Ben sets the tone...
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In This Issue.

* The market isn't a fan of QE.

* The euro rode the wave.

* BOE meets today.

* Double dip in New Zealand?

And, Now, Today's Pfennig For Your Thoughts!

Ben sets the tone...

Good day...and a Terrific Thursday to you. Wow, it was a cold start for us here in the Mid West. As I was driving into the office this morning, I had the heater basically full blast and wondered why I wasn't nice and toasty warm. When I looked down on the dash and saw a single digit on the thermometer, all of my questions were answered. We haven't really seen any lasting mid winter thaw as of yet, but it looks like we're going to end the week above the freezing point. The US dollar couldn't shake the frost either yesterday as we had yet another day of selling pressure, but this time it was Bernanke moving the market.

What we lacked in the way of data was more than made up for by Bernanke's comments at the House Budget Committee yesterday. I guess the proper way to phrase it would be the lack of what was said as there weren't any earth shattering revelations thrown about, but instead, the minutes of previous meetings could have been used as it was pretty much status quo.

He said that while the declines we saw to the unemployment rate back in December and January do provide some grounds for optimism, caution is still needed as output growth will likely remain moderate for a while. With employers reportedly still reluctant to add to their payrolls, it will be several years before the unemployment rate has returned to a more normal level.

The fact Bernanke reiterated his view that the employment picture will most likely remain a problem well into the future is what created the buzz. In fact, looking at the chart from yesterday shows everything really took off around 9am central time which is right when he was delivering his speech.

The fact that the Fed expanded its mandate to employment means that policy decisions will largely be impacted by the jobs situation as opposed to just focusing on price stability. Bernanke has repeated the fact that he needs to see a sustained period of stronger job creation before he deems the recovery firmly established.

In other words, the Fed has no intention of amending its outlook for QE2 and will press forward with its original plan of $600 billion worth of Treasuries by June. Any time we have talk about continuing or additional monetary accommodation, namely QE, count on seeing downward pressure on the dollar. As long as we have this type of accommodation and no signs of tightening on the horizon, I think a good amount of any positive data will tend to be overshadowed.

Before I move on, I got a chuckle out of this one. When Bernanke was asked about inflation, he said indications in our financial markets are lacking the proof needed to raise inflation expectations and pointed to the 1.2% figure in 2010. Despite rising oil and food prices, he still contends inflation remains quite low and deflected the blame toward China and other fast growing economies instead of the Fed's stimulus policies as to the origins of any such inflation pressures. I guess it's been a while since he paid for a tank of gas or got the grocery bill.

As I mentioned yesterday, the only economic report released was the weekly mortgage app figure and displayed the drop off that many were anticipating. The index fell 5.5% as mortgage interest rates rose to a 10 month high which has hampered much of the incentive to buy or refinance lately. Right out of the starter blocks this morning, we get the weekly jobs numbers followed by wholesale inventories and then the monthly budget statement in the afternoon.

Both the initial and continuing claims are expected to build upon gains from last week, but the winter weather effects might show differently. The initial claims are expected to drop to 410k from last week's 415k and continuing claims are expected to come in right at 3.9 million. Keep in mind that figures for continuing claims don't include those who have used up their traditional benefits and now receive emergency or extended payments.

Wholesale inventories for December are expected to show a slight increase from the previous month's contraction, but again, another muted result is expected. At this point, inventory levels look to be maintained rather than ramping up to any significant levels. If we recall, inventory building was a key component to the economic growth early on so business inventories due out next week will give us additional insight.

Moving on to currencies, the euro put together a nice run on the day and managed to pull most of the other regional currencies, including the Swiss franc, along for a ride. The overall market tendency to sell the US dollar was the main contributor to the euro's 0.75% rise up to 1.3744 yesterday. Even as I left the office last night, the euro was holding firmly onto the 1.37 handle.

As Chuck mentioned before, the euro is the offset currency to the US dollar so the essential continued confirmation of QE2 prompted over a 1 cent rise in the euro. We did have some decent news out of Germany that helped push the euro along as exports increased for a second month in December and business expectations have risen to a 4 year high.

