Greetings,

We begin with the United Kingdom where market-based long-term real rates have declined rapidly (deep into negative territory). The market is implying a massively accommodative policy, far beyond that of the ECB. Does the BoE QE justify these valuations? The first chart below shows 30yr implied real yield (yield on inflation-protected bonds). The second chart compares implied 5yr real rates 5yr forward (also based on inflation-linked bonds) across several economies.

 

Source: Deutsche Bank, ‏@joshdigga

As a result, inflation-linked bonds in the UK have seen spectacular returns. Overdone?

Source: @fastFT

1. Turning to UK's economic developments, the housing market (price balance) stabilizes after the "initial shock" of the EU Referendum vote.

Further Reading

At the same time, according to Halifax​, UK house price growth continues to slow.

Further Reading

2. UK's industrial production beat forecasts on oil sector activity improvement. However, manufacturing production softened.

 

  3. Carney suggested that the forceful action by the BOE contributed to better-than-expected UK economic data. Perhaps.

Source: BBC  

1. Turning to the Eurozone, Irish consumer sentiment seems to have stabilized since the UK's Brexit vote. 

Further Reading

2. The Eurozone credit flow data remains robust thus far despite the pressure (in some cases quite severe) on bank shares this year (driving the need for recapitalization).

Source: Deutsche Bank,  ‏@joshdigga

3. Corporate lending margins for Italian banks have fallen to record lows. Rate compression and higher borrowing costs for some Italian banks have contributed to the trend.

Source: BofAML, ‏@joshdigga

4. According to Morgan Stanley, at current yield levels, the ECB will run out of eligible German and Finnish government bonds within five months. As discussed before, there is plenty of room with Italian bonds.

Source: Morgan Stanley, @joshdigga

Source: Morgan Stanley, @joshdigga

5. The ECB has been focusing on the longer end of the German curve where yields are above the minimum (-0.4%).

Source: Credit Suisse, @joshdigga

6. The ECB may be forced to bend/change some of its rules as it runs out of paper to buy.

Source: Morgan Stanley, @joshdigga

7. According to Deutsche Bank, the markets are already pricing some form of QE extension.

Source: Deutsche Bank, @joshdigga

8. Morgan Stanley, however, does not see the ECB easing in September.

Source: Morgan Stanley, @joshdigga    

1. Continuing with the Eurozone, we go to Germany where industrial production declined sharply. Economists did not expect this. The second chart below shows the breakdown.

Source: Investing.com, Further Reading

Source: Natixis, @joshdigga​

2. Germans continue to save despite ridiculously low interest rates. This behavior contributes to (relatively) soft domestic demand and massive imbalances in the Eurozone.

Source: Deutsche Bank, @joshdigga

3. Is German construction activity about to take a hit?

Source: Deutsche Bank, @joshdigga

4. The 10yr Bund auction yield hits another record low.

Separately, the latest ISI survey suggests some green shoots for Europe.

Source:  Evercore ISI Company Survey of Europe Sales, @joshdigga  

Elsewhere in Europe, the Czech short-term bond yields move deeper into negative territory. The nation's central bank has been defending the koruna exchange rate cap by buying euros (second chart below). Is this going to be a repeat of the Swiss "de-pegging"?

Source: Bloomberg LP

Source: myfxbook.com  

1. Now, on to emerging markets where the Russian 2yr government bond yield keeps declining. This trend suggests that rate cuts are (or should be) coming, as real rates have been elevated (discussed yesterday).

2. India's 5yr government bond yield fell below 7% for the first time since 2009.

3. What was that song? "Looking for yield in all the wrong places"? On a serious note, the declining yield of the USD-denominated government bond is tremendous for Argentina, showing rising global confidence in the nation's recovery.

  4. According to Bloomberg, "Duterte's outbursts take their toll on Philippine stocks - foreigners are pulling out".

Source: Bloomberg.com

5. Russia's stock market continues to move higher. Some have suggested that this is an indication of Donald Trump's improved chances to win the presidency in the US (Trump is viewed as being more constructive on the Russian sanctions). Seems a bit of a stretch. 

  6. The charts below show Chile's latest copper exports and wage growth.

Source: Investing.com

Source: Investing.com  

Back in the United States, the Beveridge Curve continues to show a persistent skills mismatch in the labor market. Employers want specific skills and experience (nurses, welders, long-distance truck drivers, engineers, skilled technicians, etc.). The large pool of available labor, however, doesn't meet those needs. 

Here is the ratio of US hires to job openings (another way to look at the trend above).

Job openings and hires trend in the construction sector demonstrates the skills divide 

  Moreover, according to Bespoke Investment Group, the skills gap shows up in the latest Beige Book report from the Fed.

 Source: @bespokeinvest , @joshdigga 

Lately, the issue with US labor markets has been slower hiring, not layoffs.

  There are some concerns that demand for labor - especially lower skilled workers - has been easing recently (discussed on Monday).

 Source: Macquarie, @joshdigga 

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On a positive note, US intangibles Capex has been trending higher.

 Source: Deutsche Bank, @joshdigga   

1. Turning to the rates markets, the 3m US LIBOR - OIS spread jumped again. The trend indicates (relatively) tight conditions for foreign (especially Japanese) banks who want to borrow dollars in the funding markets. 

Source: Bloomberg LP, Function "LOIS"

2. Implied volatility of long-term rates in the US is trending lower. 

Source: Bloomberg LP; MOVE = The Merrill Lynch Option Volatility Estimate for treasuries

Bloomberg Terminal Function "USSN0110 CMPN <Curncy> <go>"

3. These types of markets make many at the Fed uneasy. Some may remember this from a couple of years ago.

Source: Bloomberg.com

4. In the equity markets, the VIX curve is steepening again.

Source: Bloomberg Terminal; Function "CCRV"

5. Speaking of low volatility, here is the S&P 500 120-day historical volatility over the past year.

Source: Bloomberg Terminal; Function "GV"

6. US small cap outperformance over the past couple of months has been impressive.

Source: Ycharts.com 7. Here we go again ...

Source: Further Reading  

1. In commodities, the European natural gas mini-rally has been fully reversed. The market is becoming well supplied, especially as LNG pours in.

  2. Speaking of oversupply, the WSJ suggests that US "gasoline glut threatens the crude-oil rally fueled by car travel". The chart below shows the slowdown in total miles traveled in the US.

Source: WSJ

3. Nonetheless, US gasoline futures stage a sharp rally (following crude oil higher) on more talk of a Russia-Saudi collaboration.

  4. Record Australian iron ore exports should at some point begin pressuring prices. Here are the iron ore futures in China.

  5. On the other hand, global steel consumption seems to be rebounding.

Source: Macquarie, @joshdigga   

 Turning to Food for Thought, we have 5 items today:

1. Which EU country has the largest number of citizens living abroad? 

Source: @wef

2.  ‏Latino voters in battleground states.

Source: @WSJGraphics, ‏@Tmp_Research

3. Zika mosquito habitats around the world. The WSJ article asks if the mosquito should be eliminated as a species.

Source: @WSJGraphics, ‏@Tmp_Research

4. Literacy rates globally for two age categories.

Source: @MaxCRoser, ‏@Tmp_Research

5. According to Pew, "13% of Americans don’t use the internet." Who are they?

Source: @pewresearch