The Daily Shot And Data - May 16, 2016

Greetings,

We start the week with the United States where we continue to see signs of economic improvement in the second quarter.

1. US retail sales in April grew at the fastest rate in over a year, beating economists' forecasts. Note that much of that improvement was driven by online sales.

Source: @WSJ, h/t Jake

2. Consumer sentiment also unexpectedly rose to the highest level in a year.

3. The ECRI index of leading indicators has been rising at the fastest rate in about two years.

Source: ECRI

4. The AtlantaFed GDPNow Q2 GDP tracker also rose sharply. At this point, it seems to be on the high side although not nearly as bad of an overshoot as we had in early Q1.

Source: @AtlantaFed, h/t @MarathonWealth

Morgan Stanley, however, is warning that these positive economic surprises in the US may be short-lived. Here is why.

Source: Morgan Stanley

Moreover, the UBS credit-based US recession probability indicator has risen significantly.

Source: UBS

Continuing with data out of the US, the PPI was softer than expected. Pricing power at the wholesale level remains elusive and margins are often under pressure.

One area where wholesale prices are surging is pharmaceuticals. The last time drug prices rose this quickly was after Viagra’s initial introduction. This next chart got a few chuckles on Twitter.

h/t @MarketWatch

The last chart on the US shows an increasing percentage of older Americans still working.

h/t Bloomberg

Separately, if you have a moment, please click on our 2-question survey about the Fed asking "if" and "when." The results will be published here in a couple of days.

Next, let's take a look at a few developments in the US equity markets.

1. Here is the S&P retail index vs. the S&P500 relative performance. US retail firms have been hammered.

Source: stockcharts.com

2. The S&P Buyback Index - stocks with the highest buyback ratios over the past 12 months - has underperformed. The market remains skeptical of buybacks.

Source: Ycharts.com

3. The mutual fund industry is not having an easy time. Below is the equity ETFs AUM vs. that of mutual funds over the past 20 years.

Source: BofAML

4. Investment banking revenue is highly (inversely) correlated to market volatility.

Source: Fitch Ratings

Let's now switch to China where we have a number of developments to cover.

1. The new renminbi loan volume in April came in significantly below expectations. This report was a surprise given central government's recent stimulus efforts.

It seems that Beijing was also surprised by this report, as the banking regulator sent a notice to China's banks to open up their balance sheets.

Source: Reuters

While China's loan growth slowed last month, as a whole, credit expansion continued, driven by local government bonds.

Source: UBS

2. Other economic activity indicators in April were disappointing (vs. projections). Some analysts are now questioning the improved growth expectations in Q2. Here are the results for China's retail sales, industrial production, and fixed asset investment.

3. Speaking of fixed asset investment, are stronger home sales predicting an acceleration in residential construction in China?

Source: BofAML

4. China's service sector as a percentage of the GDP is growing quickly.

Source: Macquarie, ‏@joshdigga

Analysts expect this trend to continue in part because China's working-age population has peaked. As discussed before, aging population consumes more services.

Source: Macquarie, ‏@joshdigga

Next, we revisit other emerging economies.

1. Emerging markets currencies came under pressure Friday. In particular, the South African rand gave up 2%.

South Africa's government is struggling again as the finance minister (who took office last December) may be arrested.

‏Source: The Sunday Times, h/t @leogas77

2. Speaking of scandals, Merrill Lynch is revising (up) Brazil's growth in response to Dilma Rousseff's exit. Improved sentiment and "governability" should make Michel Temer's job easier.

Source: BofAML

3. India's trade deficit hits five-year low which should limit pressure on the rupee.

4. Moody's is seeing weaker sovereign credit in some Middle East nations as a result of low oil prices.

Source: Reuters

1. Now on to the Eurozone, where German GDP growth surprises to the upside. The area's economy continues to expand.

2. Even Italy's economy grew faster than the US in the first quarter.

3. Is Finland finally out of deflation?

1. Elsewhere in Europe, Sweden's capacity utilization is now at the highest level since 2008 and the nation's economy remains robust. Is Riksbank behind the curve as it continues with QE and negative rates?

2. The UK construction output declined in the first quarter as the figure came significantly worse than forecast. Is this just Brexit concerns or is there a broader problem with the UK's economy?

h/t @DiMartinoBooth

1. Now on to Japan where capital is exiting in search of better yielding foreign assets. The second chart below shows foreign bond purchases by Japanese investors broken out by country.

Source: Deutsche Bank, @joshdigga

Source: Morgan Stanley

2. Goldman argues that there is plenty of room for the BoJ's bond purchases as it can lift JGBs from nonbanks. In particular, Japan's insurance firms have a much larger concentration of government bonds than their US and UK counterparts for example.

Source: Goldman Sachs, @joshdigga

1. In commodity markets, hedge funds continue to build long positions in silver - a bet (in part) on a slower Fed tightening path. This unwind could be unpleasant.

Source: @business, h/t Jake

2. Furthermore, Comex gold futures open interest spikes.

Source: UBS

3. In the energy markets, the Permian Basin oil production continues to rise as firms cut costs. With WTI above $45/bbl could we see other shale plays pick up production as well (at least temporarily)?