Our Jobless Recovery continues to muddle along...
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In This Issue.

* Jobless recovery continues to muddle along...

* Kiwi drops on dairy export concerns...

* Japanese yen and Pound sterling move higher...

* GDP re-calculations could have political consequences...

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

Our Jobless Recovery continues to muddle along...

Good day. It is great to be back home! I enjoyed the time I spent touring a couple of our locations in the Florida market during the first half of last week and ended the week in Dallas at a family reunion. But as Mike suggested, my flights were anything but enjoyable. Dollar bulls didn't have an enjoyable day on Friday either, as the dollar dropped after the monthly jobs report showed US employers added fewer workers.

Payrolls rose by just 162,000 workers in July, the smallest increase in four months and well below the expected 185,000 increase. June's payroll figures were also adjusted lower, but in what has become a typical 'twist' the jobless rate actually dropped from 7.6% to 7.4%. Other data showed the typical workweek shrank and hourly earnings fell for the first time since October of last year. The numbers confirm what we have been saying at all of the presentations we have been giving, that this continues to be a 'jobless recovery' here in the US. And digging into this latest employment report I discovered the average work week for all workers dropped to 34.4 hours from 34.5 hours last month. This is a forward looking piece of the report similar to the capacity utilization figure which Chuck always highlights, and it shows employers can still push more production from their current employees.

While certain sectors, including automotive and the financial sectors seem to be recovering, the Fed will have to wait a while if they truly want to see a marked improvement in the labor market before starting their taper. Employers seem reticent to add employees, and instead are finding other ways to meet current demand. Perhaps this is a result of the new health care plan, which adds more expense with each new hire. But whatever the reason, the labor market is not recovering as quickly as some had thought.

Other data released on Friday by the Commerce Department showed household purchases, which account for about 70 percent of the US economy, rose .5% in June after a .2% increase the prior month. But the pace of income didn't keep up with spending as personal income rose .3% compared to a .4% increase in the previous month. And the week ended with the release of Factory orders for the month of June which came in at 1.5%, well below the expected figure of a 2.3% increase. However, any reaction to this disappointing figure in June was offset by the revision of the prior months orders which were adjusted from an increase of 2.1% to 3.0%.

As Mike pointed out last week, we are really short on data here in the US this week, with the ISM Non-Manufacturing composite number being the only piece of data today. The Institute for Supply Management is expected to say that its non-manufacturing index rose to 53.1 in July from 52.2 in June, the lowest level since February of 2010. Trade Balance figures will be released in the US tomorrow, followed by the weekly jobs numbers on Thursday. A very light week for data so the markets will have to look overseas or to the talking Fed Heads for direction.

Moving overseas, the kiwi lost over 1 percent on Friday, dropping to the lowest level in over four weeks. The fall came after China and other nations suspended imports of milk powder from Fonterra Cooperative Group Ltd. based in New Zealand. Many readers probably don't know that New Zealand is the world's largest exporter of dairy products making up nearly 25% of the nation's total overseas sales, so the ban could turn into a major blow for the New Zealand economy. The ban was due to possible bacterial contamination of whey protein used for everything from baby formula to sports drinks. The small overall size of the New Zealand economy has always made the kiwi susceptible to some pretty dramatic swings, and when the nation's number one export is the subject of bad news the direction of that swing is downward.

The Japanese yen moved higher after the disappointing employment data released here in the US caused some traders to extend expectations of a Fed taper. Many currency traders had jumped on the 'September taper' bandwagon, but Friday's data had some of these traders now adjusting their expectations of when the Fed will start to pull back on the amount of bond buying. While 50% still believe the Fed will reduce purchases in September, more and more people are shifting to a December time frame (which I agree with). The dollar has seen selling pressure increase as these expectations have moved further out in the calendar year.

The pound sterling rose for a second day vs. the US$ after a report showed UK services grew more than expected in July. The gauge of services output rose to 60.2 from 56.9 in June, matching the increase in UK manufacturing and construction which was released last week. The UK economy is apparently growing at a quicker pace than economists had predicted, supporting a higher price for the pound sterling. The focus this week will move to the new BOE Governor Mark Carney who is expected to detail plans for forward guidance on interest rates during the quarterly inflation report due out on Wednesday.

Staying in Europe, Sweden's krona jumped higher after an index showed the services industry unexpectedly expanded in July to a seasonally adjusted 56.6 from a level of just 44.9 the previous month. Sweden's central bank left rates unchanged during their last meeting, but has continued to suggest it will start raising interest rates sometime next year as the Swedish economy continues to improve.

China's economy is starting to show signs of stabilizing after slowing down over the past two quarters. A report released over the weekend showed the non-manufacturing Purchasing Managers' Index rose to 54.1 in July from 53.9. This was the first acceleration since March and follows last weeks unexpected gain in a manufacturing PMI. These reports indicate that the Chinese economy is not in a freefall, but is instead slowing to a more sustainable level, exactly what Premier Li Keqiang and his policy makers want to see. Additional support for the Chinese economy was announced over the weekend as the country's economic planning agency said they will accelerate transportation related infrastructure projects. China's economy grew at 7.5% from a year earlier in the second quarter, and many worried that the downward spiral would continue to accelerate through the end of the year. But this recent data shows that the Chinese economy has probably stabilized, and growth through the end of the year is now expected to remain near the current levels. While below the 8% 'social unrest' threshold, the 7.5% growth rate is still very good when you consider the overall size of the Chinese economy. Readers know that I remain a bull on China, and believe the evolution of the Chinese economy, which is moving toward consumption from one driven by exports, will remain the most important global story during the next decade.

