Waiting on the labor department...
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In This Issue.

* Jobs data to drive the market...

* Euro falls after ECB cut...

* Demark goes to negative rates...

* Commodity currencies stabilize after Chinese rate cut...

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

Waiting on the labor department...

Good day. I've had a tough start to the day this morning as I got to work only to realize I had left my computer sitting on my desk back at home. Had to turn around and head back home. On a positive note, it gave me some time to listen to the market updates on the radio. That will either give me something to make fun of or pfodder to share with you readers this morning. I'm running later than usual with my trip back home, so let me get to right to it.

The big story on the radio this morning, besides the triple digit temps which continue here in the Midwest, was the employment story being touted by President Obama. Yesterday's weekly jobs numbers came in slightly better than expectations, with jobless benefits falling 14,000 to 374,000. And private payrolls were the main reason for this improvement, with non-government employers adding 176,000 workers last month according to figures released by ADP. President Obama was campaigning in Detroit and pointed to the turnaround in the auto industry as proof his policies have had a positive impact on the economy. Tuesday's vehicle sales numbers for June did show the auto industry is recovering, but there was pretty much nowhere to go but up for the big 3 in Detroit!

Today's release of the June change in Nonfarm Payrolls could confirm the labor market is finally seeing some relief. Economists predict that 100,000 jobs were added last month, with private payrolls adding 110,000 while the govt. payrolls decreased. The unemployment rate is expected to have remained at 8.2% as the additional jobs are not expected to have any impact on the bigger picture.

As I mentioned yesterday morning, the ISM index for service sector jobs remained above 50, indicating a continued expansion. But the reading at 52.1 was below expectations and over a point and ½ lower than last month's figure of 53.7 and was the lowest since January of 2010. The direction is concerning, as the US economy has definitely become dependent on the service sector as manufacturing has moved overseas.

Investors seem worried by a speech given by IMF Managing Director Christine Lagarde in which she warned of a sustained slowdown in global growth. "The global growth outlook will be somewhat less than we anticipated just three months ago," Legarde said in a speech in Tokyo. "And even that lower projection will depend on the right policy actions being taken." I'm not sure what policy actions she wants to see, as interest rates across the globe are at record lows. As I reported in yesterday's Pfennig, the ECB and China both announced rate cuts yesterday, and the Bank of England expanded their quantitative easing program. Chuck sent me the following on yesterday's rate cuts:

I just turned the computer on, and saw that not only had the Chinese cut rates this morning, but so too had the ECB! Ahhhh... See... even a blind squirrel can find an acorn! I had said that I thought the ECB would feel that cutting rates was necessary last month, and when they left them unchanged I gave them a gold star... but it appears now that I'll have to take that gold star away from them! Cutting interest rates when they are already very low is not going to provide a cure for all that ails the Eurozone.... But... like the Fed, the Bank of England, and the Bank of Japan before them, "they know best"... Of course we know better than that! This is where I would normally go into railing and pulling out funny names for these Central Bankers, but... the new Chuck has promised the legal beagles that I won't do that any longer...

So, I guess this is what promising to "promote growth" is all about for the Eurozone... the ECB members will need to find day jobs soon, because, this isn't going to work, and then... slowly it comes, inch by inch, step by step, look! it's around the corner! inflation... this isn't going to turn out good for any of these countries (U.S., U.K. Japan, Eurozone) folks... I can feel it in my bones... even the titanium femur I have!

Chris again, thanks to Chuck for sharing his thoughts on what these rate cuts will eventually bring, INFLATION. And the markets seem to agree with Chuck that these cuts will not have a big impact on the economy. Currency traders were surprisingly hard on the ECB's moves yesterday, as the euro dropped nearly 2 cents. Heck, even ECB President Mario Draghi had to admit the cuts would not make much of a difference. "It's clear that when demand is weak the transmission of price signals to the aggregated economy is muted," Draghi said in Frankfurt. Draghi was admitting that the latest cuts will only have limited impact on the Euro-zone economies. "We still expect a gradual, slow recover around the end of the year. The baseline scenario hasn't changed, although downside risks are now materializing."

Obviously the ECB realized it doesn't have much ammunition left as far as rate cuts, so they took another swipe at stimulating the economy by cutting the rate they pay banks on deposits at the ECB. Banks keep about 800 billion euros parked at the ECB each day, and the central bank cut the rate of interest it pays these banks to zero. You would think these banks would try to find a better place to park this overnight cash, and the ECB is hoping these banks lend the funds to other banks or put it into the overnight commercial paper market helping to ease some of the credit crunch.

Staying on the Euro for a minute, Lloyds Banking Group, Plc feels the current levels represent a good point to start buying. Technical strategists at the London bank told investors to purchase euros at these levels and expects the currency to rebound to $1.3241 in the medium term. According to the note from Lloyds, the euro's decline from $1.3487 is at an end amid technical signals of trend exhaustion.