One of the German policy makers said their recovery stands solidly on two pillars, which are trade and demand. The obvious issues remain at play in Europe, but at least Germany has both feet moving in the right direction. Oh, and one more item to keep an eye on. Rumors of Bundesbank President Axel Weber, who carries a hawkish reputation, dropping out of the race to succeed Trichet as the ECB President were floating around late in the day so we'll see how solid that actually becomes.

It's going to be a busy day in the UK as we see both industrial and manufacturing production figures but more importantly, the BOE meets to discuss rates. While the survey points unanimously toward rates remaining on hold for now, there has been quite a stir for a hike recently. Looking back to last month, two members did vote to raise rates by 0.25% but their economy is in the same boat in that inflation pressures are emerging but the economy isn't necessarily strong enough to withstand that type of action.

The New Zealand dollar came in last place and has certainly seen its fair share of issues over the past several months. We had New Zealand's Finance Minister express concern that the economy is at risk of a double dip recession. The economy shrank 0.2% in the 3rd quarter and concern that another contraction in the 4th quarter, which could be right around the corner, would put the economy into a technical recession. Depressed levels in consumer spending and the housing market along with results of the 3rd quarter are what's driving this concern.

As I came in this morning, the euro has given back that 1 cent it gained yesterday and is trading around 1.3630 as the rumors I mentioned before about Weber's withdrawal from the ECB chief race filters through. Since he is the most vocal on the hawkish side of the aisle, thoughts that any rate hike considerations which were being entertained have taken a step backward. All of the currencies are staring at losses so far this morning, but it's a long day so we'll see where they end up.

We typically see the Japanese yen benefit from a strengthening of the dollar, but that's not the case here this morning. On that note, Chuck has some additional thoughts about the yen that he wanted to share...

"Here's my thoughts as I look over the markets tonight.

Seems the markets are Pfennig readers, as I talked about yen losing ground yesterday, and lo and behold , I see yen losing even more ground tonight.. Look, folks, I told you yesterday that I saw cracks in yen's foundation. and there! They are being exposed by the markets. The Japanese yen has been so strong for so long now, that plenty of people don't believe it can get weaker. but I say "forget that thought". !

Here's something else that I ran into tonight. I'm sitting Augie's Piano Bar, minding my own business, when a well known newsletter writer, and Fox Business Channel guy (I can't mention his name) looks at me and says, "cheers to you, Chuck!" He then went on to tell me how his mother had just died (sad thought) but her lawyers handling her account wanted to know why her money market balances had 30% gains to them.. Our guy, said, because I put Swiss francs in her account, because I listened to this guy named Chuck Butler!

True story folks. true story. and with that, it's now back to Mike!"

Thanks again Chuck. That's a perfect example of how functional diversification into foreign currencies can actually be.

To recap...Bernanke's testimony yesterday at the House Budget Committee that unemployment will remain elevated along with rhetoric about low inflation have all but set in stone that the entire $600 billion stimulus measure will be used. The use of the QE word sent investors selling the dollar. Mortgage apps disappointed yesterday but we get to see the weekly jobless numbers today. The euro functioned as the US dollar offset and the BOE meets to discuss rates today. New Zealand policy makers worry about a double dip.

Currencies today 2/10/10. American Style: A$ $1.0051, kiwi .7685, C$ $1.0035, euro 1.3637, sterling 1.6068, Swiss $1.0382, European Style: rand 7.2775, krone 5.8285, SEK 6.4801, forint 200.07, zloty 2.8780, koruna 17.7720, RUB 29.3676, yen 82.65, sing 1.2783, HKD 7.7879, INR 45.7188, China 6.5860, pesos 12.1186, BRL 1.6631, dollar index 78.06, Oil $86.36, 10-year 3.64%, Silver $29.75, and Gold.. $1,357.00

That's it for today...and one day closer to the weekend. I don't know what it was this morning, but it took a while to shake the cob webs this morning. Talks of the Albert Pujols contract negotiations remain the talk of the town...I just hope they can find some middle ground somewhere and put this thing to bed. I'm so ready for the days of these single digit temps and highs in the teens or twenties to be over...I know winter is basically only half way over but it seems like its been here forever. Anywho, gotta run because I'm a little behind, so until tomorrow...Have a Great Day.

Mike Meyer

Assistant Vice President

EverBank World Markets



Posted 02-10-2011 9:49 AM by Chuck Butler