The Daily Shot And Data - February 25, 2016

We begin with the energy markets where we are starting to see indications of slowing US oil output.

Source: @SoberLook

Moreover, we finally have signs of capitulation.

Source: INFORUM

The article above refers to Whiting Petroleum Corp whose shares are below $4 after exceeding $90 in the summer of 2014. The market cheered the firm's decision to preserve capital rather than pump at a loss. Shares jumped 7% after hours.

They must be popping champagne corks in Riyadh.

Source: Google

On the other hand, US oil inventories continue to grow as crude in storage at Cushing, OK (WTI futures settlement hub) hits another record.

We saw the first draw on US gasoline inventories in 15 weeks as we approach the time of the year when gasoline stocks begin declining. Inventories still remain near record levels.

US distillates (diesel, fuel oil, etc.) demand remains weak relative to last year. Is it just weather-related?

This next chart has been widely discussed in the blogosphere. It's the price of crude oil measured in ounces of gold hitting new lows. Some view this as deflationary. Perhaps.

Source: Ycharts.com

Yesterday we included a chart from the Fed that shows the disconnect between inflation expectations and crude oil futures. Here is a similar result from Goldman. Inflation swap pricing is inconsistent with oil forward prices and diverges even more from Goldman's forecast for crude oil. This looks like an inflation swap vs. crude oil relative value trade.

Source: Goldman Sachs

Indeed, US inflation expectations remain near multi-year lows.

Source: ‏@auaurelija

There seems to be some debate at the Fed regarding the reliability of these measures. James Bullard seems quite concerned.

Source: ‏Reuters

But then we get this from Jeff Lacker.

Source: Reuters

These conflicting messages suggest a major divide at the Fed, as the central bank officials tell us that low inflation expectations are indeed a concern but we are going to raise rates anyway.

Rate increases may potentially be appropriate if we saw signs of accelerating GDP growth in the United States. However the latest PMI reports suggest just the opposite. Markit US services PMI is below 50 (contracting) for the first time in 27 months - and materially below forecasts. Unlike the slowdown in manufacturing, we cannot chalk this up to being a small part of the economy.

Indeed the Markit Composite PMI shows US economic activity stalling. Some have suggested this is related to extremely cold weather in the Northeast recently. Perhaps.

Source: Markit

Continuing with the US economy, new home sales were below consensus last month.

Part of the reason for the weakness is low inventories of new homes - which remain below pre-recession levels.

Here is what the above chart looks like adjusted for the US population. We are looking at a potential housing shortage over the next decade.

By the way, we got some positive news on the US economy from Home Depot, which had one of its best quarters. This could be telling us that the consumer/housing part of the economy is doing OK.

Source: @MatthewPhillips, h/t Josh

Now let us look at the latest developments in Europe.

1. The British pound continues to drift lower on Brexit fears. Is the selloff overdone at this point?

Source: barchart

Also in the UK, mortgage approvals are near two-year highs ahead of the so-called "buy-to-let" tax.

2. Swiss long-term government bond yields are hitting new lows as the curve flattens.

3. Just like in the US, Eurozone inflation expectations are near the lows and have diverged from the equity markets. Is this another relative value trade?

Source: Goldman Sachs

In the currency markets, the combination of Brexit fears and the BoJ shifting from further monetary expansion crated a massive disconnect between FX rates and interest rate differentials. Here is the USD/JPY and the GBP/JPY divergence (currencies vs. 2yr yield differentials).

Source: @bespokeinvest

Speaking of rate differentials, the 10y JGB yield is back in the red at record lows.

Switching to emerging markets, here are several updates.

1. Russia's banking system is dealing with a growing volume of bad debt. More bank bailouts in the works?

Source: JPMorgan, h/t Josh

2. Eastern Europe's labor costs are still quite low relative to the Eurozone. In fact adjusting for labor costs shows Germany having very low productivity relative to some Eastern European nations.

Source: JPMorgan, h/t Josh

3. Brazil is facing a credit contraction as loan balances shrink sharply and default rates rise.

Source: Reuters

Moreover, Moody's just downgraded Brazil by two notches - which was somewhat unexpected.

Source: Reuters

In the equity markets the WSJ points out a growing spread between GAAP and pro-forma earnings. One must keep in mind however that 2015 was a record year for M&A, which contributed to this gap.

‏Source: @jdlahart, @WSJ

‏Source: ‏@MisterPushups, @business

The so-called SPAC (or blank-check company) activity is on the rise. The latest versions are effectively distressed funds (traded as public shares) focusing on acquiring struggling businesses - especially in energy related sectors.