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In This Issue.
* FOMC minutes send the dollar lower...
* China introduces their new leadership...
* Kiwi moves into top 3 performers of 2012...
* Israeli airstrike sends oil higher...
And, Now, Today's Pfennig For Your Thoughts!
Minutes from the last FOMC meeting send the US$ sliding...
Good day. The title of today's Pfennig is a bit misleading, as a quick check of the currency scorecard will show you the dollar is fairly close to the levels of yesterday morning. But the dollar had begun to push higher during the trading day, only to reverse course rather quickly as the FOMC minutes were released yesterday afternoon. The commodities were higher yesterday helped by the introduction of the new leadership in China and increased tensions in the Mid-east. Lots to talk about today, so let's get right to it.
Wednesday morning started with the US retail sales report for October which showed a drop of .3% following a 1.3% increase in September. While most of the news organizations immediately blamed the 'storm of the decade', the Commerce Department said it officially couldn't quantify Sandy's impact on sales. While some of the drop is certainly due to the storm, I have to believe the uncertainty over the 'fiscal cliff' is weighing heavily on consumers. Other reports released yesterday morning showed inventories climbed and wholesale prices fell during October. The increase in inventories should be expected, as preparations for the big holiday shopping season have already begun. And the fall in wholesale prices were mainly due to a drop in fuel costs (remember that big drop in gas prices just before the election?).
This early round of data didn't have much of an impact on the currency markets, as the numbers failed to give investors a clear picture of the health of the US recovery. But the markets finally found something to trade off of with the release of the FOMC minutes from the last meeting. The minutes from October's meeting revealed 'a number' of Fed officials feel the central bank may need to expand stimulus efforts after the current program expires. Operation Twist, which the Fed has used to try an bring down long term rates by selling short term securities and using the funds to purchase long term debt, is set to expire at the end of December. The Fed is also buying $40 billion a month in mortgage-backed securities in an additional effort to keep mortgage rates low. This was the bond buying program was the additional stimulus introduced in September, and does not have a stated limit so it can theoretically go on forever.
While some at the Fed want to add more stimulus, they won't be able to just extend the Operation Twist as the central bank has all but exhausted their holdings of short-term debt used to fund their purchases on the long end. Instead, I would think the Fed will simply additional outright purchases of Treasuries and other securities, a much more inflationary activity. Operation Twist was billed as an 'inflation neutral' move as the Fed was 'sterilizing' their purchases with the sales of short term debt. But if they take the more aggressive activity of direct purchases, the Fed is jumping out of the frying pan and right into the fire. Where does the Fed get the money to pay for all of the bonds they are purchasing? They simply shift the printing presses into a higher gear!
The minutes also showed the increasing influence Janet Yellen is having during the negotiations. The Vice Chairman has been talking about linking the zero rate policy to unemployment and inflation data instead of the current policy of specifying an ending date. The minutes showed this idea is now 'generally favored' by the members of the FOMC. Yellen wasn't the first to suggest the idea (it was originally proposed by Chicago Fed President Charles Evans) but she has been one of the most outspoken supporters of this change in policy. Some believe Yellen is the obvious candidate to replace Ben Bernanke if he decides to step down when his term expires in just over a year.
Finally the minutes confirmed what everyone already knows, that uncertainty about the unresolved US fiscal situation is "likely to restrain the pace of economic growth in coming months". It was interesting that the minutes did not use the term 'fiscal cliff' to describe the unresolved US fiscal situation. I guess even the board members are getting sick of the term!
Chuck spotted an interesting piece of information regarding the state of one of our nation's mortgage giants. The Federal Housing Administration is expected to report later this week that it could exhaust its reserves because of rising mortgage delinquencies, according to people familiar with the matter. That could result in the agency needing to draw on taxpayer funding for the first time in its 78-year history. I guess that housing recovery which everyone was talking about isn't exactly working its way onto the balance sheet of the FHA.
Mexico's peso has done a 180 over the past few weeks, falling sharply vs. the US$ after posting one of the best returns over the first 9 months of the year. The peso has been trading off because of new concerns regarding the recovery of the US economy. Mexico relies on the US for 80 percent of its exports and worries over the fiscal cliff have seen investors bailing out of the peso. Mexico continues to have some of the highest real interest rates of any developed nation, so investors may flood back into the peso if/when a deal is worked out on the US debt ceiling.
China introduced their new leadership to the rest of the world yesterday. As was predicted, Xi Jinping replaced Hu Hintao as head of the Chinese Communist party and also took over the top spot in the nation's military. A bit of a surprise was the reduction in the number of members on the 'Standing Committee' which represents the top echelon of the Chinese leadership group. The Politburo Standing Committee was reduced from 9 members to 7, maybe this was an attempt to limit the amount of corruption at the top (less people to bribe!). Xi is seen by most as a 'safe' choice to lead China, a middle of the road kind of guy who should continue most of the reforms begun by his predecessor. Xi Jinping did promise to address the corruption in the Communist party during his acceptance speech, "Our party faces many severe challenges, and there are also many pressing problems within the party that need to be resolved, particularly corruption, being divorced from people, going through formalities and bureaucratism caused by some Party officials." Xi's wife is a popular singer, which should make him seem more 'connected' with the pop culture than his predecessor. Xi has also made a few trips to the US, meeting President Obama in Washington earlier this year and dropping by to visit his daughter who is enrolled at Harvard.
