Greetings,

We begin the week with the latest economic news from the United States.

1. US wholesale inventories fell markedly in February, with the decline far exceeding forecasts. We saw hints of significant inventory adjustments in the recent manufacturing PMI reports. Economists quickly went back to the drawing board to readjust their estimates for the first-quarter GDP.

And adjust they did, as the consensus forecast fell sharply. 

Source: @Not_Jim_Cramer 

Some GDP trackers such as the Atlanta Fed's GDPNow projections have moved even lower.

Source: @AtlantaFed

On the other hand, the second quarter looks considerably better. Certainly to the extent that companies begin rebuilding inventories, albeit gradually, growth should pick up. A couple of leading indicators also suggest improving economic momenum.

1. The ECRI index of leading indicators rose sharply.

Source: ECRI

2. The Banking Activity Index shows that concerns about tighter credit conditions in the US may be unwarranted at this point.

Source: www.AmericanBanker.com

Below are several other items related to the US economy.

1. Here are the reasons for the decline in US labor force participation since 2007. Note that a large component of the participation decline is not cyclical.

Source: Goldman Sachs

As a result of the above, Goldman sees the available worker pool being smaller than the total participation decline would suggest. Those who are retired, disabled, in school, or simply don't want a job (for example those who want to stay home with the kids) are unlikely to reenter the workforce in droves. That would suggest that the US labor force participation is not going to continue increasing significantly, indefinitely supplying employers with new workers. As a result, Goldman sees the job market tighter than some have been suggesting.

Source: Goldman Sachs

By the way, Deutsche Bank sees a wider gap than GS between the current labor force participation and the demographics (non-cyclical) effects. This is the crux of the debate around the Fed's rate hikes - how much slack is there in the labor force? 

Source: Deutsche Bank 

2. There has been some divergence in sentiment between the US consumer and small business. Some suggest that small business margins are being squeezed as wages rise faster than companies can raise their prices.

Source: BAML

3. The US 5yr real rate (implied by TIPS) turns negative again. This can be viewed as a form of easing in monetary conditions. The recent weakening of the US dollar (discussed below) is also a form of easing. Both of these are due to the Fed delaying the rate hikes. 

Switching to Canada, the nation's jobs gains came in significantly better than the forecasts. The Canadian dollar jumped in response. Many analysts remain skeptical about the sustainability of these improvements.

Source: barchart

Canadian wage growth has been relatively strong, certainly outpacing the US counterparts over the past few months.

Source: Scotiabank

Separately, Canadians seem to be OK with the new government running a ‘controlled deficit’: 

Source: The Globe and Mail, h/t Norm Mogil

Turning to the energy markets, WTI is above $40/bbl in late Sunday trading after jumping 6.6% on Friday. Many investors are concluding that the US inventory build is beginning to reverse. Perhaps. 

Source: barchart

Here are a few other updates on the energy markets.

1. The global oil rig count hit the lowest level since 1999.

Source: @Bfly, @vexmark

2. According to Reuters, some 30 large oil tankers are backed up in a "traffic jam" that has built up outside Iraq's Basra port. Iraq's output is near record levels as the market remains well supplied. 

Source: ‏@vexmark, Reuters

3. This next chart shows US oil production driven by credit. Some suggest that the Fed's QE amplified the oil market crash by pumping cheap money to oil E&P firms.

Source: @SoberLook, h/t @FT, @WorthWray, @PlanMaestro 

4. Contango (the slope of the crude oil curve) continues to decline. 

Source: @JavierBlas2 

Now let's look at a few developments in the currency markets.

1. The US dollar index continues to drift lower.

Source: barchart

2.The broad dollar index is falling as well. The US currency was down against most emerging markets currencies on Friday.

Source: Investing.com

3. Dollar-yen fell below 108 again on Sunday night. 

Source: barchart   (chart shows how many yen a dollar buys; ie the yen is strengthening).

4. Speculative accounts remain net long the yen and riding the trend above. From a macro perspective, this is a "risk-off" bet.

5. Goldman thinks these traders are wrong. The firm predicts a sharp weakening of the euro and the yen (vs. USD) starting this year. Of course, many have been predicting this for a while due to the actual and expected interest rate differentials.The Fed's more dovish posture combined with some easing disappointments from the ECB/BoJ have kept this forecast from materializing.

Source: Goldman Sachs

Switching to fixed income, here are a few observations.

1. Japanese investors are buying up foreign bonds in response to the negative rate policy.

Source: Goldman Sachs

2. This next chart shows bond funds' cumulative flows continuing unabated while the equity fund balances are below the levels they were a decade ago. However, this chart misses the fact that corporations took some of these inflows into the bond market (by issuing debt) and pumped them into the equity markets via share buybacks.

Source: Deutsche Bank

3. Middle-market sponsored deal financing activity slowed sharply last quarter. Middle-market private equity valuations that were driven by cheap financing are returning to more "realistic" levels.

Source: @theleadleft

4. CCC HY bond and loan issuance fell to 2011 lows. Investors demand quality and some weaker credits (particularly in energy/resources) will have a tough time refinancing their debt.

Next we have a couple of charts on the funding markets.

1. Japan’s interbank lending market volume declined sharply in March after the BoJ took rates into negative territory.

Source: ‏@TenYearNote

2. In the US, the LIBOR-OIS spread (effectively a "term premium" for interbank loans) widened as prime money funds' outflows tightened the funding markets. We can also see some of this increase in funding costs in the commercial paper markets. More on this later.

Source: Deutsche Bank

We also have a couple of updates on the global equity markets.

1. This chart shows the divergence between US cyclical vs. defensive sectors. The markets are betting on slow growth and persistent weakness in the financial sector.

Source: Goldman Sachs

2. Japan's shares continue to be battered by the strong yen,

Source: barchart

3. On the other hand, Japan's MOTHERS Index (market of the high-growth and emerging stocks) doesn't care about the yen as it hits multi-year highs.

Source: Bloomberg.com

4. Brazil's stock market rallies as calls for Dilma Rousseff's impeachment gain momentum.

Speaking of Brazil, the nation's inflation falls below 10% in March on weak domestic demand and the fading impact of weak currency.

In the Eurozone concerns about Portugal persist as government bond spreads to Bunds remain elevated. Can the uncertainty in Portugal spread to the broader (already jittery) Eurozone financial system? 

Source: @Steen_Jakobsen

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Greece remains in deflation. How does one incentivize spending and investment in this environment.

Elsewhere in Europe, we see Switzerland in "perpetual" deflation.

UK's industrial production fell sharply in February as manufacturing output takes a hit. This of course was not unique to the UK and some hope the nation's manufacturing will return to growth shortly.

 

Finally, we have an interesting chart on commodities. In spite of the global commodities collapse, lithium prices have more than tripled since late last year. One particular auto company had something to do with this.

Source: @SPGLMarketIntel

Turning to Food for Thought, we have 5 items this morning:

1. This chart shows the decline in percentage of young people married with kids.This doesn't look cyclical. That's why it's hard to argue that family formation weakness is driven purely by slow economic growth.

Source:  ‏@JedKolko, @DKThomp, @bencasselman 

2. Social networks sorted by the number of active users.

Source: ‏@wef 

3. Diabetes explosion around the world.

Source: @VoxMaps

4. The X-generation got hammered more than others by the housing market crash.

Source: ‏@WSJGraphics, @WSJ

5. According to Vox, "this is what the Middle East looked like in 1914". It's no wonder that tensions in a number of these regions persist through today.

Source: ‏@VoxMaps