Markets worry about a September taper...
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In This Issue.

* September taper worries markets...

* Germany and France lead Europe out of recession...

* Pound sterling rises on signs of labor recovery...

* Mixed data from down under...

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

Markets worry about a September taper...

Good day. It was actually a bit chilly walking across the bridge from our parking garage this morning. I hear we are in for what I consider a perfect day here in St. Louis with temperatures in the mid 70's and nothing but bright sunshine. Hopefully that will mean my plane to San Francisco won't be delayed this evening, but I guess a lot of that will depend on the weather in SF so I will have to wait and see.

The markets were waiting with baited breath for the release of the retail sales figures yesterday, and the overall data came in a bit better than projections. Retail sales increased .2% in July, slightly less than expected, and a drop from an adjusted .6% increase the month prior. But the 'core' number (ex autos, gas, and building materials) posted its largest gain in seven months, rising .5%. Other data released yesterday showed that small businesses were more optimistic in July and inventories were flat.

The retail sales data confirmed the US economy is still on a recovery path, and the ex-autos number indicates US sales are gaining momentum. This data supports the calls for a September taper, and therefore both the equity and treasury markets sold off following this morning's data. The dollar gained as investors moved back into the greenback following the positive economic news.

Atlanta Federal Reserve President Dennis Lockhart spoke a few hours after the release of the retail sales numbers, and basically stuck to the tone he took last week in confirming that the taper could begin as early as September if the data continues to improve. "A decision to proceed - whether it is in September, October, or December - ought to be thought of as a cautious first step" in tapering, Lockhart said yesterday in Atlanta.

In remarks last week, Lockhart stated "If we see the growth pick up in the second half and if we see a continuation of the job gains that we - not (the) 162,000 number that we saw last month but at a higher range, say 180-200,000 - I think with other fundamentals improving we probably are in a position to remove ... the extraordinary policy program over the medium term - that being the asset purchase program." The important detail in yesterday's Retail Sales figure was the .5% gain ex-autos. This is the figure which is used to calculate the GDP, so the .5% jump certainly indicates the first part of Lockhart's statement will hold true. Now we will have to see if the jobs numbers can increase to the 200k levels by the September FOMC meeting.

Economists have pulled their wagers back to September according to a survey by Bloomberg which showed 65% now think Bernanke & Company will start the taper in September. These same economists think the first move by the FOMC will be small, with a median estimate of the reduction in bond buying at $10 billion, bringing the overall monthly purchases to $75 billion. This same survey showed the economists believe the central bank will end the bond buying program by the middle of 2014.

The big news in the currency markets this morning is the emergence of the euro-area out of their latest recession. The GDP figures for the 17-nation euro area expanded .3% in the 2nd quarter, slightly higher than economists' expectations. Both of the German and French GDP numbers also beat analysts' estimates, with the German economy increasing at a .7% rate and France increasing .5%.

But as I wrote yesterday, the European debt crisis still remains fresh in the euro leader's minds. "This slightly more positive data is welcome, but there is no room for any complacency whatsoever," EU Economic and Monetary Affairs Commissioner Olli Rehn said in a blog post. "A sustained recovery is now within reach, but only if we persevere on all fronts on our crisis response."

While these GDP figures were slightly more positive than expected, the emergence of the Euro area back into positive growth was widely expected and already priced into the euro which held around $1.3250, the level it dropped to after the US retail sales numbers were released yesterday.

The pound sterling also rose overnight after a report showed Britain's unemployment rate held steady at 7.8% during the second quarter. Other data showed jobless claims declined 29,200 during the quarter almost doubling economists' expectations of an expected 15k decline.

Bank of England Governor Mark Carney has made the unemployment rate the main focus of monetary policy after pledging that rates will remain low until the jobless rate falls to 7%. But Carney was not able to get the members of the BOE to reach a consensus on forward guidance, as Martin Weale held out for a tougher stance on inflation; according to the minutes of their August 1 meeting. The Monetary Policy Committee therefore voted 8-1 to link the outlook for its benchmark interest rate to unemployment.

We got some mixed data from the land down under overnight, with a report showing slow wage growth in Australia offset by higher consumer confidence, and another report which showed a jump in core retail sales in New Zealand. Wages in Australia gained .7% in the 2nd quarter, matching the pace of increase in the first quarter which is the lowest since December of 2009. But this lackluster wage report was offset a bit by another report released today which showed Australian consumer confidence rose 3.5 percent in August to the highest level since March.

