The Daily Shot And Data - April 5, 2016

By Walter Kurtz

Tuesday, April 5, 2016 11:00 AM EDT

Greetings,

Let's begin with a few developments in Japan.

1. Dollar-yen fell below 111 as the yen continues to strengthen.

Source: barchart

This is in spite of the BoJ suggesting that the central bank could push rates deeper into negative territory.

Source: MarketWatch

2. Here is the Nikkei 225 response to the yen strengthening,

Source: barchart

3. Just like Germany, Japan's government can now make money issuing bonds. Here is the 10yr JGB auction.

4. Inflation expectations in Japan remain subdued. Here are the corporate inflation expectations as determined by the BoJ.

Source: Goldman Sachs

5. One positive development out of Japan is a boost in wage growth. It remains to be seen just how sustainable this is.

Source: Goldman Sachs

Next, we have a couple of trends from China.

1. Rates offered to China's consumer (Yu'E Bao is China's largest money-market fund) continue to decline. This is driven by the persistent demand for yield, boosting the volume of wealth management products.

Source: Macquarie

2. We now see more evidence of the rebound in China's housing market.

Source: Macquarie

Turning to India, the nation's manufacturing activity recovered last month.

Source: Goldman Sachs

India's central bank, the RBI, cut rates by 25bp (discussed here recently). The rupee gave up 50bp against the dollar in response, but otherwise the cut was largely expected.

We now turn to the Eurozone where deflationary risks persist. The currency bloc's wholesale price declines are accelerating.

It's important to note that the PPI deflation is not limited to the Eurozone. Here is Romania's PPI for example.

In other Eurozone developments, ...

1. The Eurozone's labor market improvement remains tepid. The unemployment rate, while gradually declining, is still above 10%.

2. German factory orders unexpectedly fell as a result of the recent slowdown in exports.

3. The ECB continues to expand its (Eurosystem's) balance sheet.

Source: ECB

4. As a result of this as well as the BoJ's and several other nation's bond purchases, the net supply of government bonds is no longer growing.

Source: ‏@Fmirw

5. And of course, the ECB is driving Bund yields back toward the lows.

6. Bloomberg reminds us that the problem with Greece has never been resolved. The Eurozone had kicked the can down the road instead. Given the maturity wall, this issue may resurface shortly.

Source: @business

7. Deutsche Bank shares are under pressure again.

8. Related to the above, European financials continue to underperform.

Source: Ycharts.com

9. Also related to the above, this next slide is not about the Eurozone. It shows how sharply US bank bonds have underperformed (running higher spreads) in recent weeks.

Source: BAML

It looks as though Iceland's leader got caught with some offshore activities which have been released via a scandal known as the "Panama Papers". The crowd wants him to step down.

Source: NY Times

By the way, Iceland's currency has been strengthening. The chart below shows the euro weakening against the krona.

Source: baarchart

Back in the United States we have a number of observations to cover.

1. Interbank lending activity is near multi-decade lows as banks prefer financing themselves with near-zero-cost deposits, Note that both Fed Funds and LIBOR are based on this shrinking market.

3. Two indicators seem to point to softer labor markets in the US (the Conference Board Employment Trends Index and the Fed's LMCI are shown below). It's interesting that we are not seeing much evidence of any weakness in the labor markets elsewhere.

4. US factory orders are on a declining trend - which is somewhat inconsistent with the ISM manufacturing report last week.This new orders report was quite disappointing.

5. The Boston Fed President Eric Rosengren's spooked the markets on Monday with the following comment.

Source: Boston Fed

Note that Rosengren is a dovish FOMC member. It seems as though the Fed is jawboning in order to avoid risk assets from getting too frothy.

6. Goldman's research issued a statement suggesting that with the latest increase in labor force participation, the number of those who want a job but are not in the labor force has declined to pre-recession levels. That means we probably are not going to see the participation rates growing much more. Furthermore, it tells us that the current headline unemployment rate may have become a better representation of the employment situation.

Source: @NickatFP

We now look at the latest developments in a few markets.

1. Here is an excellent chart of the S&P capitalization and income breakdown by sector over time. Spot the bubbles?

Source: Goldman Sachs

2. The equity market has diverged from the Fed Funds futures. (stock investors are ignoring the upcoming Fed hikes). This may be one of the reasons the Fed is getting uneasy with the markets.

Source: @auaurelija

3. The treasury implied vol index (MOVE) fell sharply in recent weeks. Once again, the Fed may be viewing declines in volatility as a sign that markets are becoming "complacent".

Source: @SoberLook

4. The steepness of the VIX futures curve (and low spot VIX level) is also viewed by some as complacency. One can short VIX futures and make money on contango (riding the short position down the curve).

Source: @DriehausCapital, @sobata416

5. Hedge funds, on the other hand, don't seem to be complacent at all and are in fact very cautious. The next chart shows gross exposure.

Source: @CreditSuisse

6. Next, we see ETF short covering by hedge funds last month - one potential driver of the recent market rally.

Now we have a couple of items on the energy markets.

1. The oil output freeze doesn't look like it's going anywhere.

Source: The Sydney Morning Herald

2. Here is the US shale rig productivity projection. That's why the massive declines in rig count have not translated if significant output cuts.

Source: Macquarie

Finally, we look at the trend of hedge funds increasingly getting involved in venture capital - at least that was the case last year. These days hedge funds better have some deep sidepockets to avoid facing a liquidity mismatch.