Archive for Chart Of The Day – Page 2

U.S. Home Prices Still Rising Double Digits

Home prices continued to accelerate at a double digit pace in April according to CoreLogic.  The latest reading came in at 10.5% year over year which is the fifteenth consecutive double digit reading.  Since 1977 the CoreLogic housing price index has averaged a 5.7% annual change so the current rate of change is substantially higher than the historical norm.

While the annual rate of change looks strong it has decelerated in recent months from almost 12%.  Still, the housing market in the USA remains robust.  And that’s probably not surprising since Americans have become disillusioned by just about every other asset class as seen in this recent survey on various asset classes.



SocGen: Beware the Global Macro Slowdown

Just passing along this data point from the Cross Asset Research team.  They cite the CitiGroup Economic Surprise Index for several regions to reinforce their case for a global macro slowdown:

  • The macro environment has slowed down in most regions except for the US, which is now enjoying a strong economic rebound.
  • In China, economic data continue to surprise on the downside. Yet, even in a scenario of a severe downturn, the country can still emerge strongly from the crisis in the long term, if its leaders remain on the path of reform. 
  • Emerging markets continue to slowdown as reflected by the contraction in manufacturing activity in major EM countries.


When Was the Last Time Treasury Yields Were This Low?

By Sober Look

We’ve had an unprecedented compression in US (and global) government bond yields in a short period of time. Here is one surprising fact: Treasury yields are now at the level they were during the US government shutdown. The level of uncertainty has diminished dramatically since then and the employment picture continues to improve (see Twitter post). Yet here we are again. This time however it’s the global chase for yield and expectations of ECB’s monetary easing driving rates to new lows.

US 10y bond yield

Why and How the ECB Might Implement QE

Important chart here from Michael McDonough at Bloomberg.   It shows the spread between Italian sovereign bond yields and corporate bond yields.  As you can see, as the government yield has fallen quite dramatically the corporate yield hasn’t followed.



This is not at all what the ECB would like to be seeing.   This is one of the main reasons why the ECB is increasingly likely to implement QE.  It’s also a key reason why QE in Europe might look very different than it does in the USA.  In my opinion, the ECB is likely to focus on private securities markets in addition to the sovereign bonds.  They really would love to see the yield reduction spill over into the private sector so they (hopefully) get some investment boost.

And of course, this means more chase for yield in the coming years as this is just one more set of instruments that are likely to get jammed lower….

Chart of the Day: Bond Bears vs Stock Bears

I liked this post by Surly Trader which highlights an importance difference about stocks and bonds that often goes overlooked – that is, a bear market in bonds is a very different animal than a bear market in stocks.  Given that there seems to be such widespread fear over bonds and rising interest rates, I think this is an important point (via ST):

From the return side, let’s look at the bad days.  If you look at the rolling total returns of the Investment Grade Corporate Bond Index since 1976, the bad 6 and 12 month total returns were shy of -20% in the early 80′s:


The funny thing about bonds is that their returns are “self-fixing”.  The bonds move back to  Par ($100 per face) price at maturity over time.  In addition, the investor continues to re-invest his/her coupons at higher interest rates thereby dampening the changes in price of the underlying bond holdings.

As a comparison we can look at S&P 500 price returns over the same time period.  Total returns are not available back to 1976, but they would be very close to the rolling price returns:


He notes:

“Stocks fix themselves as well, but the drawdowns are more frequent and returns are obviously more volatile”

That’s the key point.  Stocks and bonds are very different types of instruments which serve very different roles in a portfolio.  Comparing them or thinking about “bear markets” or “bubbles” is often done in such a manner that implies an unjust level of fear with regards to how those environments might apply to these very different instruments.  Don’t let a bond bear scare you into thinking that a bear market in bonds is anything remotely similar to a bear market in stocks….

Chart of the Day: Is the Expansion “Long in the Tooth”?

This was a useful chart from the WSJ over the weekend.  It puts the current economic expansion in perspective:



We’re in month 58 of the current expansion, which is right in-line with the post-war average.  I’ve said that the current expansion is a little long in the tooth, but that it’s important to keep that in the right expansion.  While we’re probably closer to the next recession than we are to the beginning of the recovery, it’s also important to remember that the business cycle seems to be getting longer and longer.  As I noted earlier this year:

“it’s also interesting to note that the expansion phase of the business cycle appears to be getting longer.  You’ll notice that 3 of those 6 long recoveries occurred since 1982.  Are these anomalies or are they signs of a changing economic landscape?  I think they’re probably signs of a changing economic landscape and that means that a lot of the data that exists before the post-war era probably doesn’t apply.”

So yes, we’re long in the tooth.  But that doesn’t mean we can’t get longer in the tooth.

