In This Issue.
* Happy Birthday Chuck...
* Bernanke worried about growth in US...
* Japan posts a trade surplus...
* Indian rupee falls...
And, Now, Today's Pfennig For Your Thoughts!
Happy Birthday Big Guy...
Good day... And Happy Birthday to Chuck! Yes it is Chuck Butlers birthday today, and I know all of you Pfennig Pfanatics will join me in wishing our fearless leader a very happy birthday today!! He is spending his birthday surrounded by his family in what he considers one of the greatest places on earth, the spring training home of the Cardinals. More thoughts on Chuck at the end of today’s Pfennig, but I just wanted to make sure I started today’s Pfennig off on a positive note.
The dollar is starting of the day with a positive move vs. most of the currencies, after spending most of yesterday bouncing around in a fairly narrow range. I couldn’t find anything which caused the move higher this morning, with most analysts crediting a return of ‘safe haven’ buying for the increase. Both Fed Chairman Bernanke and Treasury Secretary Geithner were in front of Congress yesterday, and Bernanke was sounding a cautious tone regarding the US economic recovery. There was also a private report released which caused further concern on China’s growth prospects and the existing home sales in the US were disappointing, so the combination of these two items along with the caution tone of Bernanke are probably what is making investors return to the dollar.
The 10 year treasury would certainly support the ‘safe haven’ theory. Yields on the 10 yr US bond have are down 4.3 basis points today, and now yields 2.25%. The yield on the 10 year had moved from below 2% at the beginning of the month to a high of 2.38% at the beginning of this week, a fairly dramatic move for bonds. With bonds, yields and the price of the bond are inversely related with bond prices moving lower as the yields move up. So bonds investors were selling bonds in a big way over the first 3 weeks of March, investing the proceeds into the equity markets and currencies other than the US$. But these same investors now seem to be moving back into the bonds, causing prices to rise and yields to fall back to 2.25%. Chuck has long warned Pfennig readers that the US treasury market is a bubble waiting to be popped, and the dramatic move in bond prices earlier this month should serve as a warning for investors. Bond yields just can’t remain as low as they have been, as inflation starts to put pressure on bond prices.
Existing home sales in the US dropped .9% during the month of February, compared to an impressive 5.7% increase during the month of January. Economists had estimated a increase for sales of .9%, but the revision to January’s number helped offset the unexpected loss of sales. Today we will get the usual weekly jobs numbers, which are expected to show 350k newly unemployed with continuing claims of 3,380k. We will also see an index of House prices which are expected to have risen .3% MOM in January, and the Leading Indicators which are predicted to have increased .6% during the month of February.
As I mentioned earlier, Federal Reserve Chairman Ben Bernanke was in front of the House Committee on Oversight and Government Reform yesterday and sounded a more cautious tone on the prospects for the US economy. He warned the committee members that “Higher energy prices would probably slow growth, at least in the short run”. He went on to explain that rising gas prices “create at least short-term inflation pressures, and moreover, they act as a tax on household purchasing power and reduce consumption spending, and that also is a drag on the economy.” His cautionary tone matches the warnings we heard from NY Fed Head Dudley earlier this week. It seems the FOMC members are trying to make sure investors know the economic recovery is not a ‘sure thing’ and we will certainly hit some bumps on our road to recovery. Higher oil prices are creating a strong head wind which the US economic recovery is going to have to struggle against, and Bernanke and his partners on the FOMC are hoping the rising prices are just a quick gust which we can pedal through.
Leaders of the European Union also continue to battle headwinds in their economic recovery. A report out this morning showed Euro-area services and manufacturing output shrank more than expected during March. The euro-area purchasing manager’s composite index fell to 48.7 from 49.3, with any reading below 50 indicating a contraction. But this data was offset a bit by an earlier report that showed German investor sentiment surged to a 21 month high.
The euro also caught some love from the US financial leaders. Both Treasury Secretary Geithner and Fed Chairman Bernanke told the US congressmen that the risk from Europe’s debt crisis is fading. “In the past few months, financial stresses in Europe have lessened, which has contributed to an improved tone of financial markets around the world, including in the United States,” Bernanke said. Treasury Secretary Geithner went on to say “The European economies at the center of the crisis have made very significant progress.” But Secretary Geithner also warned that slower growth which is being predicted for the EU will have a negative impact on future growth here in the US.
I haven’t written about the Japanese yen all week, but a report on Japan’s trade has finally given me a reason to visit the yen. Japan reported their first trade surplus in five months on higher than forecast exports. The news adds to growing evidence that the world’s third largest economy is finally growing again.
