Once again we start with the Eurozone where analysts have focused on the rationale behind Draghi's statement: "we don't anticipate that it will be necessary to reduce rates further". As discussed on Friday, Draghi's ending of a further push into negative rates was meant to safeguard the financial system. Negative rates on reserve balances (which are rising due to QE) will hurt bank profitability and shake investor confidence - something we saw after the BOJ's move.
Source: Barclays
On Friday the markets rewarded Draghi's statement on negative rates by bidding up bank shares.
Source: Google
Here is the Italian bank share index.
The CoCo (contingent convertible notes) index yield fell further as the financial sector stabilizes. By the way, it's unclear at this point if this market will survive in its current form, given what has transpired recently (particularly with respect to Deutsche Bank). The European Commission is trying to clarify some rules around coupon payments on this paper. More on the topic later.
Source: @SoberLook
What about the ECB's push into the corporate bond market? Non-bank financials have the greatest investment grade bond balances outstanding and will therefore benefit the most from the new program.
Source: HSBC
The next chart shows ECB-eligible non-bank corporate paper (investment-grade) by country.
Source: @tracyalloway, Deutsche Bank
What do banks think about the ECB's credit easing efforts? They seem to view TLTRO (cheap financing for banks in return for lending to smaller firms and households) as being more effective than QE.
Source: @Fmirw
In other Eurozone developments, Italy showed surprisingly strong growth in industrial output. Will the GDP growth follow?
And here is Italian 10-year government bond yield approaching last year's lows.
In fact Italy just issued 3-year government notes at negative yield. All is well.
In Germany the anti-refugee backlash is translating into political victories for right-wing populist politicians. Will this have broader implications for the Eurozone and Germany's leadership?
Source: The Spectator
Elsewhere in Europe, Romania is struggling with deepening deflation, its first in more than 25 years. This demonstrates that deflationary risks around the world persist.
We now turn to China where we've seen clear evidence of increased fiscal stimulus. Bejing's spending jumped recently while revenues declined.
Source: Barclays
As a result, China's fixed asset investment grew faster than expected.
This is clearly a positive development. However other reports from China continue to show slowing economic growth. The nation's industrial production (IP) and retail sales grew less than forecast. In fact, IP growth was the weakest since 2009.
Beijing is touting these latest economic results as "signs of improvement". All is well.
Source: Xinhua (official media)
China's freight indices continue to decline, showing weaker demand for shipping.
Source: @Callum_Thomas
It's interesting to see China's freight index declines continuing just as the Baltic Dry Index seems to have stabilized.
Source: stockcharts.com
In other China-related news, Beijing is preparing to launch its version of TARP. The bailout program will entail swapping nonperforming loan portfolios for banks' equity. This is where some analysts become concerned. China's government is fighting on two fronts: fiscal stimulus and bank bailouts. How much government debt will the nation be taking on to accomplish this?
Source: Reuters
Zhou Xiaochuan continues to say that further RMB devaluation is not in the cards because China's export market share is still growing. Perhaps.
Source: @TomOrlik
In other emerging economies, the situation in Brazil remains challenging. While many nations saw their fuel prices fall recently, that's not the case for Brazil. Here is the country's average petrol price.
Source: GlobalPetrolPrices.com
Combine that with government scandals, austerity measures and the worst recession in decades, and you get social unrest. Brazil had some massive anti-government protests this weekend calling for President Rousseff to resign.
Source: @GloboNews
The markets are betting that it is indeed time for a shakeup in Brazil's government. The Brazilian real has outperformed a number of currencies of other major commodity-producing nations (Indonesia's currency is actually the best performing one).
After a strong 2015, India's industrial production is falling this year. If inflation stabilizes, will the RBI resume rate cuts?
The BOJ will continue to struggle in its attempts in boosting inflation. Here are a couple of reasons.
1. Inflation expectations have declined.
Source: Barclays
2. Stronger yen and declining imported food prices will put further downward pressure on inflation.
Source: Barclays
Speculative accounts' net long yen exposure hit the highest level since 2008. Has the yen rally run its course? Will the Fed's threats to hike again this year result in a nasty unwind of this position?
Switching to Canada, here are a couple of important economic developments.
1. Canadian unemployment rate is moving higher, exceeding forecasts.
2. Canada's household leverage continues to rise, but a strong housing market keeps the debt-to-assets ratio stable. What happens if the housing market sputters?
Source: Deutsche Bank
Now let's look at the latest economic trends in the United States.
1. The Atlanta Fed Q1 GDP tracker is now in line with consensus at over 2%. If this is turns out to be correct, it would be impressive indeed - especially given what has transpired over the past couple of months.
Source: Atlanta Fed
2. The ECRI leading index for the US has turned higher.
Source: ECRI
3. The market-implied probability of a rate hike in 2016 has risen again - and is now at 77%.
4. US market-based inflation expectations have stabilized on firmer oil prices.
Source: Deutsche Bank
5. Some analysts are asking how much of the latest jump in US labor participation rate is due to the household survey count catching up to the official employment figures? The household survey can be quite noisy, which impacts the participation measure.
Source: @SoberLook, h/t Barclays
Speaking of US participation rate, here is the distribution of "not in labor force and don't want a job" and the proportion who are enrolled in school.
Source: Barclays
6. Related to the above, expenses for child day care services in the US jump. Are more stay-home parents going back to work?
7. Deutsche Bank argues that the Phillips curve in the US is broken in many industries. Falling unemployment is not translating into wage inflation. Here are some examples:
Source: Deutsche Bank
Source: Deutsche Bank
Source: Deutsche Bank
Based on this industry analysis, there is little evidence of broad-based wage pressures in the US. Of course the Fed is looking the Atlanta Fed employment trackers as the "forward-looking" indicators of wage inflation, which gives them ammunition to hike rates.
Source: Deutsche Bank
8. After a disastrous start of the year, US rail traffic activity seems to be stabilizing. Based on this, however, it's hard to imagine strong GDP growth in the first quarter (as the Atlanta Fed tracker seems to indicate).
Source: ASI/Transmatch
In US markets, we continue to see elevated retail money market balances. As usual, retail investors sold equities near the bottom and missed the rally.
US credit spreads have tightened sharply in the past couple of days. Too fast?
Source: @LONGCONVEXITY
In the energy markets, Crude oil storage futures dropped sharply as the WTI curve flattens (cash & carry becomes less profitable).
Source: barchart
Source: @SoberLook
Here is the Brent curve flattening over the past month.
Iron ore relative moves over the past 2 months have been spectacular.
Finally, is the recent gold rally about to stall? We've seen significant speculative inflows into that market.
Turning to Food for Thought, we have 5 items this morning:
1. Top salaries in the US by profession.
2. The count of nuclear reactors around the world.
Source: @StatistaCharts, h/t Jake
3. Child brides - prevalence by region. Disturbing ...
Source: @UNICEFData, h/t Jake
4. Merkel's popularity is not as low as it was after the Great Recession but is declining. The refugee crisis is the key reason.
Source: @Schuldensuehner, h/t Jake
5. A Taiwan study shows a stark correlation between the birth month of a child and the percentage diagnosed with ADHD. Read the bottom paragraph for a possible explanation.
Source: @sobata416
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