Chart of the Day: Showing up Late to the Party

Here’s some nice perspective on the market cycle from Lance Roberts:

An interesting article this morning via Investment News caught my attention:

“After watching the stock market climb from peak to peak last year, investors are finally starting to warm up to equities.

More than 85% of investors are feeling optimistic about the investment landscape, and 74% think stocks have the greatest potential of any major asset class, according to a survey of 500 affluent investors released Monday by Legg Mason Global Asset Management. The survey was conducted in December and January.

The survey also shows that investors still hold relatively conservative portfolios, but are increasingly willing to increase exposure to international assets.”

This is not a surprising survey by any measure. In fact, it is typical of what you would expect from a group of individuals whose investment decisions are primarily driven emotional behavior rather than a disciplined investment process.

“At the time this survey was conducted, investors had experienced in the U.S. a pretty positive stock market,” said Matthew Schiffman, managing director and head of global marketing at Legg Mason Global Asset Management.“Markets are typically forward looking, while investors are typically backward looking.”

Investors are indeed backward looking as shown below. The Investment Company Institute (ICI) began tracking flows into equity funds in 2007 which I have overlaid with the investor psychology cycle. In this manner, you can witness investor behavior in “real time.”


Chart of the Day: New DM-EM Equity Convergence

By Marc Chandler, Global Head of Currency Strategy, Brown Brothers Harriman

This Great Graphic, created on Bloomberg, depicts the MSCI equity index for the developed countries (orange line) and the emerging markets (white line).

dm em

The charts begins at the start of last year. In the first several months of 2013, DM outperformed EM. The big EM sell-off coincided with first hint from the FOMC about tapering. EM recovered and tracked the DM until October. A new phase of divergence, with DM outperforming again lasted into early March.

Since mid-March the performance is a study in contrasts. MSCI emerging market equity index is up about 8.4%. During the same time the developed markets index is up a little less than 1%.

In the foreign exchange market over this period, the dollar-bloc is the strongest. The Australian dollar is easily the best performer rising 3.3% against the dollar, followed by the Canadian dollar (1.7%) and the New Zealand dollar (1.5%). Sterling is a distant fourth, up 0.4%, and all this was recorded today. The other major currencies have lost ground against the dollar this period.

Among the emerging market currencies, the Brazilian real (5.8%), Colombian peso (5.5%) and Turkish lira (5.5%) have led the advance. Chilean peso (3.5%) and the Russian rouble (3.0%) round out the top five. As with the majors, the high yielding/high beta currencies has generally outperformed.


Chart of the Day: Estimating Wage Growth

By Marc Chandler, Global Head of Currency Strategy, Brown Brothers Harriman

This Great Graphic was tweeted by the Financial Times’ Cardiff Garcia, which he got from Goldman Sachs. It tries to assess the outlook for wage growth based on different measures of unemployment, including short-term unemployment rate.


The problem is that wages do not seem to be tied to the measures of the unemployment rates. This is to say that wage growth is been considerably weaker than the improving labor market would suggest.

Wages are understood to be an economic function of supply and demand. Yet the relationship appears to have broken down. One response is that it is simply a question of time, Back in 1998-19900, wages grew faster than expected based different unemployment measures. This was a short run anomaly. An alternative hypothesis begins with the observation that since 2001, wage growth has typically under performed what the levels of unemployment would suggest. Could this be the implicit threat posed by China? It joined the WTO in late 2001. This hypothesis suggests that politics, as in power, is may be a better explanatory variable for how the social product is divided between profits and wages.

Given that the forward guidance of the Federal Reserve is evolving and, most recently, it dropped the reference to a 6.5% unemployment rate, and the comments by Yellen, investors will be watching earnings very closely. Recall that in February, the weather prevented many from going to work, but their salaries were not impacted. This helped generate a statistical quirk of a larger than expected increase in hourly earnings. They rose 0.4% for a 2.2% year-over-year rate, which is the upper end of the range for the past three years.


Where We Are in the Cycle – Connecting the Dots

Last week I posted a good chart from Morgan Stanley showing where some countries are (potentially) in the business cycle.  Of course, the business cycle is not the market cycle so this doesn’t really connect the dots to anything.  Luckily, David Rosenberg has some data for us (at least as it applies to the USA):



Source: Gluskin Sheff

Worried About Rates? Worry About Growth.

I like this chart from ValueWalk showing the correlation between interest rates and growth.  We often hear about how the bond market is a good forecaster of future economic growth.  I usually describe the structure of interest rates as being a function of the way that traders view the way the Fed sees policy.  In other words, bond traders are always trying to front-run the Fed.  And the Fed is always trying to front-run the economy.

