In This Issue.
* Turning Japanese ????
* Mike Meyer vs. WSJ – who is right?
* New Zealand keeps rates unchanged
* Dimon gets grilled on Capitol Hill
And, Now, Today's Pfennig For Your Thoughts!
The US is turning Japanese ? ? ?
Good day. I returned home late last night after a quick trip down to Tampa. The trip was great, and I got to ‘spread the gospel’ of diversification to a couple groups of current and potential EverBankers. I took advantage of the plane rides to catch up on some overdue reading, some of which gave me some good pfodder for today’s Pfennig. The papers and magazines I picked up at the airport were full of stories about the Eurozone breakup which I expected, but there were also a number of stories regarding what has been termed the ‘fiscal cliff’ which we are moving toward here in the US. The editors seem to be having as difficult a time as investors figuring out on which side of the pond to focus their attention.
The dollar traded off through most of the day as investors are increasing their bets the Fed will discuss another round of quantitative easing during their FOMC meeting next week. The chances of another round of stimulus increased after data released yesterday showed Producer Prices fell 1% during May on a month to month basis and increased just .7% on a YOY basis. Other data showed retail sales increased less than predicted, and actually fell when autos and gas were taken out of the figure.
Today we will get the CPI data for May and the numbers are expected to mirror yesterday’s PPI data. Consumer Prices are expected to have fallen .2% during May when compared to April. It is Thursday, so we will also see the weekly jobs numbers probably won’t show any improvement over last week’s 377k increase in jobless claims.
This data reflects an economy which is stuck in slow growth, low inflation rut. The comparisons to Japan are becoming more and more evident. But the Fed definitely wants to try to avoid moving any closer to a Japanese style stagnation. This is why many investors (including me) are expecting Chairman Bernanke and the other members of the FOMC to figure a way to get more liquidity/stimulus into our economy. Whether it is QE III or TWIST II, FOMC members are desperately looking for some way of getting US growth above 2%. But will additional stimulus really do anything other than juice our equity market for the short term? Quantitative Easing sure hasn’t been able to propel Japan out of their rut, so why should it work here?
One thing is sure, any additional stimulus efforts by our leaders in Washington will lead to a weakening of the dollar. All of the different stimulus efforts revolve either additional debt or the printing of money (or both!), neither of which is positive for the US$. This is why the currency declined yesterday vs. 13 of its 16 major counterparts. The Euro looked like it would finally break out of the $1.25 handle, climbing up to $1.2610 before settling back into its former range.
The resilience of the euro is impressive, as Greek voters will vote again this weekend with the future of the euro at stake. The latest polls indicate Greeks will again back the conservative party who is in favor of austerity and staying in the euro; but there is a possibility that the margin of victory be too small and no majority government will be able to be formed. And the Greek vote isn’t the only worry on the minds of investors. Moody’s cut Spain’s rating three steps yesterday to Baa3, just one level above junk. And the folks over at Moody’s will continue to grab headlines as a story in the Wall Street Journal predicts the rating agency will be announcing rate cuts on over 100 international banks in the next few weeks. A line at the end of the story on Moody’s bank ratings says a lot about our current situation as it suggests Moody’s is rushing to get the ratings downgrades in place in order to make sure any failed bank is below investment grade before a default.
So the ugly contest between the US$ and the euro continues, and right now the US$ is looking a bit uglier. The small move up by the euro is welcomed by the Swiss central bank who continues to intervene in the markets in order to keep their currency pegged to the euro. The Swiss National Bank announced today that they would be keeping their interest rates near zero and that the peg at 1.20 francs per euro would be maintained ‘with the utmost determination’. A recent report showed the SNB’s foreign currency reserves surged to a record in May as policy makers had to step up their euro purchases in order to keep the value of the Swiss franc down. SNB President Tomas Jordan, in a briefing following today’s meeting, said there is ‘no limit’ to interventions and called the franc ‘still high’ vs. the euro at the current level.
But the Swiss economy is making his job of holding down the value of the currency even more difficult. Policy makers raised their growth forecasts for 2012 to 1.5% from 1% after data showed an unexpectedly strong start to the year. The increase was due to stronger domestic demand, and a report showed consumers were the most optimistic in a year during April, so domestic demand looks to remain strong. Right now investors in the Swiss franc will have to look to the euro for the direction of their currency, but I would have to believe the SNB may have to blink eventually, and no matter what SNB President Jordan says, in my opinion the franc has more ‘real’ value than the euro.
