The Daily Shot And Data - February 29, 2016

We begin with the United States where in spite of extremely low market-based inflation expectations and tighter credit conditions, the Fed could be back in play in 2016. A March hike is of course out of the question, but we may get a surprise later in the year.

As discussed before, many economists are discounting current inflation expectations as being inconsistent with the current oil forward curve and simply unsustainable. On the other hand US traditional inflation measures are stirring.

Here we have the core PCE (the Fed's favorite indicator) and the core CPI - both showing some acceleration in prices.

As a number of economists had predicted, healthcare inflation is waking up. Also the cost of shelter in the US is now rising at over 3% per year, with the rate continuing to increase. Sadly, this is materially higher than the national wage growth rate, putting pressure on Americans with low-paying jobs. This is the result of a housing shortage in the US and it's unlikely that there is much the Fed can do about it. Nevertheless, it's a data point.

Moreover, other measures suggest that, unlike in the Eurozone, there is no evidence of deflationary pressures in the US.

1. The so-called "sticky" CPI (the less volatile components of the CPI) is near 2.5% - the highest since 2009.

2. The "trimmed mean PCE" inflation rate is also on the rise.

Source: @SoberLook

Further reports released last week could add to the ammunition of the more hawkish FOMC members. For example US consumer spending was stronger than expected last month. Alas, some of this increase was driven by higher spending on healthcare, but it's an important data point nevertheless.

The futures markets are starting to react to all these reports, with the Fed Funds futures falling on Friday (lower futures prices imply higher rates).

Source: barchart

Another US dollar rally will likely be the result of further rate hikes, posing significant risks to the economy. However, given the Fed's focus on some of the indicators above, rate hikes in 2016 are now back on the table (more on the topic here).

Source: barchart

The US treasury curve is now the flattest since 2007 as growth expectations are discounted. By the way, this is highly inconsistent with the Atlanta Fed's GDPNow Q1 growth expectations.

Source: ‏@Sunchartist

Now let's cover several developments in the Eurozone.

1. Eurozone's inflation expectations are at record lows. It's interesting that if measured in terms of the number of standard deviations from the mean, both the US and the EUR inflation breakevens are at extreme levels.

Source: @DeutscheBank

2. Eurozone's economic confidence fell more than expected in February as market jitters start to have an impact. Overall however confidence remains far above the levels we saw during the Eurozone crisis.

3. Related to the above, the Eurozone economic surprise index continues to slide.

Eurozone economic surprise index; source: @TheStalwart

4. One of the concerns in Europe remains the banking system's exposure to energy. Analysts are still struggling to obtain the precise measures.

Source: @Sanscelerien, Bloomberg.com, h/t Jake

5. Fiscal austerity in the Eurozone is over and so is its drag on the economy from tighter government policies.

Source: @jsblokland, UBS

6. Spain remains in deflation and the German consumer inflation is in the red again. The Eurozone is struggling with deflationary pressures - something we are not seeing in the US (above).

7. Many German towns are highly dependent on a single large firm.

Source: @EconBizFin, h/t Jake

Worries about Brexit persist as the British pound drifts lower.

Source: barchart

Also in the UK, RBS shares slide further as losses continue.

Source: Bloomberg.com

In China we continue to see the stock markets under pressure - especially banks. The Shanghai Composite is at 2014 level. This is spooking US investors, with the S&P500 futures down in early morning trading.

China's growth is increasingly dependent on the service sector. Weakness in financial services is therefore not helpful.

Source: @Callum_Thomas

China's urban labor force growth slowed sharply in recent years as some workers return to rural areas. Apparently many of them are having trouble getting paid as factories struggle.

Source: @vexmark

Now let's look at other emerging economies.

1. The South African rand is getting pummeled as the political mess related to the newly reappointed finance minister continues.

Source: ‏Investing.com

Source: Reuters

2. The Ukrainian currency continues to weaken, with the latest headlines painting a picture of a government in desperation.

Really?

Source: PRESS TV

3. The Argentine peso hits new lows as multiple investigations targeting Cristina Fernández de Kirchner continue.

4. Saudi FX reserves keep falling. Is the next step to give up the dollar peg, which in theory should help preserve the reserves?

5. Is Egypt about to devalue its currency again?

6. While India's economic growth outperforms most other nations, the country's government deficit remains a problem.

Source: ‏@EMgist, Economist.com

7. Venezuela is quickly running out of FX reserves.

Source: ‏‏@JavierBlas2

In other global developments we have markets expecting rate cuts in Australia, New Zealand, and Canada. Deutsche Bank disagrees. Are the "dollar bloc" currencies undervalued?

Source: Deutsche Bank

Speculative accounts have increased their net long yen positions.

Average global bond yields hit new lows.

Source: @ReutersJamie

Here are a number of developments in US markets.

1. Energy: 400 oil rigs now operate in the US - that's 25% of peak level (in 2014), the lowest since 2009.

Also, US natural gas is in free-fall, now at the lowest level since 2001.

Source: barchart

2. Fixed income: Speculative accounts have been covering short treasury exposure.

Source: @DeutscheBank

At the same time, open interest in 10-year treasury note futures jumps.

Source: @DeutscheBank

3. Equities: Small speculative accounts have been increasing their short positions in US equity futures. Another nice contrarian indicator.

Source: @Callum_Thomas

Also, the market turbulence has shut off the IPO spigot.

Source: ‏@Callum_Thomas, h/t Jake

Finally, in spite of the Q4 GDP adjustment, US velocity of money remains at record lows. This is telling us that credit creation in the US is not translating into growth the way it has in the past (no multiplier effect).

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

1. Japan's government debt per person.

Source: ‏@BloombergBrief

Source

2. The current accounts of all countries in the world should sum to zero - this is similar to one of those conservation principals in physics. It doesn't however because there is "leakage". Transportation lag (the difference between when some nations report exports while others report imports) and tax cheating (under-reporting sales) result in non-zero global current account balances.