In This Issue.
* Mixed data results
* Other central bank meetings
* Kiwi takes another shot
* Japanese tax
And, Now, Today's Pfennig For Your Thoughts!
Waiting for the Fed…
Good day.and welcome to Tuesday morning. As I mentioned yesterday, it started off as a quiet day and there wasn't much deviation from that right on through the closing bell. The news headlines were a bit on the low side since I think most pundits are keeping their pencils sharp for the upcoming jobs numbers and the comments following the FOMC meeting, so I'm sure that helped to keep most assets in a tight range all day long. Well, there's no need to keep beating around the bush, so let's get to it.
Beginning with yesterday's data, it wasn't necessarily bad news but it wasn't considered good news either. The pending home sales figure for June dropped 0.4% after climbing to nearly a 6 ½ year high back in May. It looks like the roughly 1% rise in mortgage rates in that two month span was enough to make some buyers think twice about signing a contract to buy a previously owned home. This report is generally considered a leading indicator by many economists since it tracks contract signings, whereas the existing home sales figures from last week will report when the contract actually closes.
Along the same lines, the Mortgage Bankers Association is reporting that loan applications for purchase transactions are down about 10% since the beginning of May, so that would coincide with the pending home report. I'm also seeing more sentiment toward May being somewhat of an anomaly for housing. More headlines are talking about the fact that higher rates on the horizon in May forced the hand for a good number of buyers on the fence so the May numbers may have been inflated a bit. For example, the higher interest rate environment has added about $100 to the mortgage payment of a $200k loan amount compared to when they were at the bottom of the barrel.
With that said, housing is still progressing but I'm still interested to see what the July numbers will have in store for us. The other report yesterday was the Dallas area manufacturing report for July, which did show a continued increase but at a slower pace. The July reading of 4.4 was lower than both the estimated figure of 7.5 as well as last month's final number of 6.5. This was the last of the regional manufacturing reports before the national ISM index on Thursday, but they all showed continued expansion via positive numbers except for the Richmond area.
Its going to be another tame day in the data department, but that all changes tomorrow when the flood gates get pushed wide open. The two reports today are foregone conclusions as far as I'm concerned. We have the S&P/Case Shiller home price index as well as the national consumer confidence index for July. I touched on similar reports last week, so I'll save my commentary for tomorrow. The markets, at this point, are merely holding their breath until tomorrow anyway, but I can't think of a day in the recent past that has so much riding on it.
Since I've pretty much covered all of the US data, let's take a look at the currency market. As I indicated up top, neither the dollar nor the other currencies show much initiative one way or the other, although the dollar index did finish the day slightly higher. It's still trading near it's five week low, but it looks like a lot of traders are moving more toward a neutral stance ahead of the late week data. Depending on what pans out, we could see things take off and so many don't want to be overly committed in one direction. As a result, position squaring has given the dollar a platform for the time being.
Speaking of central bank decisions, the BOE and ECB will also hold policy meetings this week. We'll see the Bank of England's policy meeting and some initial accompanying statements on Thursday, although the quarterly report usually goes into more detail. While data reports in the UK have shown some life as of late, the new BOE governor Mark Carney has already expressed his willingness to maintain or even increase stimulus measures. If he hints around that policy could become even more accommodating, then I would think that weighs on the pound but it might prove difficult to swim against the current created by the USD flow in whatever direction that might be.
The ECB will also announce on Thursday but isn't expected to stray away from its current stance that interest rates will remain at present or lower levels for an extended period of time, which is currently 0.5%. The interest rate isn't really the factor but instead, it's what Draghi says in the way of maintaining support for the economies. I found this next bit interesting. A couple ECB board members said the ECB may explore publishing minutes of their meetings. Currently, Draghi will give his statement but minutes that give more insight, such as who voted for what policy and why, aren't released. I don't know if this would happen anytime soon, but I do like the idea of moving in that direction.
There were only a handful of currencies that finished more than 0.25% on either side of the plus/minus column, which all happened to be losses. The Mexican peso, New Zealand dollar, Aussie, and Brazilian real all finished the day with between 0.50% and 0.75% losses. There wasn't any data in Mexico pushing the currency lower so it was just a matter of taper talk at work. Any pickup in taper sentiment or any specific timetable could weigh on the currency since a reduction of stimulus could negatively impact the near term growth picture.
