The Daily Shot And Data - July 12, 2016

Greetings,

1. We begin with the United States, where the Citi US Economic Surprise Index hits the highest level since Jan-2015 as a result of Friday's payrolls report.

Source: Yardeni Research

2. Longer-term US consumer inflation expectations rose to a 10-month high (although it's a bit hard to see on this chart).

Source: @NYFedResearch

3. On the other hand, market-implied inflation expectations decline.

Bloomberg: - The five-year, five-year break-even rate, the bond market’s expectation for the pace consumer prices will increase from 2021 to 2026, tumbled to 1.3 percent, the lowest level in data compiled by Bloomberg that go back to 1999.

Source: FRED

4. US consumer expectations of wage growth also rose. However, big divergences exist between high- and low-"numeracy" responders. Skills gap?

Source: @NYFedResearch

5. Below is an interesting comment from Deutsche Bank regarding the relationship between US output gap and the yield curve ("Bu" = bull, "Be" = bear, "S" = steepening, "F" = flattening). We are looking at a slower growing potential output, which flattens the curve.

DB: - Potential output has been revised substantially downwards post-crisis. If this trend continues, additional bull flattening is likely and curve inversion could become a realistic possibility.

6. The Fed's Labor Market Conditions Index has improved a bit but remains in negative territory for six months in a row. We haven't seen this level of weakness since 2009.

7. The US dollar index is grinding higher - this is something we want to watch closely for signs of tighter financial conditions.

Source: @barchart

Canada's housing starts surged last month as rising home prices encourage more construction.

And here is the Canadian house price index.

Source: CREA

1. Turning to the Eurozone, the IMF is suggesting that bank bailouts (using government funds) should be considered because bail-ins will result in haircuts for retail investors. As a bit of background, most of these retail investors didn't actually go out and buy bank bonds. Instead, banks offered customers higher-yielding accounts that in effect represent subordinated financing for these banks. Somewhere in "fine print" these products (maybe) warned that investing is equivalent to buying subordinated paper.

Source: IMF

According to Bloomberg, some €180 billion of these high-yielding "deposit" products have been sold (junior bank bonds disguised as HY deposits). It's a serious issue for Italy.

Source: ‏@ZSchneeweiss, @JohnEGlover

Bail-in risks have pushed Monte Paschi's subordinated bonds to 50 cents on the euro.

Source: ‏@ZSchneeweiss, @JohnEGlover

2. Santander and UniCredit are abandoning their €5.3bn fund management deal that would have created a massive asset manager in Europe. UniCredit shares sell off again.

Source: Google

3. European banking sector investor sentiment index hits record lows.

Source: @FT

4. The ECB is buying more Italian government bonds because a significant portion of German bonds is yielding below negative 0.4% - which makes them ineligible for QE. The way the ECB purchases those bonds is via the Bank of Italy - raising the Italy's central bank's balance sheet and Traget2 liabilities (to the Eurosystem).

Source: Deutsche Bank, @joshdigga

5. Italian industrial production unexpectedly declined, creating further political challenges for Renzi.

6. It seems that Spain and Portugal will get a pass despite violating the EU rules by running high budget deficits.

Source: Bloomberg.com

7. This chart shows the French 12-month government bill auction (yield).

8. In our final note on the Eurozone, the Dutch 10-year yield goes negative for the first time in ... 500 years?

Source: Deutsche Bank

Speaking of negative yields, the Swiss yield curve moves deeper into negative territory.

Elsewhere in Europe, Norway's CPI jumps more than expected, as electricity prices soar 31% (YoY).

1. Now on to the UK, where the betting market odds of Scottish Parliament calling for an independence referendum in 2016 are below 25%. Of course, there was another referendum whose odds were at one point below 25%.

Source: @PredictIt_

2. According to Deutsche Bank, the sterling devaluation could send the UK inflation to 5.2% - a 25-year high.

Source: Deutsche Bank

Source: @FT

3. Markets are betting on a near-term BoE rate cut shortly as rate futures jump.

Source: ‏@barchat

Source: ‏@markets, @lucy_meakin

4. The FTSE 100 continues to rally on global risk-on sentiment, UK's weak currency, BoE looming stimulus, and Theresa May taking over for David Cameron.

Source: @barchart

5. Even the traded UK property fund jumps 5%. All is well.

1. Switching to emerging markets, Poland is still firmly in deflation.

2. Egypt's urban consumer inflation soars to 14% in June and another currency devaluation looms. Note that in the past, high food inflation in the region created social unrest.

3. India's stock market is at the highest level since last August.

4. China's tier-1 housing markets stand out in terms of valuation and affordability.

Source: @BofAML, @joshdigga

5. The renminbi continues to weaken vs. USD, approaching 6.7 to the dollar.

Source: @barchart

1. Back in Japan, the trade-weighted yen is up 25% since June of last year. Tokyo is unlikely to tolerate such currency strength for too long.

Source: ‏@jsblokland, @JmBadalamenti

2. Ben Bernanke visits the BoJ, and many are speculating that he recommended for Japan's central bank to put "pedal to the metal."

Source: Reuters

3. The anticipation of BoJ's stimulus sent the dollar soaring vs. the yen to one-week high. This market will get ugly if the BoJ disappoints.

Source: @barchart

4. The Nikkei225 futures rally on a weaker yen.

5. US bonds (especially investment-grade) received the largest share of Japanese investors’ flows.

Source: HSBC, ‏@joshdigga

By the way, we just had the greatest daily inflow into LQD - a large investment-grade corporate bond ETF.

Source:‏ @business

Market anticipates further rate cuts by Australia's central bank in the next year.

Source: Deutsche Bank, @joshdigga

1. Looking at the US markets, the S&P500 hits a new record.

Source: @barchart

2. At the same time, NYMEX crude oil drops below $45/bbl on higher Canadian output and rising US rig count.

Source: @barchart

3. As we see above, oil and equities have diverged.

4. In other commodities, US coffee futures were up almost 4% on stronger Brazilian real, tighter supply in Asia.

Source: @barchart

5. US cotton futures hit the highest level in a year on strong export data, fund buying.

Source: @barchart

The earnings season is off to a good start. Perhaps. Alcoa tops analyst estimates as the stock jumps. Some suggest that Alcoa's earnings beat is "smoke & mirrors".

Those who had young kids in the 90s may remember the Pokemon craze. It's back. Pokemon Go popularity sends Nintendo stock soaring.