In This Issue…
* Dollar rises again
* Today's data
* Swedish inflation slows
* The 10 year
And, Now, Today's Pfennig For Your Thoughts!
Stop me if you've heard this one before…
Good day…and welcome not only to Wednesday morning but also the half way point for the month of May. It was a different day but the results were the same as the dollar took liberties with the other currencies once again and most traded within a fairly tight range. It's been the same old story for the past several days, so I'm starting to feel like a broken record, but it's what we have to deal with right now.
I guess we'll come right out of the gates with US economic data. Well, the first of the three inflation reports showed that imported prices were down in April as lower fuel costs lead the charge. The monthly figure matched expectations as it came in at -0.5% and was lower than the upward revised March figure of -0.2%. With the way inflation is accounted for, there wasn't much hoopla surrounding the report, but lower oil and commodity prices were influenced by slower demand globally. The annual figure came in higher than expected at -2.6% but lower than the previous month. Again, this report didn't get much air time.
As I mentioned yesterday, it was a sparse day for US data, so let's take a look at the only other report to examine. Our friends over at the 5 Min Forecast had this to say about the April Small Business gauge…”The monthly optimism index put out by the National Federation of Independent Business ticked up to 92.1 in April. That's slightly better than the average since the economic recovery began in June 2009, but still well below the index's long term average.
“Nothing in the NFIB data” says the group's chief economist Bill Dunkelberg, “suggests that the small business half of the economy is expanding other than by an amount driven by population growth and associated new business starts now in excess of terminations.” But an interesting trend is emerging in the responses to the survey question, “What's your single most important problem?”. A year ago, there was essentially a three way tie between poor sales, taxes, and government regulations. Taxes are now the clear leader, with 23% of respondents saying that's their biggest problem. Regulation clocks in at 21%, while poor sales are down to 16%.
If you haven't had a chance to take a look at the 5, check it out.
If take a look at what's on the docket for today, we'll see that it's pretty loaded down. We start off with a couple second tier data reports with last week's mortgage apps and the Empire manufacturing report. Of the two, the New York manufacturing results actually holds some weight as will the Philly Fed report due tomorrow and represents May data thus far. Both of them are expected to show some improvement and will help to give us some kind of indication where the national figure may end up in a couple of weeks. With that said, there have been plenty of times when the regional reports don't exactly correlate to the national ISM number.
Anyway, let's move on to another inflation report and talk about the April Producer Price Index, also known as wholesale inflation. The experts are calling for these figures to match up with what we saw in March, which doesn't come as a surprise. The wholesale cost of energy last month saw the biggest decline since Feb 2010, so the continued pressure on commodities would suggest this trend continues into April. Next, we'll see the March tic flows. As we've mentioned a few times in the past, this was an important report in the pre-QE days but lost relevance since the Fed has become the largest buyer of Treasuries.
In other words, we did need foreign demand to finance our debt habit but that has since become an obsolete scenario. Regardless, the net long term tic flows are expected to rebound from the last printing of -$17.8 billion and to come in around $35 billion, which is well below what is needed to finance our deficits. Next, we get April's factory production, which is expected to show a slight gain of 0.1%, but the measure of total industrial production, which includes manufacturing, mining, and utilities are forecast to fall to -0.2%. The experts are saying capacity utilization should fall a bit and then homebuilder confidence in May should improve slightly.
Looking at the schedule for tomorrow morning, it's going to be another busy day in the data department and then cool off as we head into Friday. I think I've gone on long enough about data, so let's take a look at the currency market. As I mentioned at the beginning, there really wasn't much to talk about other than the dollar holding the title king of the hill for yet another day. The only currencies that began the day in a hole were the Swedish krona and the South African rand, but as we closed up shop at the end of the day, all of the major currencies saw negative returns with the Swiss franc and SEK bringing up the rear.
The nail in the coffin for the Swedish krona yesterday came in the way of slower than expected April consumer prices. With low inflation pressures and a currency that has been and continues to be on the strong side, inflation is expected to remain below target well into next year. As a result, traders are starting to price in a rate cut during their next meeting in July even though last month the central bank signaled that its likely to keep thing on hold at 1% through mid 2014. I'm thinking Riksbank will want to see more results like this before making its final decision since a good part of the lower number came from the import side instead of domestic economy.