The smooth transition at the top in China will help calm market fears and should be a positive for both Asian and commodity driven currencies. The New Zealand dollar has been one of the top performing currencies of 2012, with a YTD jump of 4.35% vs. the US$. This places the kiwi at the #3 spot behind the Singapore dollar (+5.85%) and Mexican Peso (+5.10%). The New Zealand currency has benefitted from an economy which is growing at double the rate of the average G10 nation and a new Reserve Bank Governor who says there is little he can do to stem the currency's gains. RBNZ Governor Graeme Wheeler said last week that lower interest rates are unlikely to weaken the currency, an indication that he would not be looking to cut rates to manage the currency. Currency analysts are jumping on the bandwagon, raising their consensus forecasts for the kiwi from .78 to .82. New Zealand continues to benefit from commodity exports to Asia, and is the globe's largest dairy exporter. A rise in the standard of living in China, and a subsequent 'adjustment' of their eating habits should help New Zealand continue to grow exports. And relatively high interest rates should also help support the kiwi as investors continue to look for yield.
Oil traded near the highest level in more than a week after an Israeli airstrike killed a Hamas leader yesterday in the Gaza Strip. The strike was in retaliation for an increase in rocket attacks into Israel, as Middle Eastern tensions continue to rise. The unrest adds to an already uncertain environment resulting from the 'Arab Spring'. A rise in fuel prices would certainly hurt the very fragile recoveries in both Europe and the US, so investors will be keeping a close eye on these events.
Gold gained a bit of ground back yesterday after the FOMC minutes indicated the Fed is leaning toward another round of stimulus for the US economy. The poor retail sales numbers added to concerns over the US recovery, and the release of the FOMC minutes provided another reason for investors to purchase gold. The precious metals jumped over 5 percent back in September after the Fed said it would begin 'unlimited' purchases of mortgage debt. The possibility of another increase to this quantitative easing is convincing many investors to add to their metals holdings which are a traditional hedge against inflation. Between the extraordinarily loose monetary policies, and gains in the disposable incomes throughout the a
Then There Was This. The news wires are full of stories about the huge national debt we have accumulated here in the US. The numbers are sometimes hard to comprehend (twelve 0's in a trillion!!). Yesterday's 5 Minute Forecast had a great piece on gold and just how much of the shiny metal it would take to pay off our debt. "How much gold," the Political Calculations blog wonders, "would the U.S. Treasury have to pay out from the nation's bullion depository at Fort Knox to fully pay off the national debt of $16.222 trillion (as of 1 November 2012)?"
For fun, let's pretend that the U.S. does plan on paying back the national debt... and in gold. Again, for fun. How much would it take? As of Nov. 1, Political Calculations writes, it would take "a solid gold cube that is nearly 80 feet tall by 80 feet long by 80 feet wide. Transporting all that gold would require over 431 of those standard 20-foot-long shipping containers."
There's a problem: If you add up all gold plucked out of the Earth, it makes up a cube only 66.1 feet by 66.1 feet by 66.1 feet... and fills only 249 shipping containers. And Obama's contribution since taking office? $5.595 trillion, or a cube 55.7 feet by 55.7 feet by 55.7 feet, or 60% of the world's recorded gold.
The 'Five' is one email I read every afternoon, as our friends over at Agora have a great handle on the pulse of the global economy. You can read yesterday's 5 minute forecast at the following http://5minforecast.agorafinancial.com/current-issue/ .
To recap. Retail sales were lower, along with wholesale prices while inventories rose but none of this data gave direction to the dollar. FOMC meeting minutes sent the dollar lower after traders increased bets we will get another round of stimulus here in the US. The Mexican peso has done a U turn recently as concerns over the US recovery sent the currency lower. China introduced their new leadership. The Kiwi took its place as one of the top 3 currency performers of 2012. Oil moved higher after an Israeli airstrike and we ended with an interesting view of the US debt in terms of gold.
Currencies today 11/15/12. American Style: A$ $1.0329, kiwi .8111, C$ $.9978, euro 1.2760, sterling 1.5841, Swiss $1.0598. European Style: rand 8.948, krone 5.7730, SEK 6.7737, forint 222.89, zloty 3.2619, koruna 19.968, RUB 31.6835, yen 81.26, sing 1.2243, HKD 7.7511, INR 54.685, China 6.2339, pesos 13.2562, BRL 2.0666, Dollar Index 81.139, Oil $86.28, 10-year 1.60%, Silver $32.49 and Gold $1,719.86.
That's it for today. I am headed off to San Francisco tonight where I will give a presentation to attendees of the Hard Money Show. Chuck should be back in the saddle tomorrow morning, after spending the week down in Houston. Tim's chili was good, but not good enough to win our first Chili cookoff. The title went to a great chili made by the members of EverTrade brokerage. Got to get this out the door and get started on my Thursday. Thanks for reading the Pfennig, and have a great Thursday!
Chris Gaffney, CFA
EverBank World Markets
11-15-2012 12:07 PM