Greetings,
1. Once again we begin with the United States where we see further confirmation of weakening economic growth (see yesterday's Daily Shot). In addition to the unexpected contraction in the ISM manufacturing index and ongoing weakness in Markit's service sector PMI, the ISM US non-manufacturing report (NMI) was just dreadful. Given the fact that the US is a service-oriented economy, this index is critical.
Source: Investing.com
Source: Institute for Supply Management (ISM)
According to the ISM, we haven't seen such a soft patch in the "non-manufacturing" sector since early 2010. Here is the "business activity" component of the ISM non-manufacturing index - take a look at the actual vs. forecast figures.
Source: Investing.com 2.
The Fed's labor market conditions index dips below zero again, which is consistent with the tepid job growth in the service sector (above), as well as last week's payrolls report.
3. It didn't take very long: the Citi US Economic Surprise Index is back below zero as a result of the ISM disappointment.
4. Many economists have recently been upgrading their US growth forecasts. Some will now begin downgrading them.
Source: Barclays, @joshdigga
Source: Barclays, @joshdigga
5. The non-manufacturing ISM report sent the futures-implied September rate hike probability back below 25%.
Bloomberg Function: "WIRP"
6. Treasury yields fell.
7. The US dollar wiped out the "Jackson Hole rally" when the Fed officials spoke of the looming rate hike.
8. The dollar dropped particularly hard against the yen.
Since we are on the topic of the yen, let's look at Japan where the Phillips curve has shifted downward under Abenomics. It's harder to generate inflation in this new regime.
Source: Barclays, @joshdigga
Source: Barclays, @joshdigga
1. In emerging markets, the JPMorgan EM Currency Index jumped on Monday - also in response to weak economic data from the US.
2. Emerging market equities and debt rose sharply (in dollar terms).
Source: YCharts.com
3. As an example of global fund money chasing EM debt, here is the Russian 10y government bond yield over the past couple of years.
4. Speaking of Russia, the nation's inflation has been declining (discussed yesterday). This trend has resulted in tight monetary conditions as real rates rose. Without further easing by the central bank, the recovery could remain elusive.
Source: Barclays, @joshdigga
Source: Barclays, @joshdigga
5. India's stock market is having a good year.
6. Similarly, Brazil's stock market is up 39% year-to-date (72% in USD terms).
7. Barclays points out that much of the recent hiring in Mexico has been focused on low-wage workers.
Source: Barclays, @joshdigga
8. South Africa's economy surprised to the upside as the quarterly GDP beat forecasts. The rand rose sharply in response (further helped by US economic data weakness).
Source: Investing.com
9. The Taiwan dollar also rose, which could prompt the central bank to ease further (fighting the "currency wars").
1. Next, we go to Europe where a change in vacation schedules in the auto industry sent the Czech industrial production down 14% on the year. This tells us just how much the Czech Republic is exposed to the auto industry (Bloomberg calls the nation's economy a "one-trick-pony" - see quote/link below).
Source: @markets
2. Hungarian unemployment is at record lows, which seems to be boosting domestic demand.
Source: Barclays, @joshdigga
3. The Swiss Q2 GDP growth surprised to the upside, with growth highest since the SNB let the Swiss franc "peg" go.
4. Related to the above, is Switzerland finally pulling out of its deepest deflation in recent history?
1. Now, on to the UK where economists are having second thoughts about their recession forecasts. As we saw in yesterday's Daily Shot, UK's economic data has been considerably stronger than expected.
Source: @fasFT
2. The UK's HY and investment-grade bond spreads are decoupling - a QE driven distortion.
Source: Citi
3. The UK homebuilder index continues to grind higher.
4. The 10yr gilt auction yield hit another record low.
5. With record net speculative short positions out there, this British pound rally is exacting some pain.
Source: myfxbook.com
6. Finally, here is the British pound implied volatility index.
1. In the Eurozone, French retail sales rose at the fastest rate since 2011 (we saw signs of this in yesterday's Daily Shot). French and Italian retail activity diverged.
Source: Bloomberg Terminal; Function "HMS"
2. The French 5yr government bond yield is heading back toward record lows.
3. German factory orders were below consensus as domestic demand dropped off sharply. Note the divergence between domestic and foreign orders.
4. Here is why Brexit matters for Germany.
Source: Barclays, @joshdigga
Source: Barclays, @joshdigga
5. Finland's growth stalls, which apparently is generating anti-trade sentiment (see "Further Reading" below).
6. According to Barclays, the ECB QE will likely run into technical limitations next year (issuer limit, capital key, etc.). These constraints are likely to be "adjusted" - there is no shortage of Italian paper to buy.
Source: Barclays, @joshdigga
7. Here is the impact of the Fed and the ECB QE on economic activity and inflation expectations. Outside of QE1 which eased the liquidity crunch in 2009, there is little evidence the other programs were helpful - including the current ECB effort (according to Citi).
Source: Citi
8. Speaking of QE ineffectiveness, the Eurozone market-based inflation expectations are drifting lower.
1. In the commodities world, the LME lead continues to rise on expectations of lower production in China (discussed yesterday).
2. Precious metals rallied sharply on weaker US dollar and a likely delay in the next Fed's rate hike.
In credit markets, here is the US high-yield energy bond index spread - a spectacular rally in 2016.
Finally, Bloomberg points out that outside of the top 5% richest US firms, cash holdings in corporate America have been shrinking.
Source: @OJRenick, @markets
Turning to Food for Thought, we have 5 items today:
1. The rise of cashless payments worldwide.
Source: @wef, @krogoff, @Tmp_Research
2. Deaths from terrorism in Western Europe and the US.
Source: @TheEconomist, @Tmp_Research
3. Related to the above, here are the annual terrorism statistics for the US since 9/11 - in perspective.
Source: @dinapomeranz, @astroehlein, @joshdigga
4. The aging US workforce.
Source: @wef, @Tmp_Research
5. The public's views on the future of workforce automation.
Source: @pewresearch @Tmp_Research
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