In This Issue.

* Labor picture seems to be improving in the US…
* Japanese yen hits a 5 year low…
* Commodities move higher in thin trading…
* Congrats to Chuck on another anniversary…

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

Labor picture seems to be improving in the US…

Good day. We had a pretty busy day on the desk yesterday as we were short a couple of folks, but thankfully the markets are still pretty quiet so Ty, Mike H., Tim and I were able to handle the volume.  I actually enjoyed jumping back into the 'queue' and getting to discuss currencies and metals with a couple of clients.  All of the clients I spoke to were making 'year-end' adjustments to their portfolios, reallocating back into some of the currencies which they feel have value at these levels.  We should be close to full staff again today, so the day should be a bit easier.

The currency markets continued on their smooth glide yesterday as most of Europe was closed for 'Boxing day' and the New York trading desks were as short staffed as ours.  The most active markets were over in Asia as the Japanese yen continued to fall vs. the US$.  The yen hit a five year low vs. the dollar yesterday, surging above 105 for the first time since September of 2008.  The yen has faced increased selling pressure as investors look at the divergent paths each of the central banks are taking regarding monetary policy.  The BOJ is working to increase inflation, and have also discussed the possibility of increasing the level of their Quantitative Easing.  In contrast, the FOMC has just announced a decrease in the amount of Quantitative Easing, and many believe the bond buying will come to an end later this year. 

But as Chuck suggests below, the FOMC bond buying may not come to as quick an end as these economists believe.  But you don't need me explaining what Chuck thinks, he sent me the following note so there is no need for me to interpret.  Take it away Chuck:

Well, here I am on the day after Christmas, all the family members that were here the last two days, have gone with no return scheduled for today. Today is my beautiful bride's birthday, I always make sure that I separate the two days, Christmas and her birthday, never combining them! So, I'm always wishing people a Happy Birthday in the Pfennig, I would be worthy of 40 lashes if I failed to say Happy Birthday to Kathy in the Pfennig!

I read in the Pfennig that Chris wrote on Wednesday with much interest in that he said it appeared that the data would indicate that Chairman Bernanke made the right decision to start tapering in January. I've thought long and hard on this announcement since it was made on 12/18, and I've come to a different conclusion than the markets or any other pundit..  Now, let's just for a minute put ourselves in Big Ben's shoes. Knowing that he's leaving, and Janet Yellen will be taking over, don't you think that you would want to leave with the markets thinking that everything is coming up roses for the economy, and so you announce a tapering, knowing all too well that when the crack in the dike finally opens up to all the bad things that the polices decisions of the past 5 years has pent up, and Janet Yellen has to come back to the QE table, You (Big Ben) can say. Well, everything was just hunky dory when I left!

It may not happen for some time, but, the crack in the dike will open up eventually. At least that's how I see it, and I could be wrong, of course, and all this suppression of bond yields, and mortgage rates, zero interest rates, and monetary base building will just lead to seashells and balloons for the economy and us.  One would think that watching the 10-year yield go past 3% yesterday would be a good indication that things are going awry. But then maybe not! I'm sure the Spin Doctors will have their say.

So, there you have it from Lake Woebegone.  I'll be back in the saddle on Monday.

Thanks to Chuck and Happy Birthday to Kathy!  One of the reasons I believed the FOMC would wait until next year to start the taper was that they are taking a risk that the US economy sputters and they are forced into giving the economy another shot of the liquidity drug which it has become addicted to.  But for now investors seem to be convinced QE will end in 2014, and the US economy will remain on a solid recovery path.

The weekly job numbers supported this view as initial claims for state unemployment benefits decreased 42,000 to a seasonally adjusted 338k.  While the holidays make this week's data a bit hard to interpret, the direction is still positive and reflects a recovering jobs picture here in the US.  But a revision adding 1,000 more applications to last week's numbers and a climbing 'continuing claims' number which is nearing 3,000k both indicate just how fragile the labor recovery is.  

Data released in Japan showed the manufacturing sector expanded in December at the fastest clip in more than 7 years and another report showed inflation is ticking higher.  Japanese consumer prices rose the most in five years and regular wages halted 17 straight months of declines in a sign that Abenomics seems to be having the desired effect on the Japanese economy.  But as I mentioned in the opening paragraphs, these positive numbers were not enough to keep currency investors from selling the yen.  Prime Minister Shinzo Abe has set a policy goal of achieving 2 percent inflation by 2015, and yesterday's data showed CPI rose 1.2% in November from a year earlier, roughly in line with forecasts.  This is the fastest pace of increase in consumer prices since October of 2008 and was also accompanied by wage gains.  The Japanese economy has been mired in a deflationary funk for the past two decades, so the price increases are excellent news for Abe and his government.  A weaker yen should also help boost the export driven economy of Japan, something which is not lost on the Japanese leaders who were probably happy to see the yen move above 105.

