The Daily Shot And Data - August 9, 2016

Greetings,

1. Let's begin with China where the central bank seems to be on hold for now. Here is Goldman Sachs' take on the PBoC’s Q2 monetary policy report.

Source: Goldman Sachs

2. Despite the inaction from the PBoC, China's government bond yields are drifting lower again - driven by global demand for yield.

3. China's exports and imports disappointed. Imports were especially soft, raising concerns about domestic demand.

Source: @jsblokland

As a result of weak imports, China's trade surplus was higher than expected.

4. Weaker renminbi is helping China's exporters by increasing the domestic value of trade proceeds.

Source: @markets

5. Based on the recent weakness in the renminbi, one would expect exports to jump. That's unlikely for now.

Source: @Callum_Thomas

6. China's FX reserves have stabilized. The trajectory going forward could depend on how hawkish the Fed will be in the next couple of years.

7. Separately, here is a comparison of India's and China's growth rates.

Source: @Callum_Thomas

1. In other emerging economies, Taiwan's exports increased for the first time in 18 months.

Source: ‏@fastFT

2. Uganda cut its benchmark interest rate again as the central bank sees inflation stabilizing.

3. Mexico's vehicle production year-over-year shows improvement.

Source: Investing.com

4. Chile's inflation slowed, suggesting that the central bank's tightening cycle is over for now.

Source: Goldman Sachs

5. With the Brazilian real stable, the country's inflation seems to be moderating.

6. Israel's FX reserves hit another record.

7. South Africa's FX reserves are drifting lower.

Source: Investing.com

8. The Russian ruble continues recovering on stronger energy prices.

9. Turkish equity market is recovering after the coup-related drop as Moody's delays its rating decision. Will we see Turkey downgraded to junk status this year?

Source: Natixis, @joshdigga

Source: Moody's

1. Turning to the Eurozone (and continuing with the ratings theme), DBRS put Italy's rating under review "with negative implications". The banking sector remains a concern.

Source: Twitter, thestreet.com

2. Italy's high court approves Renzi's referendum that will shift more power to the central government. Renzi said he will resign if he gets a "no" vote.

Source: Fox News

3. Spanish 10yr government bond yield falls below 1% for the first time. Amazing.

4. Here are the consensus forecasts (over time) for the 2016 and 2017 GDP growth for Spain, Italy, and the Eurozone. It's quite a contrast between Italy and Spain.

Source: Deutsche Bank

5. German industrial production report was stronger than forecast while the nation's construction activity has been relatively soft.

6. Separately, the German labor market trend has been rather impressive.

Source: Goldman Sachs

7. Deflationary pressures in Greece persist.

Is Switzerland pulling out of its deflation?

On a different note, the WSJ points out that nations with negative rates actually have higher savings rates, holding back spending and investment. That may bring into question the effectiveness of negative rate policies by central banks.

Source: @NickTimiraos

1. Switching to the UK, the FTSE100 is at a 14-month high (in GBP terms of course). Currency devaluation can be very effective in inflating risky assets.

Source: ‏Investing.com

2. British pound denominated corporate bond prices are going vertical. This rally is unprecedented.

Source: barchart

3. UK market-based inflation expectations are gradually rising this month.

4. According to JPMorgan, global growth is expected to accelerate - with one exception.

Source: ‏@fastFT

Japanese life insurers are buying up foreign (mostly US) investment-grade bonds.

Source: Nomura, @lisaabramowicz1, @joshdigga, @Macronomics1

Next, let's look at a couple of trends in Canada.

1. Here is HSBC's take on Canadian labor markets.

Source: HSBC

2. Canadian wage growth is stalling.

Source: HSBC

3. At least some of this weakness in Canada's labor markets is driven by softer exports.

Let's continue with the labor markets in the United States.

1. Here are the monthly payrolls increases from goods vs. services sectors.

Source: BofAML

2. Next, we have the aggregate weekly hours of all US employees (month-over-month). Demand for labor seems to be firming up.

