

1. Switching to Japan, we are below par on dollar-yen again.

  The chart below shows the Deutsche Bank trade-weighted yen index. This has to be frustrating for the officials in Tokyo.

  2. Japan's trade activity has crashed, as both exports and imports see the worst year-over-year declines since 2009.

 

3. After the cost of hedging (cross-currency swaps) is taken into account, long-dated treasuries are still attractive to Japanese buyers relative to JGBs. And Japanese institutions continue to buy long-dated foreign paper (note that some organizations don't hedge these investments).

Source: Deutsche Bank

Source: Deutsche Bank

4. Bloomberg suggests that Japanese banks are running out of JGBs to sell to the BoJ. At some point, the BoJ may be buying directly (and perpetually) from the Ministry of Finance (a form of debt monetization).

Source: @Red7Racing 

Source: @Red7Racing   

1. Back in the US, the FOMC remains divided on the timing of the next rate hike. Some members worry about tight labor markets and frothy financial markets while others see few signs of inflation. Here are a couple of paragraphs from the minutes.

Source: FOMC

Source: FOMC

Overall, markets saw the FOMC minutes as slightly on the dovish side, with treasuries reversing some of the losses from William Dudley's comments the day before.

The futures market still shows roughly even odds of a 2016 hike.

  2. Speculative accounts are very long treasuries as the market remains vulnerable to a spike in rates (albeit probably a short-lived one).

Source: Credit Suisse

3. US house purchase mortgage activity unexpectedly declines.

  4. US inflation on food items consumed at home moves deeper into negative territory. This trend has provided some offset to rising shelter inflation.

Source: h/t  ‏@boes_  

1. Now on to the UK where productivity shows no improvement in Q2. Economists remain puzzled by this trend.

Source: @fastFT

  2. The latest 30y gilt auction accepted yield was the lowest on record as investors bid up high-duration bonds.

  3. UK's July unemployment claims were down and much lower than expected. While this is a positive development indeed, economists warn that the Brexit-related labor market impact may take a few months to show up.

4. According to BBC, "Eastern European workers in the UK pass one million". This trend is one of the reasons the UK's economy has been so resilient and vibrant.

Source: BBC  

1. Now on to the Eurozone where Portugal's government bond yields jump on downgrade rumors.

2. Deutsche Bank's trade-weighted euro index is now highest since the start of the QE. The recent portion of the rally has been driven by the weakness in the British pound. This trend has to be frustrating for the ECB.

Source: Bloomberg Terminal; Function "GPM"

3. The ECB is facing a similar difficulty to the BoJ (above) as analysts suggest that the central bank could soon run out of bonds to buy. Here is a nice summary from the FT.

Source: @fastFT  

1. In credit markets, the chart below shows the latest credit fund flows.

Source: Deutsche Bank

2. One sector of US credit markets that blew up with oil prices starting last year is second-lien corporate leveraged loans. Because of the subordination and energy exposure, the spreads had nearly doubled from the lows. But even that market is starting to improve.

Source:  ‏@DriehausCapital, Bloomberg LP  

Finally, the hedge fund industry remains under pressure as outflows continue.

Source: @WSJGraphics  

Turning to Food for Thought, we have 5 items today:

1. The map below shows what we classify as the "First" (blue), "Second" (yellow) and "Third" (red) World countries - based on the Human Development Index (HDI).

Source: @BrilliantMaps

2.  US department store business continues to shrink.

Source: ‏@AEIdeas, @Mark_J_Perry 

3. The Affordable Care Act health-insurance exchange users will see sharp premium increases next year. 

Source: ‏@WSJGraphics

4. College cost increases have been brutal. The availability of cheap and plentiful student loans is (partially) to blame, "distorting" the higher education "marketplace".

Source: @AEI

5. The darknet's illicit drug economy.