Greetings,
We start with the United States where the Federal Reserve struck a decisively hawkish tone. On Tuesday, we heard the Fed's Dennis Lockhart and John Williams discuss the possibility of 2-3 rate hikes in 2016. On Wednesday, the FOMC minutes showed that the central bank has left a June rate hike possibility on the table. Here is the key paragraph.
Source: FOMC minutes
The markets started adjusting quickly to this new reality. The June rate hike odds implied by the futures markets rose above 1:3.
Source: CME
Source: @business
Treasuries sold off sharply - this time across the curve. The 2-year yield rose above 0.9%.
The 10-year yield is now approaching 1.9%.
Source: @barchart
The yield curve steepened at the short end in response to the FOMC. The chart below shows June 2017 - June 2016 LIBOR futures spread.
Source: @boes_
US bank shares rose by over 4% on the day in response to a steeper curve (higher sloping yield curve usually improves banks' interest margin).
Source: Ycharts.com
Volatility returned to the currency markets as the dollar index (DXY) shot past 95.
Source: @barchart
And dollar-yen broke through 110.
Source: @barchart
Both Canadian and Australian dollars fell sharply.
Source: @barchart
As an aside, Australia's falling wage growth (discussed yesterday) and weakening domestic demand exacerbated the currency descent.
Source: Macquarie, @joshdigga
One of the more troubling currency moves in response to the FOMC minutes was the drop in the offshore yuan. Are the markets ready for more RMB depreciation and capital outflows from China?
Source: @barchart
In commodities markets, we finally saw gold come under pressure.
Copper which has been selling off for some time now fell further.
Source: @barchart
Metals & mining shares gave up 6% on the day in response (gold miners were down 7%).
In recent weeks, we've seen this nice trend in emerging markets showing capital inflows and falling yields. Is it about to be reversed by the Fed?
Source: Citi
Indeed, emerging markets debt fell in response to the FOMC minutes.
Source: @barchart
By the way, High Yield was one market where the selloff has been limited. Resilient energy markets helped.
The markets are realizing that the hawks on the FOMC now have quite a bit of ammunition.
1. Morgan Stanley's US wage diffusion index shows US wage growth firming.
Source: Morgan Stanley
2. The next chart shows the US median CPI, an alternate measure to the core CPI (month-over-month, annualized).
These two items will make most central bankers start paying attention.
But haven't we been here before? Will the threat of a more aggressive rate hike trajectory tighten US financial conditions, forcing the Fed to pause? Or is it different this time?
This economic slowdown probability (below) is going right up again as financial conditions tighten.
Source: Citi, @joshdigga
1. We now turn to the energy markets where crude oil inventories at Cushing, OK continue to rise. This is a new record.
2. By some measures, US crude oil production declines remain gradual and may even slow further at current price levels.
Source: EIA
3. On the other hand, US gasoline demand remains strong for this time of the year as Americans hit the road.
4. Has oil diverged from the US dollar? This doesn't look sustainable.
Source: @acemaxx, Morgan Stanley
5. Energy junk bonds are getting hit with record defaults but because of the massive discounts are generating amazing returns (for those who have the stomach to hold them).
Source: @fastFT
In credit markets, we see tremendous demand for investment-grade corporate bonds. Will the Fed's action dampen some of this enthusiasm?
Source: BofAML
Speaking of corporate credit, here is how the latest $20bn Dell bond issuance compares to the largest bond deals. In spite of significant long-term uncertainty around Dell's business model, the roughly 6% yielding bonds were bid up.
Source: @acemaxx, @FT
Separately, investors really dislike actively-managed US large-cap funds.
Source:Credit Suisse
Puerto Rico halted the toll-road revenue transfers (which would normally be used to pay bond interest) as the territory's finances unravel.
Source: @business
Separately, Puerto Rico's labor force participation is now around 40%.
Source: Barclays
1. Switching to emerging markets, Nigeria's inflation is near a 6-year high as the nation's troubles mount.
Source: Seeking Alpha
2. The South African rand is getting hammered again (down 2% on the day).The nation's finance minister issued this public statement. Amazing.
Source: @barchart (chart shows the rand weakening; because one dollar can buy more rand.)
3. Poland's corporate wage growth spikes. It will be interesting to see the impact on the total cost of labor.
Source: @tEconomics
1. Now on to China where the latest stock market rally fades. Again.
2. Property disputes in China spike - from false advertising of new housing to shady land sales.
Source: @WSJGraphics, h/t Jake
3. China's commodity exchange copper inventory rises, with the nation now dominating the market (as the LME's influence fades).
Source: Barclays, @joshdigga
The next chart shows a significant divergence between bank credit and the broad money supply growth in China. Deutsche Bank explains why.
Source: Deutsche Bank
1. In the Eurozone, deflation remains a fact of life for now. The Fed's hawkish stance should help the situation by pushing the euro lower.
2. Greek bank shares continue to rally on bailout expectations.
3. Intra-euro area lending remains far below the pre-crisis levels. The full banking union is still some ways off.
Source: BofAML, @joshdigga
4. The amount of debt with negative yields in the Eurozone, other EU states, and in Japan continues to rise.
Source: @tracyalloway
The UK's employment rate hits 74.2% - a new record. The second chart below shows how employment rates look by region.
Source: @RBS_Economics
By the way, there is a massive difference in employment rate between the UK and the US.
Source: @jbjakobsen
Separately, the EU referendum situation remains fluid. The latest poll now shows the "stay-in-EU" crowd ahead.
Finally, investment banking/trading revenues hit the lowest level since the financial crisis. What happened to the good old days?
Source: @lcdnews, @MadameButcher (ECM = equity capital markets, DCM = debt capital markets)
Turning to Food for Thought, we have 5 items this morning:
1. Is Japan now lagging in robotics implementation?
Source: Macquarie
2. Who buys the most packaged food/beverage products?
Source: @PlanMaestro, @WSJ, h/t Jake
3. Do people burn most calories while resting?
Source: @voxdotcom, h/t Jake
4. Americans' spending on the lottery in perspective.
Source: @VisualCap, @joshdigga
5. According to the OECD, "9% of jobs have a high potential of being automated by technology".
Source: @OECD_Social
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