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In This Issue.

* New Home Sales Slumped...

* Today's data...

* Brazil and India slide.

* Canada to balance budget...

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

Markets continue to stabilize...

Good day.Uh oh, guess what day it is. What day is it Mike? I'll give you a hint, it's not hump day. It's actually Chris Gaffney's birthday, so all the best to him today. Well, it was another cold start for us in the Midwest but I'm more than willing to deal with that if the weekends turn out nice like we've seen over the past couple of weeks. We eased back into the swing of it yesterday, but things really start heating up from here.

It looks like the snow and cold weather is being blamed for the most recent housing data as the December new home sales were a big disappointment. Sales fell 7% to a 414k annualized pace while the November figure was revised down to 445k from the original reading of 464k. For all of 2013, there was a total of 428k new homes sold, which was an increase of 16.4% from 2012 and the most since 2008. Just to give some perspective, we saw a record low of 306k in 2011 and then the peak in 2005 at 1.28 million.

The report, however, was primarily brushed aside and hasn't tarnished the brighter outlook that many see going forward. When you boil it all down, new home sales only account for roughly 7% of the residential market, so it didn't hold as much weight as sales of previously owned homes. As we've explained before, new home sales are counted when the contract is signed instead of closed so this data is much more current and often used as a current indicator by economists. As far as the markets are concerned, housing is still on the right path and looking ahead toward a thaw in both capacities.

The rest of the data yesterday was all good news as the Dallas Fed manufacturing activity report beat expectations by climbing for a ninth month in a row to 3.8 in January. Nearly every individual component of the report increased as the production index, which is a key measure of the manufacturing conditions, increased to 7.1 from 6 and the new orders component rose to a seven month high of 14.4. I remember watching the news last week and saw where it was snowing in Houston, so the cold weather wasn't enough to derail activity in Texas.

The last bit of data yesterday came in the way of a better January Markit flash report. The data is a preliminary service sector reading that follows the same logic of many others in that a reading of 50 is the dividing line between growth and contraction. The index came in at a four month high of 56.6, which is up from the previous 55.7, and is adding to the optimism for 2014. We have several reports due today, but the markets are already looking ahead to tomorrow with the FOMC meeting.

As I mentioned yesterday, December durable/capital goods orders will be the first data out of the gates and both reports are expected to stay on the positive side but show a slowdown as we headed into year end. Actually, the same can be said about the S&P/Case Shiller home price index and consumer confidence, so nothing extreme is being called for at this point. The bottom line is the Fed meeting holds all of the marbles at this point, or should I say the statements and comments following the meeting, so I would expect to see things just wobble along today.

For most of the currencies yesterday, it actually wasn't too bad. The flight to safety eased and the emerging market rout that held control was really confined to two currencies yesterday, which was the Brazilian real and Indian rupee. Government officials in Brazil are stuck between a rock and a rock at this point. The currency lost about 1% yesterday as the central bank president advised they will fight inflation as the currency weakens and basically reiterated what Rousseff said in Davos. The currency markets are interpreting this as interest rates will be on the rise.

Normally, prospects of rate hikes are great news for currencies, just look at the pound sterling and the New Zealand dollar recently, but when its seen as desperation and being forced when it's not warranted by a growing economy, the market can view it as a negative. Growth forecasts for this year have been recently cut to under 2%, so many worry about the implications of higher rates. India is in a similar situation in that economic growth has been running on the low side while inflation has been well above target.

Policy makers are considering a change to the inflation targeting framework by using CPI rather than wholesale prices as the benchmark gauge of inflation. There is thought they would shoot for a CPI target of 4% by 2016, but the problem is that CPI averaged about 10% last year compared to wholesale prices at 6.3%. The overall thought is that interest rates will need to remain higher for longer in order to achieve this goal, which in turn, would hinder growth. Not only that, but the general thought in the market is continued tapering by the Fed will equate to less funds available for investment in emerging markets, so that has also contributed to the currency moves.

Except for those two currencies, the others either finished the day on positive ground or just barely in the red. Surprisingly enough, the Mexican peso turned in the best scorecard by rising just under 0.75%. There wasn't much to support its rise, but we did see the December trade surplus increase more than expected, but I think it got a boost by the brighter US outlook floating around yesterday and the fact that its economy is in better shape than many of the other Latin American economies. The Aussie was right behind in second place, but there weren't any reports to push it upward so it looked to be a case of an oversold currency.

