Near-Zero Rates Are Here to Stay

The Daily Shot: 11-Jun-20
The United States
Europe
Asia – Pacific
China
Commodities
Energy
Equities
Rates
Global Developments
Food for Thought



 

The United States

1. The Federal Reserve will continue with its stimulus measures and expects to keep rates near zero through 2022.
 
Changes in the FOMC statements:
 
Source: @econchart  
 
The “dot plot”:
 
Source: @markets   Read full article  
 
A comparison of current conditions to historical data also points to a prolonged period of near-zero rates.
 
Source: Piper Sandler   
 
This table shows the Fed’s projections for rates, GDP growth, and inflation (compared to ING’s forecasts).
 
Source: ING  

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2. Treasuries rallied in response to the Fed’s zero-rate forecast.
 

 
Gold advanced.
 

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3. The May CPI report was weaker than the consensus estimate, as inflation continues to moderate.
 
The headline CPI (approaching zero):
 

 
The core CPI:
 

 
The core CPI monthly changes:
 
Source: @meremortenlund   Read full article  
 
Below is a select set of CPI components.
 
Higher inflation sectors:
 
Groceries:
 

 
Medical care services:
 

 
Landscaping services:
 

 
Lower inflation sectors:
 
Energy:
 

 
Apparel:
 

 
Hotels:
 

 
Airline fare:
 

 
Car rental:
 

 
Auto insurance:
 

 
Rent CPI held steady in May:
 

 
This chart shows the composition of the core services CPI.
 
Source: Oxford Economics  
 
Finally, here is BlackRock’s inflation tracker.
 
Source: BlackRock  

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4. Mortgage applications to purchases a home are at a multi-year high.
 

 
5. Consumer confidence is rebounding.
 
Sentiment indicator from Morning Consult:
 
Source: Morning Consult   Read full article  
 
Sentiment indicator from Hamilton Place Strategies, CivicScience:
 
Source: Hamilton Place Strategies, CivicScience   Read full article  

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6. Is there too much consumer optimism about jobs returning, given that fewer small businesses plan to boost employment?
 
Source: @TS_Lombard, @LizAnnSonders  
 
7. Business investment plummetted this quarter.
 
Source: Evercore ISI, @LizAnnSonders  
 
8. US financial conditions are almost back to pre-crisis levels.
 

 
9. The budget gap continues to widen.
 


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Europe

1. Home prices in the UK are expected to decline, according to the latest RICS report.
 

Source: @financialtimes   Read full article  

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2. Sweden’s consumer spending plummeted in April.
 

 
3. Here is a summary of the Q1 GDP changes across the EU.
 
Source: Eurostat   Read full article  
 
4. This chart shows the composition of French industrial production.
 
Source: Pantheon Macroeconomics  
 
5. German car sales bounced from multi-decade lows.
 
Source: @Schuldensuehner, @TheTerminal  
 
7. The Eurozone’s economic data surprises have been worse than the global trend.
 
Source: TS Lombard  


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Asia – Pacific

1. Few economists expect more stimulus from the BoJ.
 
Source: @markets   Read full article  
 
2. The rally in the Taiwan dollar continues.
 

 
3. According to the Google Maps data, Australia is experiencing a gradual recovery in workplaces and retail/recreation activity, but a slow recovery in public transport.
 
Source: Goldman Sachs  
 
4. New Zealand had a sharper downturn and faster recovery.
 
Source: Goldman Sachs  
 
New Zeland’s credit card spending rebounded in May.
 


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China

1. Robust credit expansion continues.
 
Bank loans (year-to-date):

 
Total financing:
 

 
The M1 money supply growth:
 

 
M2 (broad) money supply (level):
 
Source: @PkZweifel  

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2. Bond issuance remains strong.
 
Source: @DavidInglesTV  


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Commodities

1. This chat shows official gold reserves (held by global central banks).
 
Source: ECB   Read full article  
 
2. Sugar continues to rebound, …
 

 
… helped by higher oil prices (sugar is a fuel source in Brazil) and …
 
Source: Fitch Solutions Macro Research  
 
… a bounce in the Brazilian real.
 
