Budget negotiations leave the dollar stuck in a rut...
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In This Issue.

* Dollar stuck in a tight range...

* German confidence highest in 6 years...

* Kiwi falls after NZ's trade deficit widens...

* Precious metals are largely unchanged...

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

Budget negotiations leave the dollar stuck in a rut...

Good day, and what day is it??? HUMP DAAAAAY!! I just love that commercial. Yes we made it to the halfway point of the week, it is all a downhill run from here. Chuck will be back writing the Pfennig tomorrow, so this is the last day of writing for me. I can get back to my early morning workouts tomorrow and take advantage of these beautiful mornings we have been having. The weather has cooled off just enough to make my morning runs nice and crisp.

The markets have cooled off a bit also, staying in a fairly tight range after a pretty volatile last week thanks to the FOMC. The dollar edged lower vs. most of the major currencies, but still didn't break out of the tight range it has settled in following the big drop last Wednesday. The uncertainties surrounding the US budget negotiations have most investors staying on the sidelines. I still believe a budget deal will be reached, I just hope it gets done soon.

The US data released yesterday was mixed, and did little to convince investors the US economy is gaining strength. The S&P/Case Shiller home price index ticked up slightly, but was just below estimates. The data showed US home prices have slowed their rate of gains, rising just .62% in July after a .88% increase during the prior month. A separate report released by the US Federal Housing Finance Agency showed a slightly better increase in home prices with a 1% increase in July. But both of these reports are for July, and don't fully reflect the higher interest rates which took hold over the summer.

The other big piece of data released yesterday was US consumer confidence which slipped a bit in September. The Conference Board's Consumer Confidence index came in at 79.7 this month following a revised reading of 81.8 in August. This was largely in line with economists' expectations and reflect consumers' worries that the US economic recovery could continue to be in jeopardy. The uneven recovery of the labor market, and uncertainties about the Federal budget and new healthcare requirements continue to weigh on consumer confidence. This recent drop in confidence is even more worrying for the markets as we are entering the incredibly important Christmas shopping season.

Today we will see some additional information on the health of the housing market with the release of the New Homes Sales figures. We will also get a relatively new piece of data which shows the Household Change in New Worth (largely driven by home prices). And before we see the latest readings on home sales we will get the Durable Goods Orders that are expected to have decreased by .2%. This is actually an improvement over last month's reading when durable goods orders fell a surprising 7.4%.

The budget battle has led to a bit of risk aversion, providing some support for the US$ and Japanese yen while some of the 'riskier' assets have been sold. As I mentioned earlier, the currencies are all trading in a fairly tight range; the largest mover of the major currencies vs. the US$ today is the NOK which is down .8%. This move is in concert with a similar slide in the value of the Swedish krona which got sold after data showed Swedish consumer and manufacturing confidence slumped in September. The Nordic country's consumer confidence gauge fell to 98.0 from a revised reading of 98.8 in August. An increase in confidence was expected, so the more pessimistic view came as a surprise to the markets.

This Swedish pessimism stands in stark contrast to German consumers whose confidence in their economy rose to 6 year highs. GfK market research group released its forward looking consumer sentiment indicator yesterday, and the survey showed German consumers are as confident in their economy as they have been since before the 2008 financial crisis rocked the markets. The same firm predicts private consumption in Germany will increase about 1 percent in real terms during 2013 a sign that the German economy will grow moderately this year as the euro-area emerges from the 'second dip' of a double dip recession. Another report confirmed the GfK numbers as the Ifo Institute's business confidence indicator improved slightly.

Merkel's victory in last week's German elections was a big deal for the euro as it provides businesses and consumers some confidence that the euro is here to stay. All of the uncertainty about the euro's future hung over the European continent like the sword of Damocles; smothering any real economic progress in the euro-region. While the euro-crisis will undoubtedly show up on our radars again, the question of the euro's survival is less of an issue. The ECB and European Union can hopefully continue to move toward creating a banking and financial system which will continue to support the weaker members while keeping the overall economy on a positive growth track. Things are certainly starting to look up for the euro area.

The New Zealand dollar fell in overnight trading after official data showed the nation's trade deficit widened to 1.2 billion NZD last month. This was the largest deficit in five years, and exactly what has been worrying us about the kiwi. Chuck and I were just discussing the New Zealand dollar a couple of weeks ago, and he brought up the tiny island's trade deficit as a factor which could weigh on the currency. Trade deficits are typically a drag on a country's currency, as the currency is sold in exchange for goods / materials being imported into the country. In contrast, countries who run a trade surplus are actually creating demand for their currencies which of course supports their price. Adding to the kiwi's woes was a earnings warning by the NZ dairy giant Fonterra. Dairy exports are very important to New Zealand's economy, accounting for about 7 percent of annual GDP and one quarter of annual exports. The kiwi is off .58% vs. the US$ today, but is still one of the best performing currencies during the month of September.