A report out of New Zealand boosted interest in the currencies of both Australia and New Zealand after it showed core retail sales increased 2.3% in the 2nd quarter. This is the largest quarterly increase since 2006 and when combined with recent inflation numbers this data seems to confirm the thought that the RBNZ will raise the key borrowing costs at their next meeting.

Then there was this. I get a lot of emails from our friends over at the Sovereign Society, so many in fact that I have to admit I sometimes don't get a chance to read all of them. But one I got from The Sovereign Investor yesterday afternoon caught my attention. In it, Evaldo Albuquerque discusses the emergence of a new 'global middle class' which is a theme I have been watching for some time. I will share a portion of what Evaldo wrote yesterday:

"It was a booming middle class that made America the world's most dynamic economy. But now the middle class is in decline. According to the U.S. Census Bureau, the middle-class share of the overall income pie has never been so low. In 1970, the middle class accounted for 62% of U.S. income. Now it accounts for only 45%. You can't have a robust economy when a growing number of Americans are falling from the middle class and into poverty.

While America's middle class is disappearing, there's a whole new middle class rising around the globe. Over the past two decades, urbanization and market-oriented economic policies have powered the growth of this new consumer class. This new middle class is demanding access to clean water, clothing, TVs, health care, housing, food ... you name it. This exploding middle class outside America wants a lot of stuff . and they increasingly have the money to buy it.

McKinsey Global Institute calls the rise of this new middle class "the biggest growth opportunity in the history of capitalism ... an economic force that's over 1,000 times as big as the Industrial Revolution."

So despite the American decline, there are opportunities of historic proportions taking place across the globe.

Savvy investors should be paying close attention to places where the middle class is booming, in countries such as India, Mexico, Turkey, Colombia, Thailand, Ghana and Nigeria. That's where you will find the greatest growth opportunities in generations."

Chris again. While the emerging markets have been getting a bit beat up lately, I agree with Evaldo that these markets hold some of the most promise. And we happen to be announcing a new MarketSafe® CD tomorrow which will be linked to 4 emerging market currencies! Mike will share all of the details with everyone tomorrow.

Thanks to Evaldo for letting me share his thoughts will all of you this morning, you can read the entire email by clicking here:

To recap. Retail sales numbers released yesterday suggest the taper could come as early as September, and the dollar reacted to the data by moving higher. But the dollar rally was cut short in early morning trading after GDP numbers out of Europe surprised on the upside. The unemployment rate in the UK was flat, but the pound sterling rallied as other data showed the labor market is improving. And we got mixed data out of Australia and New Zealand but both currencies moved higher vs. the US$. Finally, Evaldo Albuquerque shares his thoughts on the an growing 'global' middle class and what that may mean for the emerging markets.

Currencies today 8/14/13. American Style: A$ .9125, kiwi .8029, C$ .9670, euro 1.3248, sterling 1.5487, Swiss $1.0677. European Style: rand 9.9742, krone 5.8983, SEK 6.52, forint 225.41, zloty 3.1707, koruna 19.4955, RUB 33.1516, yen 98.15, sing 1.2707, HKD 7.7555, INR 61.3737, China 6.1720, pesos 12.7112, BRL 2.3144, Dollar Index 81.798, Oil $106.14, 10-year 2.71%, Silver $21.5765, Platinum $1,488.30, Palladium $735.80, and Gold. $1,325.40.

That's it for today. Mike will close the week out taking over as your Pfennig writer tomorrow and Friday. I just saw where there is already a 1 hour flight delay going into the San Francisco Airport, hopefully they will have all of those delays caught back up by the time I leave tonight. The Cardinals won a tough one last night after 14 innings of play. Our new associate general counsel, Barry, was in town for a visit and headed down to watch the Cardinals last night. I sure hope he stayed around for the exciting finish, it was certainly a beautiful night for a ballgame. Everyone is filtering into the desk so I guess it is time to hit the send button. Hope you all have a great Thursday, and thanks for reading the Pfennig.

Chris Gaffney, CFA
SVP & Director of Sales
T. 314-951-1619
EverBank World Markets
8300 Eager Road, Ste. 700,
St. Louis, MO. 63144

Chris Gaffney, CFA
Vice President
EverBank World Markets

Posted 08-14-2013 1:28 PM by Chuck Butler
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