The Daily Shot And Data - June 7, 2016

By Walter Kurtz

Tuesday, June 7, 2016 8:13 AM EDT

Greetings,

Let's begin with a few developments in the Eurozone.

1. The ECB balance sheet is approaching its 2012 peak - the central bank has been quite busy in May. The Eurozone's monetary base hit a new high.

Source: ECB

2. The ECB action (above) combined with weak employment data out of the US sent the average yield on German government bonds below zero for the first time.

Source: @fastFT

3. German factory orders dropped sharply, missing expectations by a significant margin. Both foreign and domestic demand has weakened.

Source: Statistisches Bundesamt

4. The short-term rate differential with the US suggests that the euro should weaken. However, the inflation-adjusted rate differential isn't as large. Combine that with a more dovish Fed and all the talk of the euro going to parity remains just talk - for now.

Source: Statistisches Bundesamt

Switching to the UK, the latest Telegraph poll shows Brexit vote going "down to the wire".

Source: The Telegraph, h/t @ttmygh

This poll continues to keep FX markets on the edge, raising the British pound implied volatility to new highs.

In the betting markets, the Brexit odds rose above 30%.

Source: @PredictWise

Separately, the UK's FX reserves have doubled since 2012. Would Brexit reverse this trend?

Source: ‏@joshdigga

In Japan, insurance firms and other institutions are aggressively shopping for foreign long-term securities with some yield.

Source: Capital Economics, ‏@joshdigga

Japanese firms are taking advantage of this tremendous demand, issuing record amounts of corporate bonds.

Source: ‏@GarfieldR1966

Turning to China, we discussed the divergence between the narrow and the broad money supply growth. Here is another way of looking at the situation: bank credit vs. M2 growth. It tells us that credit expansion is "staying" within the financial system (including shadow banking) - with less credit being avialable to the broader economy.

Source: Deutsche Bank

Goldman Sachs explains further the reason for this divergence.

Source: Goldman Sachs (FI = financial institution, NFI = nonfinancial institution).

Source: Goldman Sachs

Moreover, Goldman raised its forecast for China's total debt-to-GDP ratio due to higher than originally projected shadow banking growth.

Source: Goldman Sachs

Deutsche Bank sees Beijing becoming quite concerned about China's credit binge, with the government now tightening credit. That action should cool the property markets.

Source: Deutsche Bank

Separately, the EU is becoming increasingly annoyed with China's lack of reforms. Doing business in China remains a daunting task for foreign firms.

Source: Reuters

As an example of Beijing officials "smoothing" China's economic data, here is the nation's official unemployment rate and the PMI employment index (from a private source).

Source: ‏@TomOrlik

1. In other emerging markets, Russia's inflation levels off amid a more stable ruble and weak domestic demand. Is Elvira Nabiullina going to cut rates?

Related to the above, the Russian 10 yr government bond yield is firmly below 9% now.

Source: Investing.com

2. The South African rand rally continues - the currency is up over 4% since Thursday.

Source: Investing.com (chart shows the number of rand one dollar buys)

3. The offshore holdings of EM bonds have been led down by Brazil. Will the trend begin reversing soon if Brazil stabilizes?

Source: HSBC, ‏@joshdigga

Back in the United States, the Fed's labor market conditions index dipped lower. The Fed officials nonetheless insist that the latest payrolls drop was an aberration.

One indicator that has some analysts concerned about the US labor market is the recent temp workforce decline. In the past, temporary worker cuts led the overall US payrolls lower.

Source: Deutsche Bank, ‏@joshdigga

Monday's speech by Janet Yellen' was viewed by analysts as dovish. One of the reasons is that she described the real "neutral" rate as being close to zero. That means that the current real Fed Funds rate (which is negative when adjusted for inflation) isn't too far from the "neutral" rate. Yellen views the current policy as only modestly accommodative.

Source: FRB

Janet Yellen also did not provide a more specific schedule for rate hikes as she (and other Fed officials) did earlier. That was also viewed as dovish.

Source: FRB

Separately, it's amazing that the December rate hike didn't even register on bank CD (term deposit) rates (3-month CD rate is shown below). Savers are still being penalized.

Source: @Bankrate

1. In credit, the HY market loves higher energy prices and a delay in rate hikes. US HY bonds vs. leveraged loans are shown below (YTD).

Source: Ycharts.com

2. Here are the implied vs. historical default rates across several credit markets. While based on this measure corporate yields look rich, we can ask how much of the credit spread is due to illiquidity vs. default risk?

Source: Morgan Stanley

1. In global equities, one of these markets is not like the others.

Source: ‏@business

2. Below is the trend of announced M&A transactions - Europe vs. the US.

Source: Morgan Stanley

3. Hilary Clinton's presidential victory odds seem to track the stock market. A "spurious correlation"? Perhaps. However, there are two potential fundamental explanations.

a. Economic jitters tend to work against the incumbent party as well as pressure the stock market.
b. Markets hate uncertainty and Clinton is viewed as being likely to maintain the status quo.

Note that this relationship also existed when Barack Obama was running for his second term.

Source: @Schuldensuehner, SRP

4. Monday saw a massive rally in O&G Equipment & Services sector, as Weatherford (WFT) was upgraded by Barclays. Some these firms were "left for dead", but now investors see more value in the optionality that's built into many of these shares (call options on oil).

Source: Ycharts.com

Now on to commodities where we've seen most of the action recently.

1. Citi's survey asks "Where do you see the oil price a year from now?"

Source: Citi, ‏@joshdigga

2. US natural gas rally resumes as air conditioners are turned on.

Source: Investing.com

3. Wheat rally continues.

Source: Investing.com

4. The tropical storm Colin gains speed as it charges toward Florida. Orange juice futures spiked 5.5% in response. The Duke brothers would be quite happy.

Source: @barchart

5. Hedge funds have discovered milk ...

Source: @barchart

6. Broad commodity indices perk up as the dollar softens.

Source: @barchart

Finally, bitcoin is heading toward $600 for the first time since 2014.

Source: bitcoincharts.com

Turning to Food for Thought, we have 5 items this morning:

1. According to the Economist, "India wants to increase its solar capacity from 5.8GW to 100GW in six years". Aggressive.