Gold bounced back over $1,300 on Friday after opening up the morning trading below the figure for the first time in two weeks of trading. We seem to be forming another base from which we could possibly move back up above $1,400. The charts show that the shiny metal has been trading in a slightly narrower range over the past month leaving the $50 to $80 daily moves in the recent past (there were 10 of these volatile days in the past 3 months). Concerns that the Fed will cut back on stimulus has hurt investor demand for gold, with most of the selling being done in the 'paper market'. Hedge funds, which typically leverage their bets through the use of gold based derivative contracts, lowered their bullish gold bets for the first time in five weeks on the data which showed US growth may be accelerating. However, demand in the physical market continues to be strong, and spiked when the price fell below $1,300. Premiums for gold coins hit a record level on Friday according to a chart I found on Bloomberg. The reason for the increase in premiums on physical coins? Apparently there continues to be supply concerns as more and more investors opt to have their gold 'within reach'.

Then there was this. Both Chuck and Mike mentioned the changes to the GDP calculations as reported in the US last week, and while most (including me) agree that the way data is compiled needs to adjust over time, it certainly makes you want to take a closer look at these adjustments and what impact they will have across other data points. With all of the time I spent in airports last week, I caught up on my reading and came across an interesting analysis of the new GDP data in the Financial Times. In the column, Robin Harding gives his analysis of the new GDP statistic (note this was in the FT early last week): "US economic history will be rewritten this week, as the most far-reaching methodological changes in years will add the equivalent of a country the size of Belgium to output in the world's largest economy. The most important change by the Bureau of Economic Analysis, a statistical agency of the Department of Commerce, to be announced on Wednesday, will be to start counting spending on research, development, and copyrights as investment, and reflect pension deficits for the first time. Combined, they are expected to add 3 percent to gross domestic product."

Harding goes on to explain how these changes may take on a political tone in the upcoming negotiations regarding the US debt limit: "The scope of the revisions will keep economists busy for months. For example, politically sensitive figures on the size and growth of the US government will change, because the revisions have no effect on past tax revenues. At a time when Republicans argue the growth of federal government is out of control, the revisions are likely to reduce federal spending as a share of GDP by half a percentage point. They should also cut federal debt as a share of GDP by about 2 percentage points from 73 percent in 2012."

Harding makes an excellent point which I think needs repeating; while the GDP adjustments will be carried all the way back to 1929, the GDP adjustments will also impact several of the most common measures by which the US economy is compared to others. We commonly look at data 'as a percentage of GDP' and if GDP is suddenly increased, most of these measures will improve solely because of last weeks GDP calculation adjustment. I won't say the changes were politically motivated, but the timing certainly seems to be advantageous for the current administration.

To recap. The monthly jobs numbers released on Friday showed we are still in a 'jobless recovery' here in the US. The dollar got sold as currency investors started to move the timetable of the upcoming Fed taper. The kiwi booked large losses after bacteria was found in whey protein, impacting the sales of dairy products which are New Zealand's largest source of exports. The Japanese yen and Pound sterling were the two biggest gainers vs. the US$ on Friday. The yen moved higher after currency traders adjusted their expectations of the upcoming fed taper, and the Pound Sterling benefitted from an increase in a US services index. Data released over the weekend show China's economy is starting to stabilize, and Gold bounced back over $1,300 after falling briefly below that figure on Friday.

Currencies today 8/05/13. American Style: A$ .8900, kiwi .7764, C$ .9625, euro 1.3270, sterling 1.5350, Swiss $1.0742. European Style: rand 9.8431, krone 5.9214, SEK 6.5968, forint 225.02, zloty 3.1787, koruna 19.526, RUB 32.8774, yen 98.49, sing 1.2685, HKD 7.7569, INR 60.8712, China 6.1767, pesos 12.6435, BRL 2.2874, Dollar Index 81.886, Oil $106.35, 10-year 2.62%, Silver $19.7635, Platinum $1,446.40, Palladium $729.60, and Gold. $1,309.09

That's it for today. As Mike mentioned on Friday, I had quite the week of travel, spending an unplanned night in Atlanta only to get home to St. Louis and finding that my flight out to Dallas had been canceled. We did finally make down to Dallas and enjoyed the weekend with several aunts, uncles, and cousins during an overdue family reunion. It actually feels good to be back on the desk after I have traveled each of the last 3 weeks. Did you catch the Pre-Season football game last night? Hard to believe football is back, I'm sure looking forward to the Rams season; many believe this will be a breakout year for them. Thanks again to new dad Mike for covering for Chuck and me while we were out, great job! Now I'll hit the send button and get started on some of the emails which have accumulated in my inbox. I hope you have a marvelous Monday, and thanks for reading the Pfennig.

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





Posted 08-05-2013 12:21 PM by Chuck Butler
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