The rand was again troubled by a mining strike since this industry accounts for about half of the nation's export market. As a result, the currency fell to a 3 week low as investors grow concerned this could lead to the same type of violence and unrest that we saw last year. The strike is centered around a Lonmin Plc mine, which is the 3rd largest platinum producer. A direct by product of this strike was seen in the price of platinum as the metal pulled away from other commodities and gained just under 1.5% on the day.
The euro actually finished near the top, albeit at a loss, but it was in positive territory until German investor confidence rose less in May than originally forecast. The index, as reported by the ZEW Center for European Economic Research, slightly increased to 36.4 from 36.3 in April, but the experts were looking for a number closer to 40. The German economy is still hanging on, but it's not getting much help from the rest of Europe. We also saw Spanish core inflation in April drop to an 8 month low, so outperformance by the US economy was again brought to the forefront.
Speaking of getting some print, have you noticed where the 10 year has been trading. I took a glance before I went home last night and I had to take a discount double check as the yield shot up to 1.97%. Just to give some perspective, it was 1.63% on May 2nd, so that's over a 20% rise in just 8 days. Speculation that the Fed may soon indicate a tapering back of QE measures have been becoming more and more. If this type of move is based merely on a maybe, what's going to happen when/if they do actually set the stage. We've seen this type of move before so I'm sure policy makers are hoping this becomes old news and forgotten about since a sharp rise in yields is not what they want to see.
Anyway, there wasn't much else to talk about as those crowing about how well things are going for the US economy has gotten louder with each rise in the stock market. Our neighbor to the north, Canada, wasn't able to hold on as the fall in oil prices yesterday pulled it from the US coattails. According to most economists, economic growth in Canada is expected to end the year at 1.6%, compared to the US estimate of 2%.
As I came in this morning, the euro is under some pressure as the German economy grew less than expected. First quarter GDP came in at 0.1% instead of the initial forecast of 0.3%, while eurozone GDP contracted 0.2% and was lower than the estimates of -0.1%. The pound sterling is hanging on to an ever so slight gain this morning after the Bank of England increased its growth forecast and lowered their inflation expectation. BOE governor King said that of most significance today is that there is a welcome change in the economic outlook as this hasn't been a typical recession so it won't be a typical recovery.
Then there was this…According to Reuters, Fitch Ratings upgraded Greece's sovereign credit rating by citing its progress in reining in its budget deficit and the diminishing risk of leaving the eurozone. “The price has been high in terms of lost output and rising unemployment and the capacity for recovery is still in doubt,” Fitch said. “Nonetheless, sovereign debt relief and an easing of fiscal targets have lifted central bank measures of economic sentiment to a three year high and the risk of eurozone exit has receded.”
To recap…We didn't really see much in the way of a surprise from US economic data yesterday as imported inflation remained low and small business confidence moved upward. It's going to be a busy couple of days for US data, but today, we get New York area manufacturing, wholesale inflation, the tic flows, capacity utilization, and April factory output. The dollar turned in another day on top as speculation mounts that the Fed could soon indicate a tapering of QE. Swedish inflation slowed, which potentially opens the door for a rate cut, and South African mining strikes weigh on the rand. German investor confidence and GDP increased, but not as much as expected, and the US 10 year yields have shot upward.
Currencies today 5/15/13. American Style: A$ $.9863, kiwi .8195, C$ .9798, euro 1.2863, sterling 1.5214, Swiss $1.0275, . European Style: rand 9.2840, krone 5.8593, SEK 6.6790, forint 226.75, zloty 3.2464, koruna 20.2025, RUB 31.5155, yen 102.72, sing 1.2472, HKD 7.7618, INR 54.8675, China 6.2070, pesos 12.1890, BRL 2.0208, Dollar Index 83.88, Oil $93.53, 10-year 1.97%, Silver $22.90, and Gold. $1,409.50
That's it for today…Chris should be back in the office today and Chuck is going to be back in the Pfennig saddle tomorrow morning, so this will do it for me until the next call to the bullpen is made. I woke up this morning feeling like and hoping that it was Friday, but I still have a couple more days before I can make that claim. As I was driving in this morning and in between this mortgage guy and that mortgage guy telling me that I need to refinance, I heard on the radio the Cards beat up on the Mets again and the LA Kings won their first game in the second round of the playoffs. Well, I got behind on a lot of stuff yesterday, so it's time to play catch up. So, until next time…Have Great Day!
Assistant Vice President
EverBank World Markets