Japan reported a trade surplus of 32.9 billion yen, a sharp reversal of a record deficit posted in January. The surplus was even more surprising to analysts who had predicted another trade deficit. Exports to the US were mostly responsible for the surplus, increasing 11.9% in February from a year earlier. Auto exports were the main driver of the increase in shipments to the US.
The yen increased slightly vs. the US$ after the surprise news, but pared its gains in early US trading. The yen had been one of the best performing currencies over the past few years, but has reversed course this year dropping nearly 7.5% vs. the US$. At least some of this sell-off in the yen has been due to the re-emergence of the carry trade, where investors borrow and sell low yielding currencies to purchase higher yielding currencies to book the interest rate differential. Carry trades have a fairly close correlation to global growth, with more investors willing to invest in them when they are confident. This is part of the reason the yen has underperformed this year, as investors have sold it while investing into the higher yielding currencies of Australia and New Zealand. It will be interesting to see what will happen to the yen if the Japanese economy recovers. Perhaps these carry trade investors will need to find a different currency to borrow and sell; the euro certainly looks like a plausible alternative.
A top official in India’s finance ministry predicted rates may be cut in April. Economic Affairs Secretary R. Gopalan said “If inflation remains at this level after factoring in various things, then interest rate reversals may start in April.” He went on to stress that growth is important, and current interest rate levels are hampering it. Finance officials have been hinting that they are prepared to start cutting rates ever since they left them unchanged at the last meeting on March 15th.
India’s Finance Minister Pranab Mukherjee has taken steps to cut India’s trade deficit, hoping to support the Indian rupee. The main item in his plan is a doubling of the tax on imports of gold. Gold accounts for 14 percent of India’s imports, so the higher tax rate will definitely help the budget. These moves are seen as positive steps for the Indian economy, in spite of the protests from jewelers who closed their shops for five days. Investors should be encouraged by the Finance Minister’s plans to reduce the current account and budget deficits, and the currency should benefit from the rising economic fundamentals. Indian interest rates are among the highest offered, second only to those in Brazil. Higher rates have helped propel the Indian rupee to a 3.61% increase this year.
The commodity currencies of Australia and New Zealand were off slightly after a report signaled Chinese manufacturing will contract for a fifth month. The report, authored by HSBC, showed a Purchasing Managers Index fell to 48.1 in March, the lowest level in four months. This indicates Chinese manufacturing is continuing to contract.
The New Zealand dollar was also sold off after a report showed GDP rose .3% during the last quarter of 2011, slightly below economist’s estimates of a .6% growth. The slower growth figure dampened expectations that Reserve Bank of New Zealand Governor Alan Bollard would increase rates by September of this year. The kiwi has had a 4% increase in value vs. the US$ this year on the back of these interest rate expectations, so we could see a further pull back by the kiwi.
To recap... It is Chuck’s Birthday. The dollar moved higher on ‘safe haven’ buying after Bernanke and Geithner warned that higher gas prices would have a negative impact on US growth. Existing home sales were disappointing and reports out of Europe showed manufacturing is shrinking. Japan reported a trade surplus for the first time in a while, helping to push the yen higher. India’s top finance minister is predicting rates will be cut in April, and a tax on Gold imports is set to double in April. Finally, New Zealand GDP increased less than predicted in the 4th quarter of 2011, causing some to predict rates will be stay put through 2012.
Currencies today 3/22/2012. American Style: A$ $1.0378, kiwi .8086, C$ $1.0045, euro 1.3163, sterling 1.5807, Swiss $1.0919. European Style: rand 7.7197, krone 5.7892, SEK 6.7673, forint 223.21, zloty 3.1682, koruna 18.8187, RUB 29.421, yen 82.89, sing 1.2671, HKD 7.7652, INR 51.165, China 6.2994, pesos 12.8224, BRL 1.8180, Dollar Index 79.827, Oil $106.05, 10-year 2.26%, Silver $31.8775, and Gold $1,635.99.
That's it for today... Happy Birthday to Chuck! I’m sure he is probably enjoying his coffee sitting on his patio or on the beach looking out at the ocean. His family is down in Florida to celebrate with him, so I’m sure they will have a great time. We will be celebrating here with Chinese for lunch! The Blues lost a tough one, but are still leading all other NHL teams going into the end of the season. I hope everyone has a Tub Thumping Thursday, and thanks for reading the Pfennig!!
Chris Gaffney, CFA
EverBank World Markets