3. Here is the headline unemployment rate vs. Fed's "natural rate" of unemployment (below which we are supposed to get inflation). A similar chart using "underemployment" (such as U-6) and the equivalent natural rate may be a more effective tool.

4. The Fed's US Labor Market Conditions Index stabilizes.

5. Finally, here we have US full-time vs. part-time employment gains since 2010.

Source: Macquarie

In the funding markets, the 3-month US LIBOR continues to rise. Economists don't think this tightening will have a significant effect on growth because the trend is offset by tighter spreads and higher equity markets.

In credit markets, this FT chart shows US and EM HY bonds diverging from oil (discussed here last week).

Source: @FT

In equities, here is the US small caps outperformance over the past three months.

Source: Ycharts.com

Separately, Merrill Lynch sees tailwinds for US bank shares on the back of stronger new home sales.

Source: BofAML

Source: Ycharts.com

1. In commodities markets, US oil shot past $43/bbl on the unscheduled OPEC meeting. A number of oil producers are struggling with budget deficits and slowing economies and want the organization (mostly the Saudis) to take action.

Source: CNN

2. Here is the global crude oil imbalance projection from JPMorgan.

Source: @jomorganfunds

3. Efforts to overhaul China's bloated coal-mining sector are sending coal prices higher. The rally is showing in other coal markets as well.

Source: barchart.com

4. China’s steel prices continue to rise as the steel industry overcapacity cuts are not progressing as quickly as planned (more cuts to come). Note the similarity between the price trajectory in coal and steel.

Source: barchart.com

5. China's (Dalian exchange) iron ore price hits a two-year high on steel rally (above).

Source: barchart.com

In asset management, here is a good chart showing manager dispersion (variation in performance by managers) across major asset classes.

Source: @jpmorganfunds

Finally, we have a letter to the editor regarding yesterday's comment on the UK's housing market.

... here is my one disappointment - its your comment on the coverage of the UK housing market continuing to increase in value and you state: "This trend is reflective of an ongoing housing shortage". I think that is too simplistic and lazy for the Shot. Received wisdom is a housing shortage. However, for those of us who have lived and worked in the UK (twice now) the high property prices and ongoing growth are in large measure due to the tax structure plus the availability of cheap finance. The cheap mortgage rates are a global known quantity (pushing up asset prices) but the tax is less documented but very real. In the UK, there are massive tax breaks for ownership and huge taxes for movement:

1. My parents, for instance, live in a large house in a sought after neighborhood. But, unlike in the US, where such a house attracts a high property taxes, their property taxes are negligible. In addition, the extraordinarily high stamp duty means they will have to pay tens of thousands of pounds just to move (again in the US, moving home is not considered a high tax event). So nobody moves and just continually builds extensions, clogging up inventory and raising prices;

2. All of the gain is tax free with no cap. So the richer you are, the bigger the house and the greater the tax break. When I last lived in the UK, I was fortunate enough to have $500k in cash. I was looking for stocks or venture assets to invest in but why would I do that when I can lever it 4x on a house and, crucially, the gain is tax free? So like all Brits I bought a house rather than put my money into productive assets. It was a shrewd move as I sold 3 years later and made 100% on my initial investment.

As my Dad remarks, he would need "his 'ead lookin at" if he ever decided to move. Thereby clogging up inventory and raising prices. As Clinton might have said - "its the tax stupid",

Regards

Dan

In response to the above, it's worth noting that while taxation and low mortgage rates indeed play a significant role, the housing shortage is the primary longer-term macro driver of UK's housing market. New home construction is nearly half the 300k new homes a year needed to meet the demand (based on UK's demographic trends). Furthermore, new residential construction has been declining recently.

Separately, we had another letter to the editor regarding the hacking of Bitfinex. The letter can be found here in PDF format.

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

1. Xavier University now has "North America's first Pizza ATM". Maybe that's why milk futures are rallying ...