The Daily Shot And Data - February 3, 2016

We begin with the Eurozone where a number of economic reports have been better than expected.

1. While the area's manufacturing activity expansion has slowed, there are a couple of positive trends, particularly Spain and Greece. Spain now has the fastest growing manufacturing sector in the Eurozone.

Source: ‏Markit

Greek manufacturing is not growing (PMI = 50) but has seen a remarkable stabilization over the past few months.

Source: ‏Markit

2. The Eurozone unemployment rate hit the lowest level since September 2011.

Part of this trend is driven by the declines in German unemployment rate which fell to the lowest level on record. At current rate of GDP growth Germany will be facing labor shortages in the next few years.

Source: Investing.com

Irish unemployment rate fell to a 7-year low as the nation prepares for elections.

There are of course several weak spots in the euro area labor markets, one of which is Italy. Italian unemployment rate decline has stalled.

Source: Investing.com

Here are the latest unemployment rates across the EU.

Source: @fastFT

In spite of improving labor market fundamentals and all the monetary easing, Eurozone's wholesale deflation has not been tamed. The year-over year PPI has remained in the red since 2013. This gives Draghi additional ammunition he needs to pull the trigger on new stimulus.

Source: Investing.com

We've had some positive news out of China as well. Here are two key developments.

1. China's services sector activity surprised to the upside, offsetting the contraction in manufacturing.

Source: Markit

2. China’s steel production PMI rose to a nine-month high in January as stimulus kicks into gear. Clearly some of that production is being exported, but there seems to be demand. Iron ore futures jumped (charts below show Iron ore futures on NYMEX and in Singapore).

Source: ‏barchart

Neither of the above trends suggest a hard landing - at least not yet. Betting on a global recession at this point may be premature.

One final item on China worth noting is the rapid growth in the nation's domestic bond market. While some of this is due to increased corporate debt, a large portion of this trend has to do with Beijing trying to get its muni market moving. The goal is to refi local governments' sponsored financing companies debt.

Source: ‏@tracyalloway, Deutsche Bank

In other emerging economies we continue to see signs of stress.

1. The Russian ruble shed 3% on Tuesday as oil prices fell. It will be interesting to see what will be Moscow's next move on this - after the overtures to OPEC failed. Increased tensions with Turkey will certainly help improve energy valuations for example.

2. Brazil's industrial production misses forecasts again. The situation there is just a disaster.

Source: Investing.com

3. The Hong Kong dollar peg remains under pressure this year. The Hong Kong dollar still trades in a relatively tight rage vs. the US dollar, but capital outflows and bets on a sharper devaluation are building.

Source: barchart

Hong Kong's retail sales continue to weaken as demand from the mainland wanes. A weaker currency would help with that.

Source: Investing.com

4. The Ukrainian currency is still weakening as the nation tries to conserve its FX reserves.

5. Speaking of currency devaluations, the Venezuelan bolívar collapse continues. Government debt default is looming.

Source: @SoberLook

Revisiting Japan for a moment, the 7-yr JGB yield moves lower into negative territory. Amazing.

Speaking of falling yields, let's now return to the United States where the 5yr treasury yield is back below 1.3%. Yields rose in November when the market realized that the Fed is about to hike rates. That increase has now been fully reversed, and then some.

Source: Investing.com

Related to the above, the Jan-2017 Fed Funds futures hit a new high on Tuesday as rate hike expectation fade. The futures now imply the Fed Funds rate of 52bp in January of next year, just 14bp above the current rate.

Source: ‏barchart

In fact the implied probability of no rate hikes in 2016 is now greater than the probability of the Fed increasing rates.

Source: CME

As an aside, it's quite sad to see some Fed officials dismiss the moves across global markets, calling for continuing rate hikes. This is how policy mistakes are made, especially given that the markets-to-real-economy feedback loop can be quite strong (we've discussed what the dollar rally did to US growth). This is hubris, pure and simple.

Source: FT

In other US developments, the Johnson Redbook Index of US retail sales deteriorates further. Are we seeing signs of consumer retrenchment?

Source: Investing.com

On the other hand, US auto sales surprised to the upside. The auto loan ABS machine seems to be functioning in spite of tighter credit conditions.

Source: ‏Investing.com

1. NYMEX crude oil fell below $30/bbl again. And we are back in this ugly pattern.

Source: @SoberLook, barchart

2. The crude oil implied volatility index (OVX) spiked to multi-year highs.

Source: Ycharts.com

3. Perhaps the most violent move in energy on Tuesday was in US wholesale gasoline. Gasoline inventories are supposed to rise this time of the year, but this set of increases is hitting new records.

Source: Investing.com

Gasoline futures fell over 9% on the day, falling below $1 per gallon for the first time since 2009. US wholesale gasoline price is now 98 cents.

Source: barchart

Moreover, retail gasoline prices continue to decline and are now at 2008 levels.

Related to the above, the correlation between crude oil and equities remains elevated as extreme oil weakness sparks general risk aversion.

Source: @DavidInglesTV

Now we have a few developments in the equity markets.

1. This chart from Double Line has been making its way across the social media. It suggests that a significant decline in the S&P500 profit margins coincides with or predicts recessions. Perhaps.

Source: ‏@StockTwits

2. According to this next chart, US shares look overvalued. It's the ratio of forward P/E and the consensus EPS growth rate.

‏Source: @Not_Jim_Cramer, @teasri

3. Strong US dollar and high global crop yields are hurting ADM's profits.

Source: Google

4. UBS shares got hit in spite of beating forecasts. Some of this is jitters around investment banking and demand for credit.

Source: Google

5. BP's record annual loss was not well received.

Source: Google

Source: @business, Bloomberg.com

6.Twitter valuation is turning into a disaster as user growth stalls. This is unfortunate, as the platform remains one of the top sources of information for financial markets participants.

Source: Google

Source: @business, Bloomberg.com

We finish with a couple of charts from JPMorgan on the hedge fund industry.

1. Fund of funds are shifting business to "customized products" (vs. commingled funds). Note that "customized products" often means specialized single-investor funds or managed accounts.

Source: ‏JPMorgan

2. Here are the top concerns of hedge fund investors.

Source: ‏JPMorgan

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

1. The Pivit prediction market shows the Iowa probabilities shifting on Monday evening as the results came in.