Mike mentioned that he was having a hard time finding any news stories on the US deficit numbers released on Tuesday, so I was glad to see a story on the Federal Deficit in Wednesday’s Wall Street Journal. But after reading yesterday’s Pfennig, I was a bit perplexed by the headline which read “Federal Deficit Narrows as Tax Receipts Rise”. Talk about spin!! According to Mike, the deficit ballooned to 125 million during the month of May, so who is right, the WSJ or our own Mike Meyer? A quick check of the Bloomberg reveals the deficit was actually 124.6 billion in May compared to a figure of 57.6 billion in May of 2011, so this May’s deficit was over double last year’s figure. I would certainly say Mike’s description was more appropriate!
So how was the WSJ able to spin the numbers? A US Treasury official noted that the May 2011 figure was artificially low due to a shift in the timing of some payments and credits. According to the Treasury department, the ‘adjusted’ May 2011 deficit figure should have been $129 billion, putting it slightly higher than last month’s number. Funny, I don’t recall the Treasury officials letting everyone know the figure was artificially low last year when the number originally printed! It is pretty convenient of them to make the adjustment known now.
While I’m on the deficit, the WSJ story did point to some worrying figures regarding our growing debt. The US is projected to bump up against our debt limit before the end of the year, setting up another battle over the debt ceiling. Last year’s battle was only solved after future ‘automatic’ spending cuts were agreed on. Congress basically kicked the can down the road, but that road ends at the end of this year when the spending cuts and tax increases will take effect. I for one don’t believe congress is going to let these automatic spending cuts happen; I’m pretty sure our leaders will figure a way to avoid them in the name of ‘avoiding a catastrophe’. But something is going to have to be done about our national debt which this year will reach 70% of GDP according to the CBO, the highest level of debt/GDP since the end of WWII.
The commodity currencies rallied a bit as the dollar traded lower. New Zealand’s dollar was also helped by New Zealand’s central bank’s decision to keep rates unchanged. The rate non-move was expected, and central bank officials gave no indication that a future rate cut was imminent. The kiwi ran up to approach a one month high after Reserve Bank Governor Alan Bollard said the current exchange rate is more comfortable than March and signaled he expects to hold the official cash rate where it is till mid-2013. But the gain in the kiwi and other commodity currencies was capped by worries about this weekend’s Greek vote. If the vote goes in favor of the bailout/austerity measures, the commodity currencies should surge higher, with the Aussie dollar pushing back above $1.00.
Then there was this: Did you happen to catch any of the testimony of Jamie Dimon yesterday? The embattled JP Morgan chief was on Capitol hill testifying in front of the US Senate Banking Committee. He assured the Senators that his bank’s trading loss was an isolated event, and suggested they are being overblown by the press. “We will not make light of these losses, but they should be put into perspective," according to Dimon's prepared testimony. "We will lose some of our shareholders' money -- and for that, we feel terrible -- but no client, customer or taxpayer money was impacted by this incident." Dimon had been a pretty outspoken critic of heightened regulation of the banking industry, so it was interesting to hear him admit the ‘Volcker Rule’ could very well have stopped the huge losses in the trading portfolio. I guess the question is whether or not the trades would have been considered prop trades or just hedges as they were originally described. Either way these losses have largely ‘disarmed’ Dimon in his fight against additional regulation.
To recap: The dollar traded lower as data suggested the US economy is stalling out into a slower growth lower inflation pattern. Investors are betting the FOMC will institute another round of stimulus next week, which will be negative for the US$. The WSJ had my head spinning, but Mike Meyer got it right on the deficit increase. Commodity currencies rallied a bit, and are set for a surge higher if Greek voters vote for the conservative party.
Currencies today 6/14/12. American Style: A$ .99495, kiwi .77804, C$ .97409, euro 1.2565, sterling 1.5529, Swiss $1.0464. European Style: rand 8.4278, krone 5.9775, SEK 7.0415, forint 236.56, zloty 3.4355, koruna 20.3225, RUB 32.5635, yen 79.27, sing 1.2823, HKD 7.7584, INR 55.8175, China 6.3705, pesos 14.0352, BRL 2.0727, dollar index 82.119, Oil $82.68, 10-year 1.61%, Silver $28.895, and Gold $1,619.93, and Platinum $1,480.25
That's it for today. I really enjoyed the quick trip down to Tampa and want to give a big thanks to Charles Tipton and his team in Tampa/Clearwater for arranging the breakfast and lunch meetings. It looks like we are going to have some great weather this weekend, and hopefully I will be able to finish a few of the projects I have going in my backyard. Congratulations to our Nicki Storm who had a baby girl yesterday! Everyone is here, so I must be running late. Hope everyone has a Tub Thumping Thursday and thanks for reading the Pfennig!
Chris Gaffney, CFA
EverBank World Markets