The Daily Shot And Data - July 18, 2016

Greetings,

We begin with emerging markets where Friday's extraordinary events in Turkey shocked the world. The first news of the coup attempt sent the Turkish lira down nearly 6%. The chart below shows the US dollar rallying against the lira.

Source: @barchart

The news of the coup was coming in just as most markets stopped trading. The S&P500 futures and the euro fell while oil rose.

The biggest impact was on the South African rand as traders sold EM currencies with the most vulnerable governments. The chart below shows the US dollar rising against the rand (the rand falling) by nearly 2.5%.

Source: @barchart

Even the offshore renminbi reacted to the Turkey situation.

Source: @barchart

Given that the coup failed, these markets are likely to recover on Monday. However, investors will now price in a material risk premium linked to EM governments' stability. Moreover, the markets' perceived geopolitical risks will remain elevated for some time to come.

The only market that actively traded Friday night into Saturday morning was bitcoin. After rising on the news from Turkey, the cryptocurrency sold shortly after - potentially signaling that the coup may be in trouble by 9:30 PM EST.

Source: bitcoincharts.com

On Friday morning the Turkish government released the nation's unemployment figures showing the jobless rate trending higher - but not dramatically. The latest report was, in fact, better than forecast.

It's worth noting that some in Turkey are suggesting that this government report is flawed and that the unemployment claims are rising sharply. Perhaps.

Not seasonally adjusted

The misery index in Turkey has been elevated (in the top 10) but apparently not sufficiently high to generate significant public support for the coup plotters. Moreover, on a relative basis, the misery index declined significantly since 2011.

Source: Bloomberg

One metric that does stand out is the nation's private sector credit which has helped fund some of the recent economic growth.

Source: @WorldBank, h/t @andersonjustinr

Of course, all sorts of conspiracy theories are hitting the tape over the weekend. We should know more shortly.

Source: @MailOnline

1. We now turn to other emerging markets where speculative net long Russian ruble positions are the highest since 2012. Is the ruble vulnerable at this point?

2. Pakistan’s trade deficit widened to a 35-year high.

3. Brazil's business confidence shows more signs of "green shoots".

4. Argentina's stock market index had a record close last week. While this massive rally is in peso, the new highs nevertheless represent a confidence boost - something the new government clearly needs at this point.

5. Emerging markets HY bonds continue to outperform US corporate HY - up almost 12% over the past year. Will this demand for EM fixed income persist after what has transpired in Turkey?

Source: Ycharts.com

In the Eurozone, the core CPI remains below 1% as the region struggles with disinflationary pressures.

For example, here is Slovakia's CPI.

Turning to the UK, below is some color on the BoE and the housing market from a Daily Shot reader.

There’s quite a bit of speculation that the BoE will do something other than cut rates (or perhaps in addition to cutting its benchmark rate), namely re-authorize QE. I suspect Carney has no interest in “going negative” and views further rate cuts from 0.5% as not particularly impactful - and will instead turn to QE (probably its authorisation in August, although perhaps will hold off actually announcing its implementation).

Regarding housing, there is a general, and I think correct view that nothing is trading in London residential property - and the RICS survey shows that. It remains to be seen whether this will feed through to prices in any meaningful volume. Personally, I think the drop in the value of the pound will support house prices more than any loss of the jobs in the city will hurt them (in London & the SE specifically). The downside risk being that the Brexit deal with the EU is particularly punitive to the City and banks really start shifting jobs to Europe more quickly than seems likely at the moment.

Scott

Back in the United States, Friday was full of important economic data releases, which on the whole were better than expected. The US economic surprise index continues to rise.

Source: Yardeni Research

1. The most significant data point was the US retail sales figure - which jumped more than expected.

Source: Investing.com

2. Here is the trajectory of US treasury note futures over the past week.

Source: @barchart

3. One area of weakness in the retail sales report was apparel, which was clearly visible in the stock market this spring.

Source: Ycharts.com

4. Consumer confidence slid in July, in part driven by Brexit. There is no evidence of a significant shift in sentiment, however.

5. US core CPI rose in line with expectations, remaining firmly above the Fed's target of 2%. It's worth noting that the futures implied probability of a rate hike in 2016 is now 43% (up from 37% on Thursday).

US medical care CPI hit the highest level since 2012 and ...

... US shelter, rent CPI is accelerating.

As an aside, here are US average hourly wages vs. rent cost over the past decade.

The next chart shows the CPI for services less energy services - firmly above 3%. This trend suggests upside to inflation once the goods deflation eases.

h/t @mbusigin

The last chart on US inflation shows (quarter-over-quarter) the so-called "sticky CPI" - the less volatile component of the CPI measure.

6. Related to the above, the Atlanta Fed US wage growth tracker shows further improvement in pay. Once again, the Fed watches this indicator quite closely.

Source: @AtlantaFed

Separately, the divergence between wage growth (not absolute levels) between US men and women seems to be closing.

Source: @AtlantaFed

7. NY area manufacturers seem to be cutting workforce again, as the Empire Manufacturing report disappoints.

8. On the other hand, US industrial production and capacity utilization seem to be stabilizing - both beating consensus.

Not surprisingly, the most severe weakness in industrial production has been in US O&G drilling (weakest since at least since 1972) and coal mining.

9. US wholesale inventories-to-sales ratio is still elevated.

10. The ECRI US index of leading economic indicators remains near multi-year highs.

Source: @businesscycle

1. Next, we turn to commodities, where the net speculative position in silver is still rising. Is silver becoming a crowded trade?

Source: @barchart

Speaking of crowded trades, gold commercials are popping up again - both online and on TV. The last time we saw elevated advertising activity for retail gold products was in 2011/12.

h/t: ‏@DriehausCapital

2. US oil rig count continues to rise.

3. Wheat futures resume their declines on a strong crop yield expectations. More on this later.

Source: barchart.com

4. Lean hog futures remain under pressure.

Source: barchart.com

5. Cotton is still rallying, driven by dry weather in the US (and to some extent in India) as well as tighter inventories predicted by the latest World Agricultural Supply and Demand Estimates Report. Funds have also moved in.