In This Issue.
* Election worries force yen lower...
* The German recovery stalls...
* UK jobless claims rise...
* General 'risk off' day pushes commodity currencies lower...
And, Now, Today's Pfennig For Your Thoughts!
Election uncertainties push the yen lower...
Good day. I want to kick off today's Pfennig with a thank you to all of the readers who pointed out the glaring mistake I made in yesterday's post. Yes, Christine Lagarde, the head of the IMF is a female. I apologize for my error and to Mlle Lagarde if she was offended by my early morning mistake (I can only dream that she is a Pfennig reader!) All kidding aside, I do enjoy reading all of your emails and I'm sure many of the Pfennig readers would love to hear many of your comments also. With the conversion of the Pfennig to a blog, I want to encourage readers to go to www.dailypfennig.com to post your comments and replies. This way you can share your opinions and insight with all of the Pfennig nation! Now let me get started with today's Pfennig so I can see if I can stimulate some reader comments.
The currency markets were fairly flat yesterday, with the dollar moving higher against some currencies, but losing against others. The Japanese yen was on the losing side of the equation yesterday, dropping .86% vs. the US$. Uncertainty over elections drove the yen lower as investors fear a new government will take a more aggressive stance on monetary easing. I bet many of you are thinking "Uncertainty?? Chris, the elections are over, Obama won". But I'm not talking about elections here in the US, but rather elections which will probably occur in Japan. Japan's Prime Minister said he is going to dissolve the Diet as soon as next week, setting the stage for elections. The Prime Minister's party will likely lose the new elections, and power will shift to the Liberal Democratic Party which has called for additional stimulus to try and revive the Japanese economy. Japan's central bank recently increased their quantitative easing efforts in an attempt to overcome deflation which has gripped the country. The yen has lost just under 4% of its value vs. the US$ this year, after setting a post-WWII high back in October of last year. The Japanese yen is still seen as a safe haven currency by many investors, but the economy certainly doesn't support the label.
On the other side of the ledger, the Mexican Peso, euro, and Norwegian Krone boasted some of the largest gains vs. the US$ yesterday. But as I mentioned earlier, the markets were pretty flat and even the best performing Mexican peso was only up .44% vs. the US$. The euro rose after Greece was able to find enough bids in their debt auction to keep from defaulting on a T-bill maturity at the end of the week. While this was a bit of good news for Greece, the data coming out of Europe continues to be disappointing. Yesterday a report showed German investor confidence unexpectedly declined in November to minus 15.7 from a reading of 11.5 in October. Economists had predicted a slight increase in confidence, and the report worried some that the sovereign debt crisis may finally be impacting the German economy. Most of the recent data coming out of Europe's largest economy shows the European area is in serious danger of slipping back into a recession. Germany is the economic engine of Europe, and Chancellor Merkel has been doing a good job of keeping the euro together in order to help keep German factories exports within Europe rolling. But the austerity measures which have been forced on the weaker euro-members are starting to be reflected in the numbers. Merkel may have to relax her hard line on austerity in order to allow some of Germany's best customers a bit of breathing room!
Elsewhere in Europe, UK jobless claims rose at the fastest pace in more than a year. Claims rose over 10k to 1.58 million in October, the most since September of last year. BOE Governor Mervyn King said the UK economy is in danger of contracting in the current quarter and that additional stimulus measures may be needed. "We face the rather unappealing combination of a subdued recovery with inflation remaining above target for a while", King told reporters in London. "There are limits to the ability of domestic policy to stimulate private sector demand as the economy adjusts to a new equilibrium. But the Committee has not lost faith in asset purchases as a policy instrument, nor has it concluded that there will be no more purchases."
So now we have King sounding eerily similar to our own Federal Reserve Chairman who, after announcing QEIII in September said "I personally don't think it's going to solve the problem." "I don't think our tools are strong enough to offset a major fiscal shock." Neither Bernanke nor King believe their efforts will be able to stimulate demand, but they continue to just try to throw more money at the problem. The US followed the BOE down the QE path, and the BOE followed the BOJ. Is anyone seeing a pattern here?? The Japanese economy has been in a decade long funk and QE hasn't pulled it out. The UK economy is starting to slide backwards toward recession, causing many of the policy makers on the Monetary Policy Committee in London to question the effectiveness of QE. One thing is certain, all of the stimulus flooding into the globes largest markets will eventually lead to rising inflation. But that is exactly what many economist want to see, rising inflation and declining currency values which will enable them to pay down their debts with cheaper currency.
Shifting back across the pond, US retail sales numbers are due to be released later this morning along with the PPI numbers and a gauge of business inventories. Hurricane Sandy is being blamed for the slowdown in retail sales during the month of October, but that sure seems like a stretch to me. I believe Sandy reached landfall on October 29/30th right? So the popular press wants us to believe a few days of storms in October caused the entire month's numbers to be skewed? I can buy the fact that November's sales will be impacted, as many of the unfortunate residents on our East coast were without power. But I would think the coming storm would have actually boosted purchases in October as people went to the stores to prepare for the coming storm. It will be interesting to see just where the numbers come in later this morning, but don't be fooled by the spin that a poor number was caused by Sandy.
