The Daily Shot And Data - March 4, 2016

Greetings,

We begin with the latest reports on the global services sector performance in February, which were quite disappointing. According to JPMorgan/Markit, "Growth of global services activity is at a 40-month low".

Source: Markit, JPMorgan

Here are the service sector performance charts from select countries.

1. France continues to struggle with persistent economic weakness as the services sector contracts more than expected.

Source: Markit

2. German service sector on the other hand continues to perform quite well, which resulted in the Eurozone as a whole performing a bit better than expected.

Source: Markit

3. The UK service PMI came in below forecasts.

Source: barchart

By the way, some are beginning to blame this slowdown on rising uncertainty associated with the Brexit referendum. Perhaps. A more likely explanation is the elevated global economic uncertainty in February as the FTSE entered bear market territory.

Source: @business, h/t Josh

4. Brazil's service sector output collapsed as the recession deepens.

In fact Brazil's current recession dwarfs what took place in 2008/09 - here is the year-over-year GDP growth.

Below are some notes on Brazil's composite PMI showing accelerating rate of contraction.

Source: Markit

5. It would be nice to see stronger data out of the US for a change, but nation's economic growth remains tepid. Just take a look at the commentary from Markit. Is the Fed really going to ignore this chart in their process?

Source: Markit

The ISM non-manufacturing survey on the other hand was a bit more sanguine, showing the service sector still expanding (PMI > 50 means expansion).

However, the new orders growth weakened and (at least according to ISM) US service sector shed some jobs for the first time since the harsh winter of 2014. It's hard to argue the February result was also weather related.

Next we have a couple of additional items on the US economy.

1. US inflation expectations finally bounce, as both the CPI and PCE inflation measures beat expectations and oil rallies.

Source: @business

2. The Fed's RRP keeps bank reserves below maximum (temporarily "reversing" some of the QE). More on this later.

Turning to the Eurozone, analysts are asking whether there will be enough bonds left for the expanded QE program - especially in Germany. Note that bonds with yields below the deposit rate do not qualify.

Source: @fwred

Source: @OxfordEconomics, h/t Josh

Now let's take a look at a few charts on China.

1. China's firms have sharply increased RMB borrowing in part to pay down USD debt (to reduce F/X risk).

Source: Goldman Sachs

2. Most of the changes in the PBoC's balance sheet are driven by foreign reserves. So far the central bank has not embarked on traditional QE programs.

Source: BAML, h/t Josh

3. Macau's recession has been extremely deep, contracting for 6 quarters in a row. Is the end in sight? Apparently at least some of Macau's success can be attributed to corruption in China. Mid-level officials were invited to Macau and given a case of casino chips to gamble. Some of those chips were later cashed in and treated as casino winnings rather than bribes. That trick became difficult under the new anti-corruption drive.

Source: @fastFT

Here are a few developments in other emerging economies.

1. Brazil's currency and stocks rallied sharply on the news that president Dilma Rousseff may be implicated in a probe.

Reuters: - According to local media, Brazilian ruling party senator Delcidio do Amaral agreed to a plea bargain implicating Rousseff and her predecessor Luiz Inacio Lula da Silva in a graft scandal. Amaral declined to confirm the report.

Analysts said the scandal bolsters the case for Rousseff's impeachment, encouraging investors who blame her Worker Party's interventionist policies for driving Brazil into what could be its deepest recession on record.

"The market is betting Rousseff will not finish her mandate," said Pedro Tuesta, an economist with 4Cast in Washington D.C.

The stock market jumped by over 5% - the highest one-day increase in over 6 years.

2. Uruguay joins a number of other Lain American countries with double-digit inflation.

3. For now Iran's return to the global oil markets hasn't been as spectacular as the officials there had advertised.

Source: ‏@business

Now we turn to US credit markets.

1. US CCC-BB corporate bond spread remains elevated. Investors are still focused on quality names in spite of significant default-adjusted premium differential.

This next chart shows the compensation for HY bond investors after defaults are taken into account. Clearly one gets paid significantly better in lower-rated bonds even in the case of a mild recession, but risk aversion keeps investors away.