Markets wait for direction from the Fed...
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Have You Seen This?

In This Issue.

* Waiting on the Fed...

* Consumer confidence falls in the US...

* Euro area looks to be emerging from recession...

* Chinese incomes rise...

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

Markets wait for direction from the Fed...

Good day. And welcome to what will certainly be a wonderful Wednesday as we celebrate Christine's birthday today. You have probably surmised that Christine and I like to make a big deal about our 'birthday week' so today will be another celebration here on the desk. Chuck is jumping on a plane to head down to the Money Show in Orlando this morning, so I get to share my thoughts on the markets with all of you Pfennig readers for the rest of the week (lucky you!).

I had a reporter from Reuters call and ask me to share my thoughts with her readers yesterday. She wanted to know why the dollar was trading off vs. the euro while the equity markets were rallying. I let her know that the reason the dollar was moving lower was that the markets were expecting Ben Bernanke to sound a dovish tone in his press statement later today. The US economy may be recovering, but the data don't support an early end to the bond buying which the FOMC has committed to. As Chuck mentioned yesterday, Bernanke had worried some in the markets with talk of possibly ending the bond buying in 2013, but I believe today's statement will clear up any confusion caused by last month's FOMC minutes. December's meeting minutes showed the FOMC members were 'approximately evenly divided' between those who said it would be appropriate to end QE3 in 2013 and those who thought the bond buying would need to continue beyond that.

Fed officials do have a brighter outlook for the US economy than they did at this time last year, but yesterday's drop in confidence due to the payroll increase (more on that in a bit) is just the latest indication the US economy isn't on a strong recovery path. Adding to the worries, Congress faces another deadline of March 1st on the $1.2 trillion in spending cuts which they conveniently kicked down the road at the beginning of the year (bet they wish they had booted that deadline a bit further!). The spending cuts, known as the sequester, will hit the military particularly hard but it doesn't look like anyone in congress wants to deal with figuring out the best place to cut, so these across the board cuts look like they will be implemented. While I agree that we need to reduce the overall size of our government, I also believe these spending cuts will be another drag on the recovery.

The Fed Chairman has pledged to continue his asset buying policy until we see 'substantial' gains in employment. I just don't see where we will get a boost in employment with consumer confidence dropping, payroll taxes rising, and less government spending. No, I think the Fed will ease the markets concern regarding the end of QE3, and will again suggest the $85 billion per month of Treasury and mortgage bond buying will continue through the end of 2013.

The Consumer confidence numbers released yesterday morning caused quite a stir on the trading desk, as we had all agreed with Chuck who was expecting an increase. But instead we saw quite a drop in the mood of consumers here in the US. Both Chuck and Mike Meyer sent me something on the data yesterday afternoon and since I couldn't decide which one to print I will just share both of their comments with readers. First from Chuck:

"Yesterday, I took a peek at the Economic data calendar to see what that day's data looked like, and what do my surprised eye did I see? Consumer Confidence for January plunging from 66.7 to 58.6! Recall, I had said that I thought the data would show an increase due to the stock market's performance. But what I failed to recognize was that the fiscal cliff deal that was struck at the beginning of this month, was going to be more of a game changer than I would have thought.

The weakness in Consumer Confidence falling to a 14-month low of 58.6, reflected a significant (falling from 66.7 to 58.6 qualifies for significant) deterioration in consumer's outlook now that the fiscal cliff deal has added an increase in the payroll tax. It's going to take a while for Consumer Confidence to rebound based on the tax increase reaction, and that's going to be a drag on the U.S. economy folks. the back side of that storm that I talked about last year, looks to be getting closer to landfall."

And now I'll share Mike Meyer's comments on yesterday's confidence data:

"Chuck yelled over to me when the consumer confidence numbers were released and wondered if I had a chance to check them out. I then rolled over to the Bloomie screen and saw that it wasn't a pretty picture as the measure fell to just over a one year low. What caused such a drop? I mean, stocks are trading within shouting distance of their all time highs set before the walls came crashing down during the financial crisis. The consumer confidence numbers are usually just a barometer of the equities market, so this type of decline wasn't expected by many.

It looks as though the expiration of the payroll tax holiday was much more than enough to offset any warm and fuzzies pertaining to a brighter monthly brokerage statement. It makes perfect sense to me, since this is real money that we're dealing with. I guess we'll see if this is just a knee jerk reaction to the first couple of paychecks of the year, but the 2% reduction in take home pay compared to the past couple of years will have an impact on the masses. I think a fair comparison would be getting a raise today with the understanding the boss will take it away at some point in the future. Well, that day has come and we've seen the initial reaction.

Chuck mentioned this isn't a good indicator of things to come with our fragile economic recovery, but the equity markets brushed these concerns to the wayside. The successful earnings season so far and the continued rise in home prices kept stocks on an upward trajectory. But, the $64,000 question will be how the average consumer will react to less disposable income."

Thanks to both Mike and Chuck for sharing their insights. Readers will recall the payroll tax holiday expiration was just one small part of the end of year budget negotiations, and as I mentioned earlier the next shoe will drop shortly as the 'across the board spending cuts' are scheduled to go into effect on March 1st.

While prospects for the US economy are darkening, the Euro area economy seems to be continuing to climb out of its recession. Economic confidence in the euro area rose more than economists forecast in January with the index rising to 89.2 from a revised 87.8 in December. That is the highest reading since June and well above the 88.2 reading predicted by a Bloomberg survey. The Euro area recovery continues to be led by Germany which is predicted to rebound from the contraction which it went through at the end of 2012. Many were reporting that this latest data is proof that the 'worst is over' for Europe; but as Chuck has been warning we believe the euro debt crisis is not over. We would expect the markets to re-focus on the weak peripheral countries of Europe at some time during 2013. But for now the US budget problems have caught the attention of the markets.