Tomorrow will bring additional opportunities for the spin masters as we get the 'official' numbers on Consumer Inflation which are expected to show prices rose just .1% MOM in October (you can still go to www.shadowstats.com to take a look at the unadjusted numbers). And since tomorrow is Thursday, we will see the weekly job numbers which are expected to show another 375k applied for unemployment benefits.
The commodity currencies were off a bit yesterday, with the New Zealand, Australian, Brazilian, and South African currencies all posting losses vs. the US$. The Kiwi was lower after a report showed retail sales unexpectedly fell in the third quarter. Sales adjusted for inflation dropped .4% in the 3rd quarter, following a 1.3% rise in the 2nd. This latest report, combined with rising unemployment and slowdown in manufacturing has led some investors to increase bets the central bank will cut rates during their next meeting. The New Zealand Treasury department last week said GDP has slowed, and most economists believe the data will show a growth rate of just 1.1% in the second half. The RBNZ has kept rates steady since March of last year, but pressure is starting to mount for another cut in December.
Brazil's real dropped for a fifth day as central bank intervention continues to stem the flow of funds into Latin America's largest economy. Brazil's central bank has been selling the real through 'reverse currency swaps' in an effort to keep the value of Brazil's currency down. But the markets helped to push the real lower yesterday as investors sold all of the 'emerging market' currencies in a general 'risk off' day. The South African rand fell to its lowest value vs. the US$ in over a month as investors were concerned over the potential slowdowns in both Europe and the UK.
The Canadian economy has been held up as a model for the US during the latest fiscal crisis. Canadian Banks were seen as some of the most stable in the world and Canada is the only G7 country with a stable AAA debt rating. But confidence may be shaking a bit after Canadian Finance Minister Jim Flaherty said he will delay plans to balance the federal budget by one year. Flaherty's latest budget update, released yesterday, projects a return to a balanced budget by 2016. "Our country is not immune to global forces, nor can we control the economic shocks that ripple outwards from other nations", Flaherty said in a speech yesterday. His latest budget cuts revenue projections as lower commodity price predictions cut into exports. Flaherty also sounded concerned about the Fiscal Cliff waiting for his neighbors to the south at the end of the year. This latest news shouldn't be seen as a big negative on our overall opinion of the Canadian dollar. Canada's economy is still in relatively good shape when compared to other industrialized countries, and a balanced budget by 2016 is still impressive given the current state of the global economy. Canada remains on very solid fiscal footing.
Then There Was This. I am a big fan of The Economist magazine, and try to flip through it from cover to cover each week. The stories are short but packed with information, and lately I have even found some interesting insights in the 'help wanted' section. A few weeks ago I sent a note to Chuck pointing out a full page ad looking for applicants to fill a job opening at the Bank of England. I was amazed to see the position they were trying to fill was that of the Governor! Yes, the Bank of England actually ran a 'help wanted' ad looking for a new Governor in the Economist magazine. So I guess I shouldn't have been too surprised to find another help wanted add in this week's Economist looking for individuals to fill 'Forthcoming Vacancies at the European Central Bank'. Sounds like we may be seeing some turnover at the ECB in the coming months. Perhaps next week we will see an ad looking for someone to take over as Chairman of the Fed, and I think US Treasury Secretary Geithner is looking to leave pretty soon also. Maybe I should dust off the old resume.. no, I wouldn't want to have to face all of the headaches of the global debt crisis. In fact, that is probably just why these big institutions are having to place the help wanted ads in the first place; nobody wants to take on the job!
To recap. Currency markets were pretty flat yesterday, with the dollar higher vs. the yen but lower vs. many of the European currencies. The yen dropped as concerns increased over the uncertainty surrounding Japanese elections which may be called as soon as next week. The euro eeked out a small gain vs. the US$ after Greece found enough buyers during an auction of Tbills to avoid a potential default later this week. UK jobless claims rose at the fastest pace in over a year prompting the BOE Governor to raise the possibility of another round of stimulus. US data is expected to show some weakness in retail sales, and the inflation numbers will be released tomorrow. Finally, the commodity currencies were down as we had a general 'risk off' day.
Currencies today 11/14/12. American Style: A$ $1.0429, kiwi .8141, C$ $.9991, euro 1.2736, sterling 1.5867, Swiss $1.0582. European Style: rand 8.8316, krone 5.7532, SEK 6.7729, forint 223.19, zloty 3.2746, koruna 20.0031, RUB 31.6485, yen 80.07, sing 1.2217, HKD 7.7507, INR 54.875, China 6.2252, pesos 13.1901, BRL 2.0605, Dollar Index 81.039, Oil $85.58, 10-year 1.62%, Silver $32.4675 and Gold $1,722.55.
That's it for today. I was talking with my family about the Pfennig blog at dinner last night and my kids said they would be happy post some comments. They decided their number one all time favorite Pfennig comment was 'You suck, bring back Chuck'. Not exactly what I was looking for! You can see the kind of support I get at home, but that is what you get with two teenagers. We are having the first 'EverBank Chili Cookoff' today, but I don't think the trading desk is going to have an entry since our fearless leader Chuck is out of town. Chuck is a great cook, especially when it comes to the grill, but I'm pretty sure he could make a mean chili also. I just heard Tim say he went ahead and brought in some of his 'fire' chili, so I guess we still have a chance to win it all! Hope everyone has a Wonderful Wednesday and thanks for reading the Pfennig!
Chris Gaffney, CFA
EverBank World Markets
11-14-2012 1:22 PM