The Daily Shot And Data - March 29, 2016

Let's start with the US economy where we continue to see debate around the trajectory of inflation rates.

The Fed economists view the core PCE price index as the most important inflation indicator for the US. And on Monday that measure came in softer than forecast. This plays into Janet Yellen's recent skepticism about the sustainability of the latest uptick in inflation.

However, not everyone agrees. Capital Economics calls Yellen's dismissal of the recent pickup in inflation "cavalier". Of course much depends on the direction of the US dollar and the long-awaited acceleration in wage growth.

Source: Capital Economics, h/t @valuewalk

Investors are indeed becoming concerned about inflation as flows into inflation-linked treasury (TIPS) funds jump.

Source: @ReutersJamie, BAML

Capital Economics is correct in arguing that services are becoming more important when looking at inflation. US consumer spending on services as a percentage of total spending hit a new record. Much of the recent increase is due to the decline in prices of imports and energy while service costs continue to climb. Your dentist or barber will continue to raise prices in spite of gasoline being cheaper.

Source: ‏@SoberLook

Staying with the US economy, here is the updated Atlanta Fed US GDP tracker for Q1-2016 (discussed yesterday).

Source: ‏@AtlantaFed

While Q1 looks terrible indeed, we see a number of positive signals for the US economy going forward.

1. The Goldman Economic Surprise index has recovered from recent lows.

Source: ‏ ‏@boes_

2. A number of economists are quite bullish the US consumer. Here is Natixis.

Source: Natixis

Indeed, retail-focused shares are outperforming this year.

Source: Ycharts.com

3. US pending home sales came in stronger than forecast in spite of low inventories.

4. We may finally be seeing some stabilization in the US manufacturing sector. The index that combines regional Fed manufacturing indices spiked this month.

Source: Goldman Sachs

Here is the comparison of the regional index with the national ISM Manufacturing Index. This suggests that we should see an improvement in the ISM report this week.

Source: @CapEconUS

There are other indicators of improvements in manufacturing as well. The inventory overhang is gradually abating. Moreover, after a horrible start of the year, rail traffic growth has now turned positive.

Source: Goldman Sachs

Other industrial transport indicators are also showing improved momentum. Here is the truck tonnage and port container volume.

Source: Goldman Sachs

Finally, US industrial shares are outperforming the broader market.

Source: Ycharts.com

Barring another spike in uncertainty, Q2 looks materially better than Q1.

Switching to Europe, here are a few observations.

1. Italian mortgage rates have declined significantly. This suggests that in several markets, the ECB's monetary transmission is having the desired effect.

Source: HSBC, h/t Josh

2. Related to the above, negative central bank rates have been helpful for Europe's housing markets.

Source: HSBC, h/t Josh

3. German savings rate remains elevated. This is contributing to significant trade imbalances in Europe.

Source: HSBC, h/t Josh

4. Catalonia (Spanish autonomous region) faces a liquidity crunch. Debt was downgraded deeper into junk territory this month and bond yields have spiked.

Source: @IIF

Turning to emerging markets, here are some updates on BRICS, etc.

1. Russian exports keep the nation from sliding even deeper into recession.

Source: HSBC, h/t Josh

2. Less of China's foreign investment is now flowing into Africa & Latin America. More is going to ASEAN (which includes Indonesia, Malaysia, Thailand).

Source: HSBC, h/t Josh

3. Pressure on corporate earnings in India resulted in equity market outflows.

Source: HSBC, h/t Josh

4. South Korea's domestic demand has weakened again.

Source: HSBC, h/t Josh

5. Brazil's stocks, currency jump on the possibility that PMDB (Brazil's largest party) may abandon Dilma Rousseff. Bovespa is back near the recent highs. The market really wants Dilma out ...

Source: Reuters

Source: barchart

Now we have a few updates on the energy markets.

1. Here is the correlation of oil with some major asset classes.

Source: @IIF

2. This chart shows oil price needed to achieve 10% or 15% IRR on various onshore resource plays. A big chunk of production seems to be profitable even below $40.

Source: @vexmark

3. Many argue that the recent rally in crude was driven by short covering. The red line below shows what happened with managed money short positioning and the next chart from Bloomberg shows the short-squeeze in slow motion.

Source: Macquarie

Source: @business

Here are several observations on the equity markets.

1. Many continue to argue that the post-recession US equity market rally was driven by QE. This chart compares the US monetary base expansion with the S&P500. Note that correlation does not imply causality.

Source: ‏ @SoberLook, h/t Jake

2. The recent IPO volume looks terrible.

Source: Citi

3. On average, large-cap pharmaceuticals are down 24% year-to-date.

Source: Ycharts.com

4. Speaking of pharmaceuticals, the Valeant fiasco is hammering the Sequoia Fund. The withdrawals are forcing Sequoia to sell more Valeant, depressing price further, etc...

Source: ‏@WSJ

Source: Google

5. The Skew index, which measures the premium for out of the money vol (vs. at the money) has fallen sharply. "Tail risk" is less of a concern?

Source: barchart

6. On the other hand, the next two charts from the Wall Street Journal show that market participants remain cautious and are buying protection. Long vol bets are rising (via levered VIX ETFs). Of course, some of that could be the result of higher demand to borrow these securities to short them.

The second chart below shows that "safe-haven" asset classes have not retreated even as risk assets such as stocks and commodities rallied.

Source: @WSJ

Source: @WSJGraphics, h/t Jake

Next, we have a couple of observations on the credit markets.

1. Fund flows into high yield bond funds have been robust.

Source: Citi

2. Corporate defaults are starting to pick up steam.

Source: @lcdnews, h/t Jake

In the muni world, the City of Chicago is struggling as Fitch downgrades the municipality's debt. It's a train wreck in slow motion.

Source: Chicago Tribune

Finally, in the private equity world, we see a slowdown in distributions relative to contributions as the "harvesting" of investments slows. Will the net cash flow become negative?