As I suggested earlier this week, the cash crunch which had taken hold in China seems to have eased after China's central bank injected 29 billion renminbi into the banking system.  The PBOC's open market injection of cash relieved the liquidity squeeze and money market rates are back to more 'normal' levels.  I read a story last night which again pointed to the Government's own actions as the reason for the cash squeeze.  I had written about the Government's attempts to limit 'risky lending' practices in the shadow banking system, but the story pointed out another example of how the government may have contributed to the squeeze.  Typically the Ministry of Finance hands out tax refunds to companies around the end of the year and spends money in the form of subsidies and year end events.  These payments boost liquidity in the interbank markets, and in recent years the amount of this liquidity has reached 1 trillion yen.  But apparently the government delayed these tax refunds and spending, adding to last week's cash crunch.  But the report states that the government is still planning on spending a similar amount as in years past, so the markets have calmed and rates have returned back down to more normal levels. 

In other news out of China, the official Xinhua news agency reported that China's economic growth will come in right at 7.6% this year, just above the government's target of 7.5% and just slightly below last year's figure of 7.7%.  When take into account the size of China's economy, this is incredibly impressive growth, and again confirms that China will continue to be the globe's growth engine in the coming years. Good news for the future of the Chinese renminbi.

Commodities moved higher as Oil popped above $100 and the precious metals finally found a bid.  Gold was up $11 this morning, and Platinum had the biggest daily gain in three months adding almost 2% to its price.  Signs of an improving labor market propelled the metals higher in the thin holiday markets.  These gains also helped the commodity currencies of AUD and NZD both of which have been stuck in a very tight range over the past week.  The Aussie dollar almost broke through .90 and the kiwi moved above .82 in overnight trading. 

Then there was this.  The 'big boss' Frank Trotter mentioned that he had something for the Pfennig as he ran past me on the way to his office yesterday morning.  He knows I am always thankful for any 'Pfennig Pfodder' he can provide, and I figured he had written up some eloquent view on the FOMC taper or China's global domination.  So I was a bit surprised when I opened his email and found the following:

Two pounds of lucite, thirty-two years of partnership.   In 1981 I was a fresh MBA grad assigned, as was the custom at Mark Twain Banks, to EVP and Chief Lending Officer Bob Butler.  At some point during that year as we departed his office for a meeting he mumbled – “well lets go see what Butler is made of.”  I thought it odd to be talking about himself that way until I arrived at the Internal Audit wrap up and met a slender young man named Chuck Butler.  He had been brought in as Operations Director of the Bond Department after the previous tenant had created an operational near disaster.  The audit went brilliantly of course and we all know what Chuck has done over the past 32 years.  Fast forward to this morning and a package is dropped on my desk.  It's a commemorative item, very heavy, lauding Chuck's 15th anniversary at EverBank.  Around our part of the EverBank shop you can't get any more seniority since we started the banking division in 1998.  Despite its mass the recognition seems light for all that Chuck has done for EverBank World Markets and his mission of global diversification these many years.  Here's celebrating 15 years of EverBank, and 32 years of friendship.  Hip-Hip-Hooray.

Chris again.  I think we all share in congratulating Chuck for this big anniversary.  I haven't known Chuck quite as long as Frank, but am happy to be able to call him a friend and co-worker for the past 24 years.  He continues to be an inspiration to all of us.  Congrats Chuck!!

Recap. Data showed the labor markets may be improving here in the US, but Chuck still questions just how long this improvement will last.  With most of Europe and the US on holiday, markets were focused on China and Japan.  Japanese data showed inflation continues to move higher and manufacturing is recovering, but the yen still sold off to 5 year lows.  The cash crunch in China ended as the government injected cash into the banking system.  And commodity prices moved higher helping to boost the commodity currencies.  And in TTWT, Frank Trotter writes a congratulatory paragraph to Chuck Butler on his 15 years at EverBank.

Currencies today 12/27/13. American Style: A$ .8907, kiwi .8178, C$ .9382, euro 1.3836, sterling 1.6530, Swiss $1.1310. European Style: rand 10.407, krone 6.1133, SEK 6.4876, forint 214.74, zloty 2.9972, koruna 19.836, RUB 32.5105, yen 104.97, sing 1.2665, HKD 7.7546, INR 61.998, China 6.105, pesos 13.1264, BRL 2.3552, Dollar Index 79.877, Oil $99.60, 10-year 3.0149%, Silver $19.84, Platinum $1.367.50, Palladium $704.50, and Gold. $1,211.20

That's it for today.  And that is it for me at least for a while.  I will be heading down to Florida to spend next week laying on the beach with my family.  As Chuck mentioned above, he will be back in the saddle on Monday to close out the year for everyone.  I certainly have enjoyed sharing my thoughts with you these past two weeks and appreciate all of the comments you readers have sent.  I hope all of you have a wonderful New Years celebration, and a Fantastic Friday!  I'll talk to you all next year.  Thanks for reading the Pfennig.

Chris Gaffney, CFA
Vice President
EverBank World Markets