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The Fed leaves rates unchanged and says stimulus wind down will begin relatively soon. And according to Saxo Bank's senior sales trader Christoffer Moltke-Leth, this is because the Fed is struggling with an inconsistent labour market and low inflation. The Fed still foresees one more rate hike this year and three hikes next year, but the market does not agree, says Moltke-Leth. "The market expects the Fed to be even more dovish."
Article / 27 May 2016 at 12:17 GMT

Daily Shot: US capex weak, 'vice index' gloomy too

TradingFloor.com Team / Saxo Bank
Denmark
  • US capex declines further, pointing to subdued productivity growth
  • Weak US manufacturers' orders resulted in scaling back June rate hike expectations
  • Declining US inflation expectations, despite higher oil, is ammunition for Fed doves
  • Fed officials, including Jerome Powell, continue to beat the tightening drum
  • Tighter US banks' underwriting standards point to increased corporate default risks
  • "Vice index" of booze, gambling, unhealthy food suggests weaker economy ahead


By Walter Kurtz*

We begin with the United States where new capital goods orders (ex-aircraft) continue to decline. Weak capex is likely to keep productivity growth low for some time to come. 

US capital goods orders down
Source: Federal Reserve Economic Data


According to Merrill Lynch, investors are keenly aware of this situation and apparently would like to see more Capex spending by companies. So far, however, corporate America does not seem to be paying attention. 

US corporate investment Source: BofAML 


Capital goods shipments and business investment are trending lower.

US capital goods shipments and business investment  



















Source: @GregDaco 


Here is the growth in unfilled capital goods orders (year-on-year). 

US unfilled capital goods orders Source: Federal Reserve Economic Data


This surprising weakness in manufacturers' orders resulted in markets scaling back the June rate hike expectations, focusing on July instead. In the chart below, the June hike probability is the white line and the July one is yellow. 

US rate hike expectations Source: @boes_ 


Another trend that may provide support for the doves on the Federal Open Market Committee is declining US inflation expectations — in spite of stronger crude oil prices.

US inflation expectations Source: Federal Reserve Economic Data


Moreover, the FOMC is likely looking at the tightening in US banks' underwriting standards which points to increased risk of corporate defaults. It's not clear how much weight the committee will assign to this. 

US corporate default risks Source: Deutsche Bank, ‏@joshdigga 


Nevertheless, the Fed officials continue to beat the tightening policy drum.

Fed's Powell
 























Other economic indicators in the US point to a mixed picture.

After a disappointing Kansas City Fed report on manufacturing, (with several other Fed banks having already reported), it looks as though the ISM PMI (at the national level) may show US manufacturing contracting again.

US regional surveys Source: @Not_Jim_Cramer 


On the other hand, US pending home sales rose to the highest level in a decade.

US pending home sales up
Source: Investing.com 


That's why the various GDP trackers offer different results. The Atlanta Fed's GDPNow is now projecting close to 3% for the second quarter (annualized). This seems to be too high. 

Atlanta Fed's GDPNow
 



















Source: ‏@AtlantaFed 


The NY Fed Research Nowcast on the other hand just printed a 1.7% Q2 GDP growth. This seems more realistic considering that Markit's projection is 0.7%. 

NY Fed's Nowcast  Source: ‏@NYFedResearch, h/t @OneTopQuark


There is one more economy-tracking indicator that some are monitoring, the so-called "Vice index". Booze, gambling, unhealthy foods seem to be a decent predictor of economic growth. And the Vice index now suggests economic deterioration ahead. 

Vice index up
 





























Source: ‏Seeking Alpha, h/t @historysquared 

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Switching to the UK, the nation's first-quarter GDP growth disappointed. 

UK GDP disappoints
 





















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Economic sentiment in Sweden declined for four months in a row.

Sweden economic sentiment down Source: Goldman Sachs


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Greek government bond yields rose after the IMF resumed expressing its concerns about the country's solvency. 

Greek bond yields Source: ‏@fastFT 


Japan is back in deflation. The chart below shows the Tokyo CPI which is reported one month ahead of the national figure and tends to be a great leading indicator. Will the Bank of Japan accelerate its QE program in response? 

Japan back in deflation Source: Investing.com


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In China, we see capital outflows grinding to a halt. For now. Let's see what happens if the dollar rises further. 

China capital flows Source: CDeutsche Bank, @joshdigga 


A public dairy company in China (Huishan Dairy) completed a lease-back deal of 50k cows to raise cash (sold the cows and is now leasing them). Why did it need the funds? Huishan Dairy has been buying back its stock to boost share prices. The trick worked, as the shares continue to outperform. Financial engineering is in full swing in China - even if it involves cows. 

China dairy cow leaseback deal Source: Bloomberg.com

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Turning to the equity markets:
Long-dated treasuries are still beating the S&P500 over the past year.

Long bonds beating SP500 Source: Ycharts.com, h/t @JmBadalamenti 


We discussed the Vice Index earlier. Here is a vice mutual fund outperforming the S&P500. 

Vice mutual fund vs SP500
Source: Ycharts.com 


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We finish with a few updates on commodities.

The Wall Street Journal ran a scary story of "moms and millennials" trading leveraged crude oil products (such as 3x oil ETFs). With oil nearly doubling since the January lows, this market is attracting new participants. This is unlikely to end well.

Moms trading oil
Source: WSJ, h/t @Stalingrad_Poor 


Oil prices Source: @FT 


Turning to Food for Thought:

According to VOX, "Indoor air pollution kills 3.5 - 4.3 million people each year."

Food for Thought Source: ‏@voxdotcom


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Note: The next Daily Shot will be out Tuesday, May 31. Have a great weekend.

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— Edited by John Acher


* Walter Kurtz is an alias 

**This is an abridged version of the Daily Shot. To subscribe to the full version, link to the Daily Shot here. E-mail addresses are never shared with anyone.

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