The Daily Shot And Data - April 6, 2016

Greetings,

This morning we start with China where the service sector PMI (from Caixin/Markit) came in above expectations. This had a calming effect on stock markets in Asia and pushed the S&P futures higher.

Source: Markit

Here are several other China-related developments we are tracking.

1. Auto sales growth in China rose.

Source: MNI

2. The steel rally in Shanghai continues as stimulus kicks in.

Source: barchart

3. As bad loan balances at China's banks rise, Beijing is implementing a debt for equity swap at the nation's lenders. Banks will convert nonperforming loans into shares of the borrowers. Inefficient firms who are unable to pay their debt will thus be allowed to continue rather than going into bankruptcy. Other than shedding debt and changing owners, these businesses are unlikely to be restructured, resulting in moral hazard.

Source: @SandyHendry, @business

Source: The Telegraph

4. While there are some positive economic signs from the mainland, Hong Kong is experiencing deteriorating economic conditions. Here is a summary from Markit.

Source: @MarkitEconomics

Has the Russian economy turned the corner? The latest PMI report suggests that there are signs of stabilization.

Source: @MarkitEconomics

Russian business sentiment remains terrible but at least it is no longer worsening.

Source: MNI

Russian inflation slowed more than forecast as the impact of ruble's decline fades and domestic demand remains weak. Some analysts are suggesting inflation will pick up again. Perhaps.

We now turn to Western Europe where Iceland's Prime Minister resigned as a result of the Panama Papers scandal. The documents revealed a major unreported conflict of interest.

Source: Reuters

Iceland krona remains strong in spite of the political turmoil (chart shows the euro declining vs. krona).

Source: barchart

In the UK, RBS points out a surprisingly weak labor productivity. The UK's productivity underperformance has been the subject of academic research and debates, but clear reasons for this remain elusive.

Source: ‏@RBS_Economics

According to RBS, "new business growth for UK service sector continues to slow - the weakest since Jan 2013".

Source: ‏@RBS_Economics

UK retail outlets have been cutting prices since 2013. This trend has contributed to weak CPI results,

In the Eurozone, retail sales surprised to the upside. Europe continues to shop.

The 10yr Bund yield fell below ten basis points. Is it headed for negative territory?

French economy continues to underperform. Here is a summary from Markit.

Source: Markit

Now let's go back to the United States where we have quite a few developments to cover.

1. US non-manufacturing business activity bounces back in March, beating analysts' forecasts.

Below is the summary of the ISM report.

Source: ISM

US non-manufacturing employment still looks weak, but at least it is no longer contracting (Index > 50). Note that there is a bit of a disconnect between this result and what we've been seeing from the US Labor Department.

Perhaps the most surprising development in the ISM non-manufacturing report is this jump in export orders index.

2. US trade deficit report was worse than forecast.

US goods imports from Mexico now exceed that from Canada. Part of this trend is the weakness in oil prices but its an important shift nonetheless.

3. The US hires-to-openings ratio remains low relative to historical levels. Part of this trend is the skills mismatch - many of the openings are for harder to fill jobs.

US construction is one of those areas where skilled labor is in high demand. The housing market crash had essentially gutted the pool of skilled workers who had shifted to other professions. Here is the construction jobs openings count.

4. Mortgage market remains tighter than during the housing bubble. The chart below shows elevated FICO scores for new mortgages.

Source: JPMorgan

5. Goldman projects a significant jump in US household formation which will be positive for the housing market.

Source: Goldman Sachs

6. The Fed's Reverse Repo Program (RRP) outstanding shows quarterly window dressing (discussed previously).

7. Here is the latest Atlanta Fed GDP tracker for Q1. As discussed back in February, the index clearly overshot.

Source: @AtlantaFed

7. Many point out the weakness in the current US economic recovery relative to previous cycles (which is often the subject of political debate).

Source: JPMorgan, h/t @MarathonWealth

It's important to point out however that at least a portion of the slower than usual GDP growth is demographics. As the working age population growth stalls, so does the GDP growth.

Source: JPMorgan, h/t @MarathonWealth

8. Here is an updated consumer balance sheet.

Source: JPMorgan, h/t @MarathonWealth

Now, a couple of developments in the energy markets.

1. We saw the first draw on US crude oil inventories in 6 weeks.

2. It seems that the production freeze is back on. Perhaps.

Source: Reuters

Crude oil moved higher in response.

Source: barchart

Separately, Bloomberg ran a story on wind power in Texas (and elsewhere) creating negative wholesale electricity prices. It's not a good development for alternative energy, which will need financial incentives as the tax credits get phased out in the future.

Source: ‏@business

The US Treasury tax ruling on "inversions" (which apparently did not require a congressional approval) killed the Pfizer/Allergan deal. It will be interesting to see if the new ruling gets challenged in court by other firms.

Source: WSJ

Below is the Allergan share price.

Source: barchart

The next chart shows bank share underperformance vs. the broader market (over the past 200 days).

Source: Stockcharts.com

The situation was exacerbated in Europe as Deutsche Bank and HSBC got stuck with a hung equity deal. Schaeffler, whose share sale did not go well, is a manufacturer of bearings for the auto and the aerospace industry. The mess with Volkswagen, which is a big client of Schaeffler did not help.

Source: Bloomberg.com

Source: Google

US HY spreads are rising again. It's unlikely we are going back to the Feb/early March levels.

Source: @fastFT

Dollar-yen hit a multi-year low on Tuesday as the equity markets sold off. The yen is viewed as a "safe-haven" currency and it has been strengthening (the dollar has weakened against the yen).

Source: barchart

Finally, according to PirchBook, private equity funds continue to increase in size. Part of the reason is that the reduced fees make operating smaller funds uneconomical.

Source: @theleadleft, @PitchBook, @garrettjblack

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

1. Which cars do consumers in China prefer?

Source: MNI

2. Global military spending is rising again. Here is the situation in Europe.

Source: ‏@business

3. Electric vehicle sales in the US.

Source: ‏@wef

4. Countries where politicians and public figures have been impacted by the Panama Papers so far. It's important to point out that not all of the transactions in those documents are illegal.