The Daily Shot And Data - August 1, 2016

Greetings,

Let's begin the week with the latest developments in emerging markets. Friday saw a number of economic releases, some of which were a bit surprising - especially data from Latin America.

1. Brazil's debt-to-GDP ratio disappointed (highest since 2008), even as the fiscal gap was smaller than expected.

Brazil's unemployment rate reached the highest level since 2004. The increase, however, was lower than expected. Analysts continue to look for signs of "green shoots".

2. Chile’s economic data was disappointing and some economists now question the wisdom of hiking rates.

Source: Bloomberg.com

Source: Investing.com

3. Mexican GDP unexpectedly contracted (first time in 3 years). Some suggest that this is a reflection of the soft economy in the US.

4. Colombia's central bank hiked its benchmark rate again to fight inflation. The central bank ignored the last minute plea by President Santos to halt rate increases, which is dampening economic growth.

5. The South African rand rallied 2% Friday on Bank of Japan's "disappointment" (which resulted in weaker US dollar).

Chart shows the number of rand one dollar buys.

Separately, the South African money supply growth has moderated recently. Are the credit markets tightening?

6. The Nigerian naira continues to weaken. There are rumors in the market of significant capital flight and collapsing FX reserves.

Source: TradingView.com

The chart below shows Nigeria's latest FX reserves trend. Some, however, suggest that these figures are overstated, and the actual situation is even worse. Further weakness in the currency could destabilize the nation as inflation spirals out of control. The recent rate hike (discussed last week) has not worked.

7. Indian 10yr government bond yield hit multi-year lows as fixed income money pours into emerging markets.

8. The renminbi strengthened substantially on softer US dollar. This reversal could be bullish for global risk assets.

Source: barchart.com

1. Switching to Japan, dollar-yen broke below 102 on Friday - dropping over 3% since the BoJ disappointment. Some suggest that we are going to see par and below shortly, especially if the Fed holds off on rate hikes. This yen rally (dollar weakness) could lead to further deflationary pressures in Japan.

2. The Nikkei futures closed higher on Friday after several wild swings.

Source :Investing.com

3. According to Reuters, the BoJ may once again consider implementing the so-called "helicopter money" as the central bank runs out of options - especially if the yen continues to strengthen.

Source: Reuters

Switching to New Zealand, the Kiwi dollar rallied 2% on Friday in response to the BoJ's "inaction". While this size move may not seem like much for stocks, in the developed markets' currency world, a 2% day is a big deal.

Source: barchart.com

Investors are snapping up New Zealand government bonds that still have one of the highest yields in the developed world. The 10-yr yield fell to record lows.

1. Turning to the Eurozone, most European banks survived the ECB stress tests. Monte dei Paschi is working on a capital raising scheme.

Separately, for some reason, RBS is not shown in the WSJ chart below. The bank didn't do too well - here is more on RBS.

Source: @WSJGraphics

2. The Eurozone may be pulling out of deflation. Perhaps.

3. Italy's labor markets are still a mess as the unemployment rate unexpectedly turns higher. There has been no progress in bringing down Italian unemployment this year at all.

3. Spain's real GDP grew three times as fast as the US economy in the first half of the year (3% vs. 1% annualized).

Separately, Spanish deflation, which started two years ago, persists though today.

Source: barchart.com

French GDP growth unexpectedly flatlined. According to some economists, in Q1 the French economy was boosted by preparations for UEFA Euro 2016, pulling forward some economic activity.

Switching to the UK, speculative net short British pound positions hit a record. Short GBP/USD is quickly becoming a crowded trade.

UK mortgage approvals fell to a one-year low in June. Now everyone wants to know what July looks like.

Sweden's Q2 GDP growth was much softer than expected on weak exports. As discussed last week, there are signs of moderating economic expansion.

Canada’s GDP fell more than expected in May due to wildfires and a sharp decline in manufacturing activity. Economists are suggesting that the situation has improved since.

Source: Investing.com

In the United States, the GDP report was a disappointment. Here is the real GDP growth on a year-over-year basis - not a great trend. The second chart shows what the recent growth looks like in perspective.

Source: @WSJGraphics

It's interesting that the Atlanta Fed's GDPNow (discussed last week) predicted this weakness in the GDP report based on slow inventory build in June. Some Daily Shot readers told us they made money on this information going long treasuries before the GDP release.

Source: @AtlantaFed

The next chart shows the various contributions to GDP growth. Strong consumption was offset by inventory reductions and slower investment.

Source: Natixis, @joshdigga

Here are the components and the forecast from Natixis.

Source: Natixis, @joshdigga

2. US federal debt-to-GDP ratios continue to rise. It's surprising just how little attention this is getting in the presidential debate - perhaps due to "austerity" becoming a dirty word.

3. US velocity of money continues to fall as credit expansion (which causes the money supply to rise) buys increasingly smaller amounts of nominal GDP growth.

4. US employment cost index rose, suggesting more pressure on margins unless companies can raise output prices.

Source: @Econoday

By the way, US employment cost index growth for workers in accommodations and food service rose sharply due to regional minimum wage hikes.

Fed's Williams is jawboning the markets with a threat of not one but two rate hikes this year. Most economists expect one hike, probably in December.

Source: Reuters

1. In the fixed income markets, treasuries were whipped around on Friday, ending higher (yield lower) after the GDP report.

Source: barchart.com

2. The US dollar index tumbled 1% on Friday after the BoJ announcement, with Morgan Stanley warning that more dollar weakness is on the way. That's a bullish sign for risk assets (equities, commodities, emerging markets, etc.).

Source: barchart.com

3. LIBOR continues to grind higher.

Source: stockcharts.com

Turning to the equity markets, Wall Street seems to want Hillary Clinton to win. The two charts below show (in part) why. Historically, a leadership change with the same party in place produces the best returns. A Democrat in the White House with a Republican-controlled Congress also produces the best result.

Source: @BofAML, h/t Stan

Related to the above, according to the WSJ, hedge fund owners and employees have donated $48.5 million to Clinton and $19 thousand to Trump.

Source: @WSJGraphics

2. The once-hot online lending ("P2P") market does not seem too attractive anymore.

Source: Reuters

Source: Google

3. Ex-US markets sharply outperformed the S&P500 over the past 5 days.

Source: Ycharts.com

1. In commodities, crude oil remains under pressure as US oil rig count rises again.

Source: Investing.com

2. However, according to Bloomberg, "glut in oil supply is set to end amid investment cuts". Indeed, major oil firms show little appetite for CapEx, suggesting that supplies are unlikely to keep up with the rising global demand in the intermediate term.

Source: Bloomberg.com

3. Long-silver has become an incredibly crowded trade.

4. US wheat continues to sell off. The second chart below shows Deere & Company shares over the last couple of months.

Source: barchart.com

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

1. According to the WSJ, the US faces a "college loan glut. Massive investment in improving skills turns sour, echoing the housing crisis".

Source: @WSJ

2. Growth in connected devices.

Source: BofAML

3. By and large, Europe isn't much into diversity.

Source: ‏@paul1kirby, @pewresearch chart

4. The next chart shows the national poverty line vs. the prosperity of each country. A "poverty line" is the level of income below which a nation would classify one as impoverished. PPP is purchasing power parity (a way to compare incomes across nations).