The Daily Shot And Data - February 26, 2016

Let's start with several developments in Japan.

1. The BOJ's core CPI measure disappoints, as the 2% inflation target remains elusive. The situation is further exacerbated by the recent strengthening of the yen.

Source: @business

2. The 10yr JGB yield continues to drift deeper into negative territory.

3. It seems that the Japan's central bank had sold treasuries in response to the Fed's rate hike - a rather naive move. Whatever the case Japan's official accounts are now sitting on a great deal of dollar deposits.

Source: @markets

4. Japan's population has officially started to decline as the nation faces daunting demographic challenges.

Source: the Guardian

5. Foreigners dominate Japan's equity markets.

Source: CLSA - GREED & fear

That's why the recent international market jitters were exacerbated in Japan, with volatility spiking to levels not seen since the Fukushima Daiichi nuclear disaster.

Source: CLSA - GREED & fear

Now let's look at several items in the Eurozone.

1. The 5yr German government bond yield hits record low as the ECB stimulus expansion approaches.

2. Related to the above, deflation remains a concern in several member states. Here is Slovakia's CPI.

3. Credit expansion in the Eurozone remains tepid but thus far loan balances continue to rise. Will the recent selloff in the banking sector dampen this nascent recovery as banks limit balance sheet usage?

Source: ECB

The best indicator pointing to continuing credit expansion in the Eurozone is the broad money supply - which grew a bit faster than expected. The March report on loans and money supply will be crucial because it will tell us if the banking system is once again retrenching.

Elsewhere in Europe we see Switzerland's industrial production, orders contract. The Swiss franc's strength is creating significant headwinds for growth.

Below are the recent poll results on Brexit. The two camps seem to be tied but there is a large undecided group. Will this play out the way the Scotland referendum did?

Source: ‏@wef

In China bank valuations hit record lows as investors fret over bad loan balances.

Source: @justinaknope

China's recent sharp credit expansion (spike in RMB loans discussed a few days ago) is showing up in improved money supply growth. In the past money supply growth led industrial production (IP). Will we see IP turn higher in the next few months?

Source: ‏@ANZ_Research

A severe currency depreciation can end up being costly. Here is Zambia's CPI after a massive decline in the kwacha.

Back in the United States, we have quite a few items to cover this morning. 1. We are getting conflicting signals regarding US manufacturing. At first glance it looks as if the manufacturers orders report was better than expected.

Source: Reuters

On the other hand some have pointed out that this could be due to seasonal adjustments. Here is what the above chart looks like without those adjustments - it's hard to see an improvement.

Also the regional Fed surveys still point to persistent weakness at US factories. Here is the Kansas City Fed index.

Moreover, the regional surveys as a group suggest a sharply lower ISM (national manufacturing report) result.

Source: @Not_Jim_Cramer

1. And yet the recent US natural gas flows to metal industrial plants point to a rebound in the above measure of manufacturing activity. Who is right?

Source: @Callum_Thomas

2. Related to the above, US manufacturers' inventory to shipments ratio has risen to the highest level since 2009. This suggests that inventories have not yet fully adjusted to slower demand.

3. Here is a helpful indicator of US industrial/construction activity: shipments of heavy duty trucks in the US. Clearly this indicator is responding to the current uncertainty.

4. US oil and gas field equipment orders show a spectacular bubble bursting in the energy sector.

5. Are more people working part-time these days? Below is the proportion of people employed part-time - which increased dramatically during the recession and declined gradually since. The ratio however remains elevated relative to the pre-recession years.

6. US house prices finally exceed the pre-recession peak.

7. Are house prices growing too fast? One way to tell is by comparing them to wage growth.

8. Below are two indicators from the Atlanta Fed: rising risk of deflation and yet a 2.5% projected GDP growth for Q1.

Source: @AtlantaFed

9. Here is one way to describe some of the economic data we are seeing from the US.

Source: @IvanTheK

Taking a look at equity and credit markets, here are some interesting trends.

1. As discussed a couple of days ago the US banking sector has underperformed dramatically. Bank valuations look really attractive now as the chart below shows.

Source: ‏@Callum_Thomas

2. VIX (implied volatility index) is below 20 now as risk appetite gradually returns.

Source: Investing.com

3. It seems that many retail investors exited the equity market this year and are sitting on cash - again.

4. The equities - oil correlation remains elevated.

Source: ‏@Schuldensuehner

5. Turning to the credit markets, we finally had a strong HY funds inflow.

‏Source: ‏ ‏@lcdnews, @mfuller2009

6. On the other hand we had 31 straight weeks of outflows from leveraged loan funds. The aggregate AUM of these funds has declined dramatically over the past couple of years.

‏Source: ‏ ‏@lcdnews, @mfuller2009

7. According to JPMorgan, "Loan issuances below $300mm represent just 8% of total issuance, down from 49% in 2001". Access to term funding for middle market firms is becoming difficult.