The euro has certainly been the benefactor of this shift of attention away from the European debt crisis. The euro strengthened above $1.35 for the first time in over a year yesterday and tested a 'resistance' level which could lead to a further move higher. Some technical analysts are now predicting the euro could move as high as $1.37 by the end of March, much higher than the median of analyst predictions which pegs the euro at $1.31 at the end of the first quarter. I guess that is what makes markets right? Some think the euro will rise while others are expecting it to trade lower.

The pound sterling rose for the first time in four days against the US$ after a report showed UK mortgage approvals rose. Lenders in the UK granted 55,785 mortgages in December, compared with 54,011 in November. Bank of England Governor Mervyn King has been easing credit conditions in an attempt to boost the lagging housing market in the UK. But while mortgage approvals are increasing, the numbers are still only half of what their were prior to the financial crisis.

Both the Swedish and Norwegian currencies rose nicely vs. the US$ over the past 24 hours. Sweden's krona rose after a report showed Swedish consumer confidence improved from an almost 4 year low. Sweden's central bank, the Riksbank, lowered rates last month in an effort to stimulate growth in their manufacturing driven economy. The 6% increase in the krona over the past 12 months has impacted exports, a majority of which are headed into the Euro zone.

The kiwi reversed gains yesterday amid speculation the Reserve Bank will attempt to 'jawbone' the currency lower after their meeting tomorrow. Officials of the RBNZ are expected to leave rates unchanged but will probably comment on the recent gains of the NZ$. Recent data show inflation pressures are easing in New Zealand so there is less need for the RBNZ to push rates higher.

Inflation is also easing in Brazil, but the official measure fell less than analysts had expected. Prices in Brazil, measured by the IGP-M price index, rose .34 percent in January, down from a .68 percent jump in December. The gain compares with a median estimate of .32 percent increase. Central bank president Alexandre Tombini said "Inflation remains under control" during a speech last week. Interest rates in Brazil are still among the highest of all the currencies offered in our WorldCurrency® Certificates of Deposit, so the currency should remain a favorite of investors looking for higher yield.

Both Gold and Silver moved higher overnight as investors predict the FOMC will continue their QE3 bond buying. The purchases by the Fed pump billions per month into the markets which helps boost the equity markets but also increases the risks of long term inflation. The precious metals are moving higher as investors purchase gold and silver as a way to hedge against this risk of inflation. I read a report this morning released by the US Mint which stated they had sold a record amount of American Silver coins so far this month, and this after sales were suspended for a week because of a lack of inventory! It certainly seems investors are looking at physical metals as a good hedge against both inflation and the uncertainty which faces all of us in 2013.

And I will close today's Pfennig with a story I found on Bloomberg this morning regarding a shift which is occurring in China. Rural incomes in China actually rose at a faster pace than in the cities for a third straight year in 2012. Rural per capita income advanced 10.7% compared with a 9.6% increase for urban dwellers according to a report from the National Bureau of Statistics. This illustrates a shift which the Chinese government has been trying to make, spreading some of the benefits and income out to the countryside in order to try and level out income gains. I have highlighted the emergence of a 'middle class' in China, and its impact on the global economy. This latest report is good news for the global economy as gains in income are starting to reach the very poor rural areas where a vast majority of China's population still live. Spread this increase in income across the massive population in the rural areas and we should see a pickup in Chinese consumption which will benefit those countries which supply China with goods and materials. This should be good news for the commodity based currencies and those Asian neighbors which are supplying these new Chinese consumers.

To recap. The Fed will probably announce 'no change' in their bond buying program, and will counter the thoughts that they would end QE3 in 2013. Chuck and Mike both share their thoughts on US consumer confidence which took a hit this month. The Euro moved higher after numbers showed a pickup in confidence across the pond. The pound rose as UK mortgage approvals rose, and both the Swedish and Norwegian currencies also booked gains vs. the US$. Gold and Silver moved higher as investors worry about further bond purchases by the Fed. And a report showed Chinese incomes continue to rise, and the biggest increases are occurring in the rural areas of China which should be good news for the global economic recovery.

Currencies today 1/30/13: American Style: A$ $1.0428, kiwi .8329, C$ .9973, euro 1.3550, sterling 1.5768, Swiss $1.0910. European Style: rand 9.052, krone 5.4894, SEK 6.3577, forint 218.33, zloty 3.0943, koruna 18.915, RUB 30.02, yen 91.27, sing 1.2359, HKD 7.7587, INR 53.305, China 6.2204, pesos 12.696, BRL 1.9845, Dollar Index 79.398, Oil $97.91, 10-year 2.03%, Silver $31.355, and Gold. $1,664.51

That's it for today. Happy, Happy, Happy Birthday to Christine!! She is always a ray of sunshine on the desk, and we absolutely love the energy she brings with her to work every day! Antione and his wife Brooke got some great news yesterday as their new daughter Taylor had a great checkup and is gaining weight at a good rate. Storms rolled through the area yesterday, which were expected as we had temps rise up into the low 70s. Some crazy weather for the end of January! With that I will say Happy Birthday to Christine one more time and I hope everyone has a Wonderful Wednesday. Thanks for reading the Pfennig!

Chris Gaffney, CFA
Vice President
EverBank World Markets
1-800-926-4922
1-314-647-3837





Posted 01-30-2013 2:10 PM by Chuck Butler