Dudley strongly defends last week's FOMC decision...
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In This Issue.

* NY Fed President Dudley defends last week's non-move...

* US PMI disappoints, in contrast to China and Europe...

* Gold trends lower, reversing last week's spike...

* BOJ pledges to keep adding liquidity...

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

Dudley strongly defends last week's FOMC decision...

Good day. And good Tuesday morning to everyone. As I suggested yesterday, the markets were driven by 'Fed speak' yesterday as there was little in the way of data to move them and we had three different Fed Presidents weighing in on last week's FOMC taper decision. The dollar continued to lose ground throughout the day Monday as New York Fed President William Dudley reiterated what I had written in the Pfennig; that the Fed will remain 'data dependent' and that fiscal uncertainties still 'loom very large'. Dudley also noted that Chairman Bernanke never specified that the first tapering of the bond purchases would occur in September. With the debt ceiling debate and a possibly government shutdown looming over the markets, I think the Fed heads continue to believe the markets continue to need the stimulus provided by the most recent round of QE (more on this in today's TTWT section).

Dudley stole the spotlight from the two other Fed Presidents who spoke yesterday, as neither Atlanta Fed President Dennis Lockhart nor Dallas Fed President Richard Fisher said anything deemed as 'newsworthy' as the New York Fed President. His strong defense of the Fed's non-move last week kept a negative bias on the US$, and the selling was increased by US PMI data which was released early Monday morning. In contrast to the preliminary Purchasing Manager Index numbers released in China and Europe, US PMI data disappointed. Economists had predicted a reading of 54 for September's US PMI, but the figure came in at 52.8 which was slightly lower than last month's reading of 53.1. The good news is that any reading above 50 is considered a positive reading, but the direction of September's number was a bit worrying; especially after the PMI figures for both Europe and China surprised on the upside.

Today we get a bit more data here in the US with the release of the S&P / Case Shiller Home Price Index. This reading of US home values is expected to show a slight increase for the month of July (boy July seems like a long time ago already doesn't it?). We will also get the Richmond Fed Manufacturing index (a non event, but it is expected to show a slight decrease), and the Consumer Confidence reading for the month of September. Economists predict that consumers were slightly LESS confident during the month of September with an expected reading of 80 vs. the 81.5 reading for the same index during the month of August. Can you really blame consumers for being a bit concerned about the direction of the US economy? What, with the debt ceiling debate, a continuing conflict in Syria, and the beginning of Obamacare all lingering on the near term horizon.

A reader asked me to weigh in on the debt ceiling debate, and opine on the chances of a government shut-down / default. I have stayed away from this issue simply because I don't think the markets really care about it. Everyone, and I do mean everyone, is convinced that the 'debate' which is currently going on is nothing but political posturing, and in the end the debt ceiling will be raised and the country will continue to borrow and spend. The markets are certainly convinced the US government will not be 'shut down' and will not default on our obligations. So I will hold off on any long discussion of the debt ceiling, by now you should all know what Chuck thinks about our mounting debts, and I certainly agree with him. But the government won't be shut down, and to avoid that the debt ceiling has to be raised no matter what.

The euro is off slightly from the lofty levels it reached yesterday, dropping back below the $1.35 handle. The common currency ticked lower after data on German business confidence missed estimates. The German September IFO business climate index was 107.7 vs. estimates of 108. But the figure was still slightly higher than last month's reading of 107.5. The euro was also seeing pressure from investor worries that German Chancellor Angela Merkel may struggle to put together a ruling coalition. While Merkel cruised to an easy victory in this weekend's elections, the party which helped form the current coalition lost badly, leaving Merkel to have to search for a new partner.

In other European news, ECB President Mario Draghi said Europes central bank stands ready to offer banks long term loans to keep money-market interest rates from rising. This was not news, as Draghi has continually pledged to do 'whatever it takes' to keep the European economy from slipping back into recession. But at the same time, Draghi has assured investors that the central bank is closely monitoring the impact of having interest rates at record lows for an extended period, saying the central bank was 'very sensitive' to risks to financial stability stemming from low rates. He stated the ECB would act against inflationary pressures if/when it was needed. Draghi certainly seems to be walking a tight rope here, and doing a fairly good job of it; assuring markets that the liquidity will continue, but also trying to make sure long term inflation expectations keep in check.

Gold continues to move lower and has all but given back the gains it booked following the FOMC meeting last week. Tim Smith, our head metals trader, let me know that volume has really dried up in the precious metals markets. Most investors seem to be taking a 'wait and see' approach right now, and the lower volumes have led to much more volatility in the precious metal prices. One thing which could give some support to the markets is the increase in physical demand which usually accompanies the beginning of the 'wedding season' in India. India and China are the two largest markets for physical metals, with China predicted to overtake India for the first time this year. But according to several reports, Chinese buyers are not jumping in at the current levels, choosing instead to wait for further price drops.

