In This Issue.

* Data shows US economy is improving…
* ECB stops lending to Greek banks…
* Merkel hosts Hollande…
* Aussie and kiwi rebound…

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

Data shows US economy starting the 2nd quarter a bit stronger…

Good day. The dollar continued to benefit from the troubles in Europe yesterday, adding to its weekly gains. The dollar index, which tracks the major currencies vs. the US$ is up 1.86% in the past 5 days as investors seek the shelter of the US treasury market. I was talking to Mike last night, preparing for this morning’s Pfennig, and we agreed that all of this dollar buying is starting to look a bit overdone. At some point the markets will figure they have ‘priced in’ the Greek exit and will again start to trade on fundamentals.

Speaking of economic fundamentals, we got a ton of data released in the US yesterday, and most of the numbers surprised on the upside. Housing starts and industrial production exceeded forecasts in April. Starts rose 717k vs. an adjusted 699k in March. With the adjustment to last month’s numbers, the percentage gain in housing starts was 2.6% vs. an expected 4.7% increase, but the numbers were still positive which is all the markets focused on. Building permits, a number which is a bit more forward looking, were a bit mixed. Last month’s permit number was increased to 769k, making April’s number of 715k look worse. April’s permit number was 7% lower than the March number vs. expectations of a 4.5% drop. All in all, the housing numbers show a bit of an improvement in this very important sector of the US economy.

My mortgage guy (I have my mortgage with EverBank of course!) contacted me yesterday to let me know rates had dropped enough to make refinancing a good option for me. As I mentioned in the opening paragraph, much of the ‘safe haven’ flows back into the US dollar have been funneled into the US treasury markets. This fresh round of bond buying has pushed interest rates down which is obviously helping to support the housing market. The average rate on a 30-year fixed mortgage fell to an all time low of 3.83% last week, and the average 15 year rate dropped to an all time low also according to Freddie Mac.

Another report released yesterday showed industrial production climbed 1.1%, the most since December of 2010. The industrial production number was propelled by gains in auto sales which were the strongest in 4 years. Half of the gain in factory output in April was due to a 3.9% surge in vehicle sales according to today’s data. Utility use also increased during April, climbing the most in two years.

In addition, we got the Capacity Utilization numbers for April which increased to 79.2 percent, the highest since April of 2008. Chuck always watches this number closely, as it is a very good indication of whether businesses are using all of their production facilities. A rise of this number above 80 is typically an indication that the economy is ‘running on all cylinders’. We are not quite there, but certainly getting closer!

The combination of an uptick in housing and auto sales was great news for the US economy, and would typically have led to a surge in the equity markets, as these are two of the most important pillars of the US economy. But the stock markets were down here in the US as investors continued to worry about the Eurozone crisis.

Data released in Europe yesterday showed inflation slowed last month and exports dropped in March as the region’s fiscal crisis undermined the economy. The Eurozone crisis was also on the minds of the Fed policy makers during their last meeting. Minutes from the FOMC meeting at the end of April showed members were worried about a loss of momentum in global growth caused by the European crisis. The members of the FOMC ‘indicated that additional monetary policy accommodation could be necessary if the economic recovery lost momentum or the downside risks to the forecast became great enough’. The minutes also pointed out the ‘fiscal cliff’ which the US economy is approaching at year end, as US lawmakers have to agree on a budget before automatic spending cuts kick in.

We will get a few more pieces of data released this morning, including the weekly jobs numbers and leading indicators. The jobs data is expected to show another 365k increase in weekly claims, a bit lower than last week’s 367k increase. The numbers of jobless claims have been steadily drifting lower since peaking in March of 2009.

I spent a lot of ink this morning on the data releases here in the US, so I better move back to the currency markets which have been dominated by events in Europe. The big news yesterday was an announcement by the ECB that they would temporarily stop lending to some Greek banks in order to limit its risk. ECB President Mario Draghi signaled the ECB would not compromise on key principles in order to keep Greece in the euro. The ECB said it will push the responsibility for keeping the Greek banks liquid back onto the Greek central bank until they have sufficiently boosted their capital. The announcement was meant as a warning shot for the other peripheral euro-zone banks, but lending will probably resume shortly. “Once the recapitalization process is finalized, and we expect this to be finalized soon, the banks will regain access to standard European refinancing operations,” the ECB said in an emailed statement.

