Dollar strength still hangs on...
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In This Issue.

*US data disappoints...

*Currency market breather...

*Gold and silver rebound...

*Canadian ties...

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

Dollar strength still hangs on...

Good day.and welcome to another Friday. In fact, we're only a week away from the unofficial start of summer, which reminds me that I need to clean up the grill and dust off the coolers for another season of fun in the sun. I'll be taking over the captain's seat for Chris while Chuck makes the trek back home from the Vegas Money Show, so he should have lots to talk about on Monday morning. As Chris mentioned yesterday, it's been all about the struggles in Greece and whether they become the first to exit the euro. Ultimately, these questions have been pulling the strings of the global financial markets.

He also talked about a return to fundamentals and when the markets feel they have done enough as far as pricing in a worst case scenario for Greece. While we aren't out of the woods by any means, it was a rather tame day for the currency market and the euro ended right where it began, which was just a hair under 1.27. The US dollar did rise again yesterday, but not nearly as much as earlier in the week, so risk aversion was still present. I guess the question at this point becomes whether we're just seeing a breather or if the market is actually sinking back into its comfortably numb attitude.

Before I talk about the currencies, I thought I would take a look at the economic reports from yesterday. Since it was Thursday, we had the initial and continuing jobless claims, both of which came in worse than expected. The forecast for initial claims was 365k, but the end result was 370k, and matched the previous report's upward revision from 367k. There was a larger upward revision to continuing claims from the last report, so yesterday's numbers weren't very encouraging. The recent job numbers haven't been progressing as they were earlier in the year, so we'll see what the May report holds in store on June 1.

We also saw a gauge of consumer confidence fall to the lowest levels since January and can be attributed to several factors, including the slowdown in jobs as the Bloomberg consumer comfort index fell to -43.6. Just to give some perspective, it began the year at -44.8, peaked in April at -31.4, and has averaged -15.3 over the past 25 years. Consumer confidence reports and gauges have been as stable as the markets, but this level is generally associated with recessionary times and broad economic discomfort.

Consumer confidence is connected at the hip with stocks so the recent pullback hasn't helped by any means, but April's jobs report didn't support matters. While this isn't a major report, I found it insightful to look at some of the individual components. For example, the personal finances portion fell for a fourth consecutive week to levels from November and a measure on how comfortable consumers felt purchasing goods fell to a 3 month low. Also, consumer outlook on the state of the economy fell to a 2 ½ month low.

While gas prices have fallen a bit, they're still on the high side and just acts like an additional tax on the already strapped consumer. We also saw the leading indicators report from April unexpectedly fall to -0.1% from the previous report of 0.3%. This report tries to assess the economic conditions over the next 3 to 6 months, so the less than stellar jobs numbers didn't do any favors. For comparison, the March report expanded for a 6th straight month and had everyone talking about how well things were progressing, but as I brought up earlier, it doesn't take much to turn the tide.

The last bit of data from yesterday came in the form of the Philly Fed index, which measures manufacturing in that general area. As we've mentioned in the past, these regional reports can be all over the board but it did fall for the first time in eight months. This report contradicts expansion in some of the other regional reports, such as the New York area, so it's just another testament to the choppy waters that have been present for quite some time as well as the lack of sustained momentum.

If economists are calling for 2nd quarter GDP to match or beat the 1st quarter, we need to see a lot more traction and consistency in these economic reports, especially on the jobs front. The only things on the docket for today are revisions to both factory orders and durable goods, so not much to see here unless there is some type of rogue adjustment. Looking ahead to next week, it looks fairly empty in the data closet as we're pretty much stuck with April housing numbers and durable goods orders. Unless we see a flare up in Greece, there shouldn't be much wreaking havoc on the markets heading into the holiday weekend.

Moving on to the currency market, we did see a reprieve from the extreme currency moves that have been present as a result of Greek driven risk aversion. The Japanese yen was the biggest mover and the only currency to finish in positive territory but none of the other currencies exceeded 0.75% losses. While risk aversion is still the trade of the day, I think the market just out ran its coverage and just needed a break, so the conversation Chris and I had a couple of nights ago has rung true, at least for now.

The same couldn't be said about the equity markets as the S&P 500 fell another 1.5% and stock investors took more to heart the disappointing US economic news than currency investors. The pre-crisis fundamentals in the currency market, which meant bad US economic data is bad for the dollar, briefly took hold as the dollar index was actually down and many of the currencies were in the black heading into late morning. The sentiment turned back toward the safety of the US dollar around lunch time and sent the currencies back into the red, but it was an organized retreat.

All but Brazil, Sweden, Mexico, Canada, and Britain finished the day with fractional losses and could have easily found themselves on the other side of the tracks. With all of the news swirling around Greece and the euro, you would think another rough day would have been in order, but we only saw a 0.6% swing between the high and low. Normal trading days without break up talk or contagion among the euro members will generally bring at least a 1% high/low spread but we didn't see that.

While I'm talking about the euro, it's not just about Greece. We saw Spanish GDP in the first quarter contract by 0.3% as austerity measures ate into household spending and there isn't much on the table right now that would reverse that trend. As concern about Spain builds, their bond yields have been on the rise. In fact, they shot up to 6.34% and prompted policy makers to begin seeking support from the ECB to get them under control. Just to give you an idea, bond yields at 7% and above were the tipping points for Greece, Ireland, and Portugal to require bailouts. Going back to March, yields were hovering in a tolerable 5% range so the markets have definitely expressed their concern.