One of the more common concerns in this market environment is the concern about interest rates and the likelihood of a big move higher.  But as the following chart shows, if you’re worried about rates you really should be worried about growth.  After all, if the Fed is watching the economy then higher rates aren’t likely to transpire without much stronger growth.


Who’s Where in the Economic Growth Cycle?

Here’s a nice bit of global macro perspective on the state of different economies in the business cycle.  Clearly, this is an approximation, but I have a feeling they’re pretty close to right here:



Source: Morgan Stanley

Inflation Expectations – on the Fast Track to Nowhere

If you’re worried about high inflation then you must definitely think that the markets have things all wrong.  As we all know, inflation, as measured by the CPI has been extremely low for the last 5 years.  The latest reading of 1.1% is well below the historical average reading of about 3.5%.

But the past is the past.  One of the better ways to gauge the market’s expectations of inflation is to look at the 10 year break-even.  This is just the yield on the 10 year versus the inflation protected equivalent.  When this rate is moving higher it means that the market is pricing in higher inflation expectations and vice versa.

So, what’s it telling us today?  Not much.  In other words, if the markets are right then low inflation is here to stay.


Chart of the Day: the CRB and Oil Prices

By Marc Chandler, Global Head of Currency Strategy, Brown Brothers Harriman

Commodities are very much the center of attention in the financial markets. The first Great Graphic, created on Bloomberg, is the CRB index. Through last Friday (March 7) it had rallied 13.5% since January 9.

It gapped higher on March 3and gapped lower earlier today, leaving a bearish island top in it wake. Technical indicators like the RSI and MACDs have turned lower. The gap extends from yesterday’s low (304.75) to today’s high (303.72). Completing the gap and moving above it would negate this bearish views. In late morning activity, there was an attempt to close the gap but it was rebuffed and the CRB returned to the middle of its range. We suspect is break away gap, meaning that it is unlikely to be filled in the near-term.


The CRB index also gapped higher on February 19. This gap has not been completed. In can be found between 298.55 and 299.29. A move to this area will be the first bearish objective. The next one is 294.50 We suspect there may be potential toward 290.

The lower chart, also from Bloomberg is a chart of the May US crude oil futures contract. The rally was not as impressive as the one in the CRB. It did not gap lower and there is not island gap, but the technical condition appears almost as bearish. The RSI and MACDs are trending lower.

It closed yesterday at the psychologically and technically important $100 a barrel level, but follow through selling today has seen it loss another 2%. It has moved toward the 61.8% of the rally off the the early-January though early March high (found near $96.60). That rally has carried oil up a little more than 15%.


Today’s sell-off may have been aggravated by conspiracy theories sparked by the unexpected announcement by the US Department of Energy. It said it would sell up to 5 mln barrels of crude oil from its strategic reserves as a test of its systems. It is the first sale since 1990 specifically for test purposes. It will off sour crude and bids are due March 14.

The test apparently has been subject of internal discussion for some time and was timed to be the most helpful for refineries in term of their maintenance schedule. The 5 mln barrels is roughly equivalent to the US daily import of crude oil and about 25% of the US daily consumption.

Many observers initially linked the release of the strategic reserves to confrontation with Russia over Ukraine and Crimea. Yet, 5 mln barrels is a drop in the bucket, so to speak and it is not clear, in any event, how much the announcement weighed on prices, which were already moving lower before announcement. If the US were really trying to depress oil prices, the amount would have been bigger and, more than likely, it would have tried coordinating with Europe as was the case when the last time the reserves were tapped. In 2011, in response to the civil war in Libya, in coordination with Europe, the US sold 30 mln barrels of oil from its reserves.

At the present, none of the major currencies, including some crosses, are particularly closely tied to the CRB in general or oil prices in particular. Sterling against the yen may be about the best (highest correlation with oil) and that is only about 0.28 correlated ( 60 day percentage change basis) We have looked at a number of emerging market currencies and the results were similar results.


SocGen: 2 Reasons to be Bullish About Peripheral Europe

Here’s a contrarian view for you (via Societe Generale):

“Financial markets have taken note of the improving situation in southern European countries, with major equity indices and bonds posting double-digit performances over the past six months. Although an acceleration of the recovery may not be in the cards for the moment, we believe it is still time to invest in peripheral assets considering: 1) the ECB should remain accommodative; 2) attractive valuations compared to the US (more expensive) and EM (more risk ahead). In particular, in book value terms, eurozone and peripheral valuations are still attractive compared to the US which is trading at 2.6x book value whereas the eurozone is trading at 1.5x (the historical discount is 34%, vs 43% at present), leaving room for further performance of European assets.”