Another central bank which cut rates was Denmark, where CD rates paid by banks are now below zero. The benchmark lending rate in Denmark was cut to .2% while the deposit rate was reduced to negative .2%. The negative deposit rates is uncharted territory in Denmark, so it will be interesting to see how the markets react. I remember when Switzerland maintained negative interest rates on holdings, and investors continued to buy the franc as they flocked to it for safety. But the Danish krone doesn't share the same 'safe haven' history as the Swiss franc, so it will be interesting to see what impact the negative rates have on the currency. So far, the krone has moved a bit lower vs. the dollar, but it remains in a fairly narrow trading range. Denmark has joined its Nordic neighbor Norway in battling currency appreciation due to safe haven flows out of the euro. The third member of the 'Nordic troika', Sweden, has indicated it would not attempt to stem the Swedish Krona's appreciation through fiscal policies. It will be interesting to see what happens to the Swedish currency now that Denmark has moved their interest rates below zero.

While the euro dropped dramatically yesterday, the commodity currencies held firm yesterday. The Canadian dollar actually strengthened to a two year high vs. the euro and moved a touch higher vs. the US$ yesterday. The good weekly jobs numbers out of the US had a positive impact on the loonie which is very dependent on a strong US economy. The Canadian dollar also benefited from the recent moves of crude oil back above $80 a barrel.

Mike Meyer was in early as usual, and pointed out a chart on the Bloomberg which he had come across. Knowing I was in need of some additional 'Pfennig Pfiller', I asked him to send me something on the chart. So take it away Mike: As I was flipping through Bloomberg this morning, I came across a chart that really caught my eye. There wasn't a story attached, but it simply illustrated the relationship of commodities and the US dollar. In this example, it was an overlapping chart of oil compared to the US dollar and highlighted the strong correlation of oil prices and the direction of the US dollar. While this isn't anything new to readers of the Pfennig, it showed an especially close relationship of a weakening US dollar to the rising price of oil since the year 2000 as investors use commodities as another way to hedge against dollar weakness.

We can see that pattern materialize this morning as the dollar is up so far and commodities, including gold, silver, and oil are all sitting on losses. There have been many other trading dynamics at work other than this type of inverse relationship, especially over the past couple of years, but it does, nonetheless, demonstrate that both commodities and currencies can be used to hedge against potential weakness in the US dollar.

Thanks again to Mike for his contribution. As he points out, the commodity currencies have drifted lower this morning. Both the Aussie dollar and Kiwi reached their highs of the week yesterday morning just after the rate cut announcement by the Bank of China. Both currencies actually touched the highest levels we have seen since early April yesterday, but have now drifted lower. Global growth will continue to be tied to China and the emerging markets, so the cut in Chinese rates sent positive vibes through the commodity currencies.

Even the Brazilian real caught a break yesterday as it rose for the first time in three days. China is Brazil's largest trading partner, so the cut in Chinese rates for a second time in a month boosted the Brazilian real. Brazil's currency remains the worst performer in 2012, so any love shown the real's way is certainly appreciated by investors.

Gold and Silver are recovering a bit this morning after a pretty big drop in the overnight markets. Gold had fallen back below $1,600 in overnight trading, but has climbed back above this morning as US investors seem to be taking advantage of the cheaper prices. Neither precious metal has been able to break free of the downward trend which began back at the end of February. Gold has lost 7.25% and Silver is down an eye-popping 22.5% since March 1 of this year. It would certainly seem to be a good time to look at adding to Silver positions, especially our longer term view that all of these low rates will eventually lead to inflation.

To recap... The weekly jobs numbers were better than expected, but today's monthly numbers are the ones everyone is waiting for. Other data released yesterday showed the service sector in the US is still expanding, albeit at the slowest rate in over two years. The IMF is predicting slower global growth, and wants to see additional stimulus measures. Chuck shared his thoughts on the recent cuts in Europe and China and what the result of all of this 'free money' will be: INFLATION. Lloyds thinks these are good levels to buy the Euro, as their technical charts predict a move higher. Commodity currencies held firm yesterday, with the Canadian dollar benefitting from a move up in Oil.

Currencies today 7/6/12... American Style: A$ $1.0262, kiwi .8011, C$ .9848, euro 1.2371, sterling 1.5532, Swiss $1.03..., European Style: rand 8.2243, krone 6.07.13, SEK 6.9895, forint 232.48, zloty 3.40.52, koruna 20.724, RUB 32.656, yen 79.87, sing 1.2684, HKD 7.7531, INR 55.425, China 6.3648, pesos 13.4389, BRL 2.0193, Dollar Index 82.878, Oil $85.65, 10-year 1.58%, Silver $27.455, and Gold... $1,594.77

That's it for today... Sorry for the late delivery this morning, it has been a bit of a struggle for me. The record heat continues here in the Midwest, with temperatures expected to remain above 100 degrees for a 10th straight day. I heard there is a slight possibility of a thunderstorm Saturday night which will hopefully cool things off a bit. My daughter Lauren returned home from out east last night; she's been gone for a majority of the summer with camps and trips with friends. We harvested our first batch of vegatables from our backyard garden last night, and have a ton of cucumbers and tomatoes (I guess the heat really hasn't had much of an impact on them). Hope everyone stays cool today, and has a Fantastic Friday!! Have a great weekend, and thanks for reading the Pfennig!!

Chris Gaffney, CFA

Vice President

EverBank World Markets



Posted 07-06-2012 12:02 PM by Chuck Butler