Staying in Asia, Bank of Japan board member Sayuri Shirai said the bank stands ready to take additional simulative steps if inflation fails to reach their goal of 2 percent. Shirai said the BOJ will continue to increase liquidity being pumped into the markets until prices increases reach the desired level. He pointed to the bank's forward guidance on policy which gives the bank scope to take additional actions. "In my view, this second set of guidance warrants any necessary actions by the Bank beyond the two-year horizon, if it judges it necessary to do so in light of stably achieving 2 percent," Shirai said in a speech last week. It certainly looks like the Bank of Japan will stand alongside the US Fed in continuing to supply the markets with as much liquidity as they feel they need. Whick brings me to today's TTWT.

Then there was this. I have quoted items from AgoraFinancial's 5 Min Forecast in previous Pfennigs, I love the afternoon updates and usually find myself nodding along as I read. Yesterday was one of those days as Dan Amoss shared his thoughts about how the Fed has backed themselves into a corner with all of the rounds of quantitative easing. Here is tidbit of what appeared in yesterday's 5:

"The Fed may finally have realized the economy is addicted to QE," adds our macro strategist Dan Amoss with his own reflections from last week. "Like a parent that's spoiled a child, the Fed has lost its ability to discipline Wall Street.

"Bernanke cited 'tightening financial conditions' as a key reason to not slow the pace of money printing. Those tighter financial conditions (higher Treasury yields and mortgage rates) were the result of Bernanke's talk all through the summer. So which is it?

"If this is how the Fed now operates, then it has trapped itself into never tapering or even hinting at tapering again. If nonstop QE is a permanent condition, then the Fed will have made the ultimate crash of bonds and stocks back to nonmanipulated prices that much bigger. As each month passes with an extra $85 billion added to the base money supply, capital markets move further from realistic, sustainable conditions.

"Several months from now, when the next Fed chair (probably Janet Yellen) starts hinting at tapering, the tightening of financial conditions will be even stronger -- a more spectacular temper tantrum, in other words. This, in turn, will result in yet another round of promises to not slow the money printing."

The addict analogy never gets old: "The market is building up a tolerance to QE," Dan concludes. "Ever-higher doses of QE will be required to prop up stocks and bond prices."

Thanks to our friends over at Agora for letting me share Dan's thoughts with you this morning. You can learn more about 'The 5' and read yesterday's entire post by clicking here: http://agorafinancial.com/2013/09/23/wrong-way-bicycles-and-spoiled-children.

To recap. NY Fed President Dudley came to the rescue of the FOMC, defending their non-action and stating the reiterated the taper will come when the data supports it. His strong defense of the FOMC's actions offset remarks by St. Louis Fed President Bullard who suggested the taper could begin at the next meeting. The euro slipped below $1.35 after German IFO data missed estimates. ECB President Mario Draghi continues to walk the line between stimulus and keeping a watchful eye on inflation (as if he can do both!). Gold moved lower and has given back all of the price gains we saw during the spike following last week's FOMC decision. And I ended today's Pfennig with a great piece from 'The 5' on the drug of stimulus.

Currencies today 9/24/13. American Style: A$ .9391, kiwi .8289, C$ .9717, euro 1.3487, sterling 1.5995, Swiss $1.0968. European Style: rand 9.8664, krone 5.9605, SEK 6.4119, forint 222.56, zloty 3.1384, koruna 19.239, RUB 31.93, yen 98.65, sing 1.2548, HKD 7.7534, INR 62.7525, China 6.1485, pesos 12.8620, BRL 2.2081, Dollar Index 80.577, Oil $102.93, 10-year 2.68%, Silver $21.52, Platinum $1,425.00, Palladium $712.25, and Gold. $1,315.46.

That's it for today. I headed across the river last night, accompanying my mom to go watch my daughter Lauren play a JV field hockey game in Edwardsville. It was a very nice evening, and the sports complex over at Edwardsville High School is unbelievable. Lauren won her game, and played well enough for the Varsity coach to invite her to accompany the Varsity team to a tournament in Chicago this weekend, a pretty big honor for a freshman. But she was also invited to her 'first' high school homecoming dance this weekend, so she was forced to make a decision. She chose to go play field hockey instead of going to the dance, I'm sure disappointing the boy she had agreed to go with, but making her father happy (there is plenty of time for boys!). It is getting late now, so I better hit the send button. Thanks for reading the Pfennig, and I hope you all have a terrific Tuesday!

Chris Gaffney, CFA
Vice President
EverBank World Markets

Posted 09-24-2013 5:06 PM by Chuck Butler
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