The best performing currency during the month of September? The Brazilian real which is up over 8% vs. the US$. Brazil's central bank chief Alexandre Tombini said their FX market intervention had accomplished their intentions, reducing volatility for the Brazilian currency. Tombini told Brazilian lawmakers that the central bank would continue to 'stand at the ready' with its $60 billion intervention program. I am not a fan of currency intervention, as it rarely works over the long term, but it can have an impact in daily trading levels. One piece of positive news which Tombini relayed in his speech was that he expects Brazil's current account deficit to fall to 3% of GDP from the current level of 3.4%. Also supporting the real is the expectation that interest rates will increase 75 basis points before the end of the year. Inflation expectations have been increasing, with current forecasts of 5.96% inflation next year; well above the central bank's target rate of 4.5%.

The commodities inched higher as China demand drove prices of raw materials higher. Precious metals reversed a 3 day drop in overnight Asian trading, but couldn't hold on to the gains in early European trading and are mostly unchanged.

Then there was this. The folks on the desk know I sometimes struggle for material when I'm writing the Pfennig, so they help me out by sending me a steady stream of what I call 'Pfennig Pfodder'. Tim Smith did just that yesterday, sending along a couple of very good quotes which he had come across on the internet; and one in particular stuck out. It is from Peter Coy, in a posting on the Bloomberg-Businessweek website on September 17th:

''The nonpartisan Congressional Budget Office on Tuesday projected a much gloomier long-term outlook for federal budget deficits than its year-ago forecast. The CBO now predicts that federal debt held by the public will rise to 100 percent of gross domestic product by 2038 under its 'extended baseline scenario.' (It's around 73 percent now.) Last year it predicted the ratio would fall to 52 percent over the quarter-century in the baseline scenario.

This is, as the CBO notes, a 'very large' forecast revision.''

''Reasonable people can disagree as to whether the federal government needs to tighten its belt right now, with the economy weak and unemployment high, but it's pretty obvious that in coming decades, something has to give.

Here's how the CBO put it:

'How long the nation could sustain such growth in federal debt is impossible to predict with any confidence. At some point, investors would begin to doubt the government's willingness or ability to pay U.S. debt obligations, making it more difficult or more expensive for the government to borrow money. Moreover, even before that point was reached, the high and rising amount of debt that CBO projects under the extended baseline would have significant negative consequences for both the economy and the federal budget.' ''

Chris again.We have been writing about the growing debt and deficits for years now, but the story just doesn't get old as the IOUs just continue to pile up. As the CBO suggests, we will eventually hit that 'tipping point' but even before that we will definitely see dramatic reductions in the amount of funds available for 'discretionary spending' as rising interest rates continues to push the cost of servicing all of this debt higher. It isn't a pretty picture, but unfortunately it is one which is certain.

To recap. The US dollar is stuck in a range as the congressional budget battle has investors wondering where to turn. European data showed German confidence is at a 6 year high, while Swedish confidence levels dropped. The New Zealand dollar was the largest loser vs. the US$ after a report showed the trade deficit widened and the globes largest dairy company issued an earnings warning. The Brazilian real moved higher and the precious metals are largely unchanged.

Currencies today 9/25/13. American Style: A$ .9359, kiwi .8218, C$ .9696, euro 1.3504, sterling 1.6033, Swiss $1.0979. European Style: rand 9.8683, krone 6.0194, SEK 6.4259, forint 221.96, zloty 3.1198, koruna 19.153, RUB 31.99, yen 98.44, sing 1.2541, HKD 7.7533, INR 62.42, China 6.1497, pesos 12.9780, BRL 2.1971, Dollar Index 80.424, Oil $103.80, 10-year 2.64%, Silver $21.63, Platinum $1,426.24, Palladium $718.97, and Gold. $1,321.06.

That's it for today. Another absolutely gorgeous evening here in St. Louis and another win for my daughter's JV field hockey team. I ran home from her game to watch the Cardinals inch a little closer to wrapping up the division. Rookie pitcher Michael Wacha (who we got with the compensational pick after losing Pujols) got within one out of throwing a no hitter last night. What a game! If any of you were watching it on TV last night you saw both Jack Stapleton and Frank Trotter sitting in the first row behind home plate. I just love the post season, and if our 'young arms' can hold up we could see our Redbirds go deep into the fall again this year. Chuck will be back in the saddle tomorrow, so this is it for me. Thanks to everyone for putting up with me the past three days, and I hope you all have a Wonderful Wednesday!!

Chris Gaffney, CFA
Vice President
EverBank World Markets

Posted 09-25-2013 11:58 AM by Chuck Butler
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