The New Zealand dollar was kicked once again by a government official as Prime Minister John Key offered his thoughts yesterday. He said that we are likely to see a depreciation of the New Zealand dollar against the US dollar and that's welcomed because the government's view is that the foreign exchange rate is still overvalued. This is the same old song and dance that we've seen time and again, so I continue to question why the market even entertains this viewpoint. The central bank last week said that the next direction for interest rates are up, even though it might not be until well into 2014, but what do you expect for the currency when something like that happens. Again, you can't have the best of both worlds.
On the flip side, the Japanese yen took the top spot with a marginal gain of 0.25% yesterday. Comments from the central bank governor regarding a planned sales tax increase helped to lift the currency a bit. Governor Kuroda said a two step sales tax increase won't cause major damage to growth in Japan's economy and they consider a downturn in overseas economies to be the largest risk factor to the outlook for economic activity and prices. The sales tax is set to rise 8% in April 2014 and then to 10% in 2015, but the vote of confidence that the economy could sustain itself after such action is what the market wanted to hear.
As I came in this morning, most of the currencies are in a holding pattern but we do have a handful of currencies that are beginning the day in the dumps. The Indian rupee and Australian dollar are both down over 1% so far this morning as a result of their respective central banks. It looks as though the RBA is out making the case once again for a rate cut and the Indian central bank decided to keep rates on hold. Other than that, not much to speak of heading into Tuesday morning.
For What It's Worth.I know Chris touched on this Friday, but I found this from our friends at the 5 Minute Forecast, so enjoy. “I've been through all this before,” says EverBank World Markets chief Chuck Butler – who's hearing a chorus of voices saying King Dollar is back. We pause here to note that while Chuck is fond of citing long lyrics in his Daily Pfennig dispatches, he seldom does so in his talks with investors. But yesterday, he led the crowd in a brief singalong of Trini Lopez's “Lemon Tree.” (Don't fret if you order the recordings; we're pleased to report Chuck sings in tune!)
“Fundamentals used to drive currency values,” he said – and one day they will again. “But right now,” he concedes, “it's all about sentiment.” Chuck called the long-term decline of the dollar relative to other fiat currencies in 2001. The trend has paused – the dollar index is now at 81.6, after touching a low near 72 in mid-2011 – but he's confident it will resume.
“The dollar's fundamentals were not good then, are not good now and won't be good in the future,” he says, “until there's the political will to deal with the national debt.” Which, judging by the DHS headquarters, there's not. Bottom line, says Chuck: Foreign currencies remain an attractive way to preserve your declining purchasing power alongside precious metals.
To recap.US economic data started off slow yesterday as pending home sales fell but remained near recent highs while the Dallas area manufacturers report gave the same outcome by still increasing but not as much as expected. The flood gates open tomorrow, so get that seat belt ready. The markets are pretty much focused on the Fed, but the BOE and ECB also meet this week. The dollar finished the day up slightly while the New Zealand dollar fell as a result of getting dissed by the government once again. The Japanese yen was higher on thoughts the economy can withstand a planned rate hike.
Currencies today 7/30/13. American Style: A$ .9082, kiwi .7991, C$ .9735, euro 1.3276, sterling 1.5310, Swiss $1.0758, . European Style: rand 9.8720, krone 5.9339, SEK 6.5450, forint 225.37, zloty 3.1821, koruna 19.4647, RUB 32.9267, yen 97.88, sing 1.2701, HKD 7.7554, INR 60.4850, China 6.1770, pesos 12.7432, BRL 2.2684, Dollar Index 81.71, Oil $103.97, 10-year 2.59%, Silver $19.69, Platinum $1,436.50, Palladium $739.60, and Gold. $1,323.75
That's it for today.I was dodging some rain drops on the way into work this morning. It's been so long since I had to use the windshield wipers that it took me a minute to remember which button made them work. I was outside for a bit last night and I could definitely tell the days are getting shorter, but we still have quite a while before the days are numbered for daylight savings. It turned out to be a busy one yesterday and I would expect that trend to continue throughout the week. It's that time where I need to get caught up from yesterday and get this out the door. Until tomorrow, Have a Great Day!
Assistant Vice President
EverBank World Markets