Rumors floating around earlier in the day about a Moody's downgrade on Spanish banks didn't help the situation, but the ratings agency did confirm the cuts right when I left for home last night. The concern about these downgrades involves the Spanish government forced into a position to provide capital, which would obviously add to their debt levels and offset some of the necessary austerity measures. Unfortunately, the daily dose of news from Europe is far from uneventful and it's just one thing after another, but it's something we all need to track.

Touching on the bright spots from yesterday, the Japanese yen finished up with nearly a 1.25% gain from a combination of safe haven flows and a better than expected first quarter GDP print. In fact, the economy expanded 4.1%, which was well above the 3.5% forecast, and helped to offset the two contractions from last year. While there was some excitement, most economists view this a peak for 2012 as some of the earthquake rebuilding tails off. Deflation and fiscal deficits remain the elephants in the room so any appreciation on the other side of 80 would look to be profit taking points.

The shiny star yesterday went to both gold and silver as they regained some life by rising 2.25% and 3.0% respectively. Talk about too far, too fast. The recent selloff in those metals looked about as overdone as Albert Pujols' batting slump. Before I packed up my computer last night, gold was trading around $1,575 and silver clawed its way back above $28. A combination of being oversold, rumblings of additional stimulus from the Fed, and the disappointing data all gave a push to these metals.

Other than that, everything else finished on the other side of the chart. The pound sterling and Canadian dollar were left to duke it out over last place as they both ended the day with 0.70% losses. Overflow from the euro zone had a helping hand in its fall yesterday but talk of renewed QE didn't help matters as it would suggest the economy still can't stand on its own. The UK economy has their own problems to deal with but any type of euro area disruption would significantly impact the nation.

The Canadian dollar suffered at the hands of weaker US data, causing investors to reduce bets the central bank will raise rates this year. Although recent data, such as jobs growth in March and April combining to be the biggest gain in 30 years, wasn't enough to overcome the grip from its southerly neighbor. Just last month, government officials were tossing around the idea of higher rates in order to keep inflation in check but the US data cut those odds to 43% yesterday from 55% earlier in the week. The Canadian economy has fared well lately, but external factors have taken over at this point.

Another economy on the move, in the right direction I might add, comes from Singapore. We also saw first quarter GDP numbers from this island nation and they continued to show expansion. As long as the economy keeps chugging along and inflation remains on the sticky side, the central bank should maintain or even increase the slope of the currency trading band. They use the exchange rate to control inflation instead of interest rates, so higher CPI estimates will give government officials the scope to tolerate a higher currency.

As I came in this morning, things are surprisingly unchanged from last night. I expecting to come in and see the dollar large and in charge, due to the Spanish bank downgrades from Moody's, but the overnight markets didn't seem too concerned. There has been a lot of bad news already priced into the euro, so the market may need to pause for the cause and fill in the gaps before embarking on its next journey. The downgrades did impact gold and silver as both have added on another 1% so far this morning. Could fundamental trading be making a return back to the metals markets?

Then there was this. Treasury Secretary Timothy Geithner said the financial crisis and economic woes in Europe continue to threaten the U.S. economy. "We still have a lot of work to do to repair the damage from the crisis and get more Americans back to work. And we still face some risks ahead," Geithner said. "We still live in a dangerous and uncertain world, with Europe confronting a severe and protracted crisis."

To recap.The currency markets took a bit of a breather, but the dollar won out on continued European concern. The US data disappointed as both initial and continuing jobs claims increased. Consumer confidence and leading indicators took a hit along with the Philly area manufacturing report. The yen turned in the best currency performance while gold and silver stole the show. The other major currencies all lost ground yesterday but most traded in a tight range. The Canadian dollar was weighted down by disappointing US data and first quarter GDP in Singapore showed expansion.

Currencies today 5/18/12. American Style: A$ $.9865, kiwi .7591, C$ .9825, euro 1.2692, sterling 1.5801, Swiss $1.0566. European Style: rand 8.3407, krone 5.9896, SEK 7.1822, forint 234.83, zloty 3.4364, koruna 19.9816, RUB 31.3075, yen 79.37, sing 1.2740, HKD 7.7657, INR 54.5250, China 6.3282, pesos 13.8248, BRL 2.0087, Dollar Index 81.462, Oil $92.61, 10-year 1.72%, Silver $28.44, Gold $1,590.50, and Platinum $1,450.

That's it for today.I just looked up at the clock and noticed I'm running behind schedule. It's been a busy week so I'm looking forward to the Memorial Day holiday for some rest and relaxation. It seems like every year around this time, I think to myself how nice it would be to add a smoker to my grilling arsenal but I never get around to pulling the trigger. Maybe this year will be different. We're supposed to have great weather this weekend so hopefully it holds for another week. I have a million things to do before the phones start ringing, so I'll cut you loose for today. On that note.Have a Great Day!!

Mike Meyer

Assistant Vice President

EverBank World Markets



Posted 05-18-2012 1:04 PM by Chuck Butler
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