Source: Fitch Solutions Macro Research  
 
But sugar inventories are expected to climb.
 
Source: Fitch Solutions Macro Research  


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Energy

1. US gasoline demand is rebounding.
 

 
The gap between US driving activity and gasoline demand keeps widening.
 
Source: Thomas Costerg, Pictet Wealth Management  

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2. US crude oil inventories hit a record high.
 

 
3. Fundraising for energy-focused investing has been slowing in recent years.
 
Source: @WSJ   Read full article  
 
4. US electricity demand has decreased substantially this year.
 
Source: EIA   Read full article  
 
Coal usage for electricity generation is collapsing.
 
Source: EIA   Read full article  


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Equities

1. The S&P 500 futures are lower amid worries about the “second wave.”
 
Source: @business   Read full article  

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2. Some investors have become convinced that the sharp rise in the money supply can support the equity rally. But there is a problem with this assumption.
 
Source: @ISABELNET_SA, @MorganStanley  
 
There are two drivers of the recent money supply spike.
 
The first one is the result of the Fed’s massive securities purchases. The central bank buys bonds from dealers, who, in turn, purchase them from investors, boosting the money supply in the process (see #3 here of an overview). Are institutional investors who sold their bonds to the Fed rotating out of Treasuries into stocks? Much lower Treasury yields make stocks attractive on a relative basis. Still, it’s doubtful that pensions, insurance companies, funds, and other bondholders suddenly got interested in the equity market in a way that would sustain the rally.
 
The second source of the recent growth in the US money supply comes from companies tapping credit lines as well as getting new loans to boost their liquidity (as revenues collapse). But corporations are certainly not drawing credit lines to purchase shares.
 
It’s worth noting that the federal government’s stimulus does not increase the money supply because cash simply flows from bond investors to stimulus recipients (no new money is created).
 
3. There is some anecdotal evidence that retail investors have been using stimulus money (chart below) to invest in the stock market.
 
Source: Morgan Stanley Research  
 
Indeed, the online search activity for “day trading” and “call options” rose to record levels. But this trend suggests that the market rally is vulnerable.
 
Source: @jessefelder  

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4. The Nasdaq Composite broke above 10k for the first time.
 

 
What is the composition of the Nasdaq Composite?
 
Source: @WSJ   Read full article  

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5. Tesla is about to become the most valuable automaker in the world.
 
Source: @technology   Read full article  
 
6. The options market shows some nervousness about the November elections.
 
Source: BofA Merrill Lynch Global Research, @markets   Read full article  


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Rates

1. Real rates implied by inflation-linked Treasury yields are pushing deeper into negative territory.
 

 
2. Will the Fed boost the pace of its securities purchases to keep up with the government’s issuance?
 
Source: Pantheon Macroeconomics  


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Global Developments

1. More people are driving again.
 
Source: Morgan Stanley Research  
 
2. The US economic data momentum has been the first to bounce from the lows (before Asia-Pacific and the Eurozone).
 
Source: Arbor Research & Trading  
 
3. Insurance companies face substantial losses from the pandemic.
 
Source: @business   Read full article  


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Food for Thought

1. US STEM graduate students from overseas:
 
Source: @Noahpinion, @bopinion   Read full article  
 
2. US birth rates by mother’s age:
 
Source: @WSJ   Read full article  
 
3. Urban population vs. GNP per capita:
 
Source: UN   Read full article  
 
4. COVID-19 cases per million:
 
Source: Statista  
 
5. The economic impact on US households:
 
Source: @financialtimes   Read full article  
 
6. COVID-related deaths in red vs. blue districts:
 
Source: Pew Research Center   Read full article  
 
7. What do you like most/least about working from home?
 
Source: Pioneer Public  
 
8. Wholesale used-car auctions in the US:
 
Source: J.D. Power  
 
9. The cost of getting astronauts into space:
 
Source: Statista  

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