In This Issue.

* Holiday thinned markets…
* US 3rd quarter GDP surprised on the upside…
* Mexico's credit rating upgraded…
* Brazil's real falls on reduced intervention…

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

Holiday thinned markets have the US$ drifting…

Good day. And welcome to what looks to be a very slow week in the markets.  If Asian trading is any indication of what we will see in the markets this week I wouldn't expect much movement in the currencies.  The major currencies barely moved from where we left them on Friday afternoon, as a holiday in Japan and decreased trading liquidity in the markets.  Europe isn't providing any additional  excitement so we are heading into Christmas week without anything driving the markets.  Without any impetus, the markets are simply drifting in fairly tight ranges.

Without much to write about in the weekend markets I will instead discuss some of the highlights from last Friday.  The dollar was supported by the release of 3rd quarter GDP data which showed the US economy expanded at the fastest pace in almost two years.  Gross Domestic Product rose at a 4.1% annualized rate in the third quarter, well above the previous estimate of a 3.6% increase.  This follows a 2.5% pace of expansion in the 2nd quarter and certainly indicates the US economy was gaining strength as we headed into the final quarter of the year.  Inventories accounted for a third of the gain in GDP, but stronger retail sales in October and November may have helped clear some of the stockpiles which were building.  Consumer purchases account for almost 70 percent of the US economy, and Friday's data showed Personal Consumption increased 2% during the 3rd quarter, again beating the previous figure of a 1.4% increase.

The government shutdown and large inventory levels carried into the 4th quarter have most economists predicting GDP will slow to a 2% rate during the last quarter of 2014, up slightly from the 1.5% rate they had predicted previously.  The Christmas shopping season has been less than stellar so far, but I'm told most of the buying occurs during the final weekend before Christmas.  My daughter and I helped my wife out by heading to the grocery store with a very long list yesterday and I noticed the parking lots were crowded but not overly so. According to the latest estimates, the stronger housing markets and increases in the equity markets have made consumers feel more confident which the administration hopes will carry over into holiday spending which is needed to boost the final quarter GDP numbers. 

Today we will see the Personal Income and Spending figures here in the US along with the PCE numbers for November and the U of Mich confidence numbers.  Tomorrow we will get the durable goods number s along with the New Home sales for November and the Richmond Fed Man. Index.  But I don't expect any of this data to really drive the markets as most of the desks are VERY lightly staffed and those actually working this week will probably be pretty reticent to put on any big positions.

As I mentioned earlier, the dollar continued to drift in a fairly tight range on Friday in spite of the positive GDP data.  The US$ did reach a five year high vs. the Japanese yen which headed for an eighth weekly decline.  As I reported last week, the BOJ retained their quantitative easing  efforts adding from 60 to 70 trillion yen to their monetary base next year.  But the BOJ policy statement also suggested that this amount could be increased if needed.  The BOJ definitely wants to continue to encourage inflation as they worry about slipping back into the deflationary 'funk' they have been in for the last two decades.

The Mexican peso continued to drop in value which it started following the FOMC's taper announcement.  The drop was stalled a bit after Standard & Poor's raised the credit rating by one level.  S&P raised Mexico to BBB+ from BBB and announced they had a 'stable' outlook for the country.  The analysts cited a change to the constitution opening the energy industry to private investment as a positive move for the country.  The Mexican peso should benefit from the oil reforms, as it should encourage more foreign investments into the oil industry creating additional demand for the currency.  

The Brazilian real fell for a third day after the central bank said it will begin cutting back on the amount of intervention it has been using to support the currency.  The Brazilian central bank will auction $200 million of foreign exchange swaps on trading days from January through the end of June, down from offerings of $500 million four days a week this year.  These currency swaps are designed to help boost the currency, but neither Chuck nor I have ever been fans of the intervention, and perhaps the government reduction in support could actually be viewed as a positive since they don't feel the need to continue at the previous levels. 

Gold moved up a bit over the weekend, but is still set to close the year with the biggest annual loss in 32 years.  Enough said, better levels for all of us who still believe in 'hard assets'.

Then there was this.  Chuck sent me a note over the weekend letting me know he had some additional information which he wanted me to include in today's Pfennig.  So I figured it was perfect for our TTWT section this morning.  Take it away Chuck…

Well, there I was placing my last online Christmas gift order on Friday, when an email came through from a dear reader of many years, with a link to a video from a guy that spends a lot more time going over Fed numbers than I do, and that's saying something! In the video, this fellow claims to have run the numbers himself, and. and this is the important piece, has confirmation from Fed insiders, that the Fed has been actually buying up to $120 Billion in bonds each month, not the $85 Billion they state.   WOW! I thought to myself.. Could this actually be true?  I mean, the Fed Heads themselves told us it was $85 Billion! They wouldn't lie to us would they? Maybe it's just a rounding error.   Anyway, we'll have to just choose who we believe on this… I know who my money is on.

I know that some of you are aware that I'm a child of the 50's and 60's, and with that has brought about my questioning of everything the Gov't tells me. I think that's in our nature, DNA, or whatever, being of that age to question the Gov't. That's why I'm so likely to look under the hood, or around the corner, and under the stairs to see if the markets missed anything, or just took what the Gov't said at face value.  So, when I say things like I don't believe the Fed, it's not that I'm saying that they are liars, or anything like that, It's simply that I question everything, and always have.  Kids today, they don't question anything.  And I sure hope that doesn't lead them into bad things later in life!

Chris again.  Yes, Chuck has instilled a 'question everything' type of attitude in me over the years.  I think that is one of the main things which make his Pfennigs so refreshing – the way he always looks 'under the hood' and his absolute candor in letting his readers know exactly what he finds.  

To recap. The currency markets are very quiet as holidays take hold of the trading floors.  The 3rd quarter GDP data here in the US seem to support the FOMC decision to reduce support.  The Japanese yen continued to fall, Mexican peso was up, and the Brazilian real was down in thin markets.  Gold was up a bit but will still end the year in the negative column.  And Chuck gave us a peak 'under the hood'.

Currencies today 12/23/13. American Style: A$ .8943, kiwi .8207, C$ .9445, euro 1.3696, sterling 1.6367, Swiss $1.1179. European Style: rand 10.2810, krone 6.1647, SEK 6.5778, forint 217.75, zloty 3.0348, koruna 20.126, RUB 32.782, yen 103.79, sing 1.2659, HKD 7.7538, INR 61.849, China 6.1161, pesos 12.9572, BRL 2.3695, Dollar Index 80.418, Oil $99.05, 10-year 2.89%, Silver $19.42, Platinum $1.332.49, Palladium $696.72, and Gold. $1,198.20

That's it for today. So is everyone done with all of their holiday shopping?  I wrapped the last two presents on Saturday, so we are all set.  We are hosting my wife's family for Christmas eve, and then heading to my sister's home for Christmas day. I already know this is going to be a tough week to try and stick to my 'biggest loser' plan! Chuck sent the desk a note on Friday and said he was buying the beers after work so we all headed down to the local watering hole and enjoyed an impromptu holiday party for the desk.  Thanks Chuck!!  He has also delivered a treat for all of you Pfennig readers, so make sure you tune in tomorrow.  With that tease I will wish everyone a Marvelous Monday and hit the send button.  Thanks for reading the Pfennig.

Chris Gaffney, CFA
Vice President
EverBank World Markets