The pound sterling rounded out the top three as investors were betting 4th quarter GDP will come in better and put the central bank in a position to raise interest rates sooner than later. This baffles me since Carney just got done saying interest rates aren't going anywhere, so I'm not sure where or why they are leaning on this. I guess it's a case of so you're saying there's still a chance. Speaking of that, I wouldn't be surprised to see both the BOE and the Fed move the goalposts as it pertains to their unemployment rate thresholds and future policy. Neither economy is ready for rate hikes, so I can see them both saying something about how unemployment moved faster than expected, but nothing will change until we hit 6% or whatever number they would come up with.

The Canadian dollar finished the day down a bit, but Finance Minister Flaherty said there is no doubt they will have a balanced federal budget in 2015. He left some wiggle room if things drastically change, but we've heard this all before. If economic growth is healthy and self sustaining, I would see this as a reasonable scenario. In other news, Canadian consumer confidence dropped to a four year low last week but most are looking ahead to Friday when we see November economic growth figures.

As I came in this morning, we're seeing more currencies in positive territory than not with the Indian rupee in the top spot as the central bank did pull the trigger and raise interest rates. The news that got the markets excited was the fact policy makers said they don't anticipate more rate hikes if inflation stays grounded. We also had an Australian business conditions report rise to a 2 ½ year high in December so the Aussie got a nice boost overnight while the pound lost some steam as 4th quarter growth failed to rise. Economic growth slowed from the third quarter by only increasing .7% but full year growth for 2013 came in at 1.9%, which was the highest since 2007.

Then there was this.I was greeted with an email from the Big Boss, Frank Trotter, this morning that I wanted to share, so here you go. "Chris asked me yesterday if I was headed down to Cafayate, Argentina in March. Seems that the Casey Report and letters from John Mauldin have mentioned that I am speaking at Harvest Conference. Well the rumors are true and if you are even slightly inclined to visit then head straight to http://www.lec.com.ar/visit/events/ and check out the proceedings and book your flights now. This will be my fifth or sixth time down and I have to say it gets better every time. If you are inclined towards golf, or equestrian pursuits, or hiking, or wine you'll find a calling there. And for me the best element is the level of conversation with a raft full of intellectual and engaging people in the charming city square, the clubhouse of the estancia, or out in the countryside.

Like the different impacts of economic downturns here in the US, while life is great up in Salta province it's another world entirely in Buenos Aires. Argentina has been in the news of late as an example of an emerging market gone bad. Never mind the decline from one of the wealthiest countries after World War I to the volatile situation we have seen now for many years. In the past week Argentina has been named as the source of extreme concern as their currency was (finally) devalued. I have personally witnessed the exceptional spread between the official rate and the street rate for exchanging US dollar widen progressively for several years; and even after the devaluation the figures aren't that close together but the official drop moves in the right direction. Add to that the global number one 2013 performance of the Merval stock index; according to Bloomberg the measure was up nearly 90% last year - perhaps this requires a moment of reflection for those who think that stock market performance is a clear indicator of national economic health." Thanks again Frank.

Recap.Cold weather is once again being used to justify a disappointing data report as this time its December new home sales, which fell 7%. The bright spot is that new home sales in 2013 was the highest since 2008. Both the Dallas Fed manufacturing report and the Market Flash services report showed improvement, but the Fed meeting tomorrow now has all of the attention. Except for the Brazilian real and Indian rupee, it wasn't too bad in the currency market. The peso, Aussie, and pound rounded out the top three performers yesterday while the others all finished close to breakeven.

Currencies today 1/28/14... American Style: A$ .8803, kiwi .8278, C$ .9003, euro 1.3640, sterling 1.6559, Swiss $1.1122. European Style: rand 11.00, krone 6.1572, SEK 6.4562, forint 223.17, zloty 3.0695, koruna 20.124, RUB 34.63, yen 103.15, sing 1.2744, HKD 7.7633, INR 62.51, China 6.1053, pesos 13.2728, BRL 2.4083, Dollar Index 80.66, Oil $96.22, 10-year 2.78%, Silver $19.71, Platinum $1,414.75, Palladium $716.10, and Gold. $1,254.70

That's it for today...I just wanted to once again say Happy Birthday to my colleague and good friend Chris Gaffney. It was a busy day yesterday as the tax calls are starting to roll in. It's that time of the year where all of the tax documents are being sent, so I would expect the call volume to really pick up. Anyway, I'm running a little behind this morning, so I'll go ahead and wrap it up. Chris will take you through the rest of the week, so until next time, Have a Great Day!

Mike Meyer
Assistant Vice President
EverBank World Markets
1-800-926-4922
1-314-647-3837





Posted 01-28-2014 12:28 PM by Chuck Butler