Draghi fired another shot at Greek leaders with his first acknowledgment that Greece could leave the monetary union. He said while the bank’s ‘strong preference’ is that Greece stays in the 17 nation euro area, the ECB will continue to preserve ‘the integrity of our balance sheet’. As I mentioned yesterday, the Greeks will go back to the polls on June 17th in what many are now seeing as a vote to exit or remain in the euro.

Chancellor Angela Merkel hosted the new French President Francois Hollande on the day of his inauguration. That just amazes me that the new French President would travel to Berlin on his first day in office. It definitely shows you exactly where the seat of power in Europe is located. I also think it is a sign that Hollande will be much more inclined to cooperate with his German neighbors than some of his election rhetoric indicated. And it wasn’t an easy trip for Hollande to make, as his plane was struck by lightning forcing a return to Paris to board a second flight to the German capitol.

During the press conference at the end of their meeting, Merkel and Hollande sounded as if they would get along and work together to solve the Greek crisis. Hollande definitely looks like a better partner for Merkel than the last French President, and the two look like they have already started down the path of compromise concerning Greece. The European leaders said they would consider measures to spur economic growth in Greece as long as voters there committed to the austerity demanded to stay in the euro. Hollande affirmed at the closing of his visit that “we have a common task” to accomplish. “Greece can stay in the euro area,” and “Greek citizens will be voting on exactly that.”

Chuck sent me a note yesterday morning suggesting the Australian dollar may be oversold: “A charts friend of mine, sent me a note indicating the Aussie dollar is showing oversold on the RSI readings. RSI stands for relative strength Index, and my research shows that the A$ has reached current RSI levels 4 times since 2010, and each time, A$ has bounced off these levels. So… maybe the sun will begin to shine in the A$ again soon…”

I watched the Aussie dollar continue to slide after reading Chuck’s email, and thought his chartist friend had probably mis-read something. But as I turned on the screens this morning I saw both the AUD and NZD has turned around and began to move higher. These two currencies were helped by Asian stock markets which headed for their first advance in seven days. A feeling that the US Fed could introduce another round of stimulus also helped buoy these commodity based currencies.

To recap. The US data released yesterday indicated the economy is still in a ‘recovery’ mode. An increase in housing starts and industrial production showed two of the most important pillars of the US economy, housing and the automobile industry, had stabilized. Another release showed capacity utilization increased to get close to 80. The crisis in Europe continues, as some Greek banks were ‘cut off’ by the ECB. The new French President traveled to Germany, and from the look of things the leaders are going to show a united front in their battle to save the euro. And finally the AUD and NZD look like they are oversold according to the charts.

Currencies today 5/17/12. American Style: A$ $.9916, kiwi .7645, C$ .9858, euro 1.269, sterling 1.5847, Swiss $1.0566. European Style: rand 8.3418, krone 5.9774, SEK 7.1997, forint 234.17, zloty 3.4371, koruna 20.118, RUB 31.0825, yen 80.19, sing 1.2681, HKD 7.7688, INR 54.5175, China 6.3252, pesos 13.8069, BRL 2.0009, Dollar Index 81.551, Oil $92.86, 10-year 1.76%, Silver $27.50, Gold $1,548.30, and Platinum $1,441.00.

That’s it for today. I want to wish my co-worker and good friend Keith Rigdon a very happy birthday (one day early)! Keith was a key member of the team which steered our huge computer conversion project to the finish line. I have spent a majority of my hours here at work during the past few years huddled together with Keith reviewing the new system. His dedication to Everbank is absolutely amazing; and in addition, he is just a great guy (even though he is from Texas!). So Happy Birthday Keith! Just heard we have a day game for the Cardinals today, so we’ve got that going for us! Hope everyone has a Tub Thumping Thursday, and thanks for reading the Pfennig!!

Chris Gaffney, CFA
Vice President
EverBank World Markets