The Daily Shot And Data - May 31, 2016

Greetings,

We begin with the Eurozone where analysts expect deflationary pressures to start subsiding given the rise in oil prices over the past few months. According to some estimates, the decline in oil prices shaved somewhere around a percent from the recent CPI measures. That's about to be reversed.

In fact, the latest inflation report from Germany showed headline inflation that was somewhat higher than expected.

Despite the jump in oil prices, however, markets remain skeptical of any immediate improvement in euro area inflation metrics. Forward inflation expectations remain depressed. Are the markets uneasy with the sustainability of these higher energy prices?

Source: @CapEconEurope

Furthermore, other indicators suggest that deflationary risks persist.

1. For example, German import prices fell the most since 2009, as the Eurozone imports disinflation.

2. Spain's 2-year long consumer deflation persists.

3. Italian PPI decline on a year-over-year basis has been the steepest since 2009.

The ECB is under pressure to eliminate these risks. Below is the Eurosystem securities held for monetary policy purposes (QE), now exceeding €1.1 trillion.

Source: ECB

The central bank is also about to undertake corporate bond purchases (announced earlier). That's why corporate bond sales have been on the rise recently.

Source: @fastFT

On the currency front, the month of May has not been kind to the euro as a result of a more hawkish Federal Reserve.

Source: @barchart

With shorter-term rates rising in the US, real rate differential has been driving the euro lower.

Source: Morgan Stanley

Elsewhere in Europe, Sweden's GDP growth cools more than expected but remains strong on a year-over-year basis (4.2%).

Meanwhile, household credit expansion in Sweden is accelerating again (approaching 8% YoY).

Turning to emerging markets, we've now seen leadership changes in Argentina and Brazil this spring. Moreover, these countries seem to be shifting their economic strategy, which is essential in the post (China-driven) commodity supercycle economy.

Will Venezuela be next? Are we witnessing the "Latin Spring", with some of the governments who rode the commodities wave now being replaced?

Indeed, the situation in Venezuela looks unsustainable as the opposition leaders who now control the legislative branch are attempting to push Maduro out.

Source: Reuters

Meanwhile, Venezuela's isolation worsens.

Source: BBC

Time is running out as the nation's FX reserves dwindle.

Continuing with emerging markets, here are a few other developments.

1. Colombia's central bank hiked the benchmark rate to 7.25%.

However, the central bank signaled it would be ending the tightening cycle for now as the economy softens. Retail sales fell more than expected.

2. Mexico just reported a massive MXN 239 billion government surplus. More on this later.

3. Turkey sees the worst drop in tourism since 1999.

Source: ‏@fastFT

4. Singapore faces a credit contraction, with the Monetary Authority of Singapore responding by easing auto loan rules.

5. The next chart shows emerging markets currencies vs. the dollar in May. Much of this is due to a more hawkish Fed. However, South Africa stands out due to significant declines in mining output and elevated domestic political risks.

Source: Barclays

1. Turning to China, the concerns around wealth management products (WMPs) persist. The asset-liability mismatch, cross-ownership, and increasing reliance on corporate bond market stability could result in a sharp liquidity squeeze if investors panic and pull out. WMPs now represent 35% of China's GDP.

Source: @SoberLook, China Central Depository & Clearing Co, h/t ‏@JmBadalamenti

2. The recent weakness in the renminbi is stoking concerns of further capital outflows.

Source: @barchart

3. China's cotton rally resumed and trading activity rose again despite the authorities having introduced trading curbs recently.

Source: @barchart

1. Now on to Japan where investors' purchases of foreign debt continue to accelerate.

Source: ‏Barclays, @joshdigga

2. The Kumamoto earthquakes weigh on recent sentiment surveys in Japan.

Source: Goldman Sachs

3. Growth in lending to the household sector slowed materially recently, driven by weak demand.

Source: Credit Suisse, ‏@joshdigga

Switching to North America, Canada's housing market looks stretched. Even when measured in US dollars (after the big loonie decline), house prices are near the highs. Moreover, the appreciation seems to be accelerating.

Source: @alex_macdonald, @ac_eco

1. Back in the United States, the focus remains on the upcoming rate hikes - which many economists think are overdue. According to one measure, the Taylor Rule, that's certainly the case.

Source: ‏Goldman Sachs

2. Here is the futures-implied rate hike probability for 2016 - now and a month ago.

Source: @SoberLook, CME

3. Previously we discussed the weakness in Capex in the United States. A Daily Shot reader suggested looking at "US short-cycle demand," which has been on the rise.

thanks Bede

4. Here is a helpful chart from the WSJ showing US mortgage origination by credit score. This tremendous decline in the lower-credit-score lending is the result of regulators fighting the "last war". Some are pinning hopes on non-bank lenders stepping into subprime lending going forward.

Source: @WSJGraphics, h/t @JmBadalamenti

1. Turning to fixed income, the 2-year treasury yield is pushing higher again.

2. As a result of the above, the treasury curve is still flattening.

Source: ‏@SoberLook

As an aside, a flattening US treasury curve tends to correspond to steepening credit curves in emerging markets.

Source: Barclays

3. Financial centers are holding more treasuries, indicating rising investor demand.

Source: Barclays, @joshdigga

4. Investor demand is also seen in treasury auctions as institutional investors rather than dealers now drive the primary US government bond market. The regulatory squeeze on banks' balance sheets is exacerbating the situation.

Source: Morgan Stanley

1. Shifting to commodities, oil prices have diverged from TIPS-based inflation expectations. Something has to give here.

Source: ‏@ScottFarnham

2. Oil also seems to have disconnected from copper. While this has been the case in the past, it's another data point.

Source: Nomura

3. Goldman points to significant upside potential for US oil production if drilled but uncompleted wells are activated. If prices rise further, this outcome is quite likely.

Source: Goldman Sachs

4. Is gold now probing the $1200/oz support?

Source: @barchart

5. US corn futures hit a 10-month high. Apparently China put some state-owned corn for sale (including some imported from the US a while back) and the auction went better than expected.

Source: @barchart

1. In the currency markets, the trade-weighted US dollar index is recovering. As a result, the recent easing in US financial conditions may begin reversing now.

2. Speculative accounts sharply cut back net long yen exposure (in response to the Fed).

3. FX volatility declines despite US monetary policy uncertainty.

Source: ‏ @fastFT

4. We had quite a pop in bitcoin recently as the cryptocurrency rallies some 20% over the past couple of weeks (to $531). Supposedly some of this is in response to the weakening yuan (discussed earlier). Also, Ernst & Young Australia is about to sell AUD16 million of confiscated drug-related bitcoins, and that got some market participants excited.