In This Issue.
* Still no inflation…
* On hold until the FOMC…
* China and New Zealand agree…
* Possible rate cut in Canada…
And, Now, Today's Pfennig For Your Thoughts!
Waiting on Janet Yellen…
Good day.and welcome to Wednesday morning. I just got a new laptop yesterday that has all of the latest and greatest updates, so I'm still trying to get used to the nuances this morning. Change is usually difficult to deal with, especially when it's something you like and are very comfortable with, but the break in period should be a breeze and I should be back to business as usual shortly. The currency market once again went about its day as usual attitude even though we didn't see any resolution to the events in Crimea.
As was largely expected, the data from yesterday didn't offer up an real surprises. Beginning with February CPI, inflation remained muted and came in right as expected. According to the Labor Dept, headline monthly inflation increased 0.1% for the second month in a row while the annual figure fell to the lowest in four months, which was 1.9%. The CPI figure provides the broadest perspective of the three inflation reports since it includes goods and services. As Chuck has mentioned numerous times, inflation means different things to different people. For example, if I never go to the movie theatre and there is an increase at the box office, I won't necessarily be impacted but my neighbor who may catch a matinee every Sunday would have a different answer.
Either way, the government numbers just never seem to correlate to real life even though they claim otherwise. Whether it's the insurance company raising premiums, the cable company charging more for the same service, or the landscaper assessing a fuel surcharge, I feel like a lot of goods and services now cost more than they did a year ago. Maybe I can buy a pair of jeans on the cheap, but inflation at 1.1% or 1.6% just doesn't look and feel realistic. I recently did some painting, granted it been a couple of years since I last tackled that task, but I was surprised to see how much a gallon of paint set me back.
Anyway, picking through the report a little bit revealed that food costs were responsible for more than half of the rise in consumer prices. In fact, the 0.4% gain was the largest since September 2011 as meat prices increased by the most since April 2010. On the opposite end of the spectrum, energy costs fell 0.5% since gas prices were lower, so there was plenty to offset the spike in food prices. The year over year CPI number fell to 1.1% from 1.6% and was assisted by certain retailers, particularly the apparel industry, cutting prices to attract customers.
The core number, which strips out food and energy, held steady from January as the monthly and annual figures came in at 0.1% and 1.6% respectively. The Fed has a goal of 2%, so some economists see them making reference to inflation when setting monetary policy going forward since several members have expressed concern over the past several months. Some policy makers have made the case that too low inflation is just as bad as inflation running too high, but we'll see if Yellen addresses any of that this afternoon.
Next, we had February housing starts and building permits show some mixed signals. This is one report where I truly buy into the weather excuse since its pretty tough to dig a foundation when the ground is frozen or covered by a blanket of snow. Housing starts slowed a bit to 907k from 909k in January while the experts were calling for 910k. The improvement in building permits overshadowed the groundbreaking figure since its forward looking. Permits filed for future projects rose 7.7% as a surge in mult-family construction offset the drop in single family homes.
Lastly, we saw the Treasury International Capital (TIC) data from January rise less than expected. Before the Fed started buying a lion's share of Treasuries, this used to be an important number since we needed foreign capital to finance our debt but that hasn't been the case in quite a while. Nevertheless, net long term TIC flows came in at $7.3 billion, which was well below the expected result of $40 billion. While this report wasn't included on the data calendar, we had the Business Roundtable's economic outlook, which measures the confidence of CEOs, increase in the first quarter.
Switching gears, the data today is all about the Fed. Sure, we get the weekly mortgage apps and the fourth quarter current account deficit but the markets will remain on hold until we make sure the tapering continues and see what Janet Yellen has to say. The taper of another $10 billion is a given as far as I'm concerned and will be the case going forward until it runs its course. The question whether the Fed removes or adjusts the unemployment rate threshold from its official statement has the market captive at this point.
For the most part, it was another range bound trading day as the dollar index finished where it started and several currencies did post some positive returns. There was a sigh of relief yesterday when Russian president Vladimir Putin said that he has no intention of seizing other parts of Ukraine or otherwise. Initially, the thought Russia might try to reassemble the old USSR of sorts had been present but that has since been all but flushed out, especially after what Putin said in his speech. With that said, he didn't miss an opportunity to take a dig at the west when he and other leaders were signing the treaty to make Crimea a part of Russia.
The New Zealand dollar gained over 0.7% yesterday and posted the best returns against the US dollar after market anxiety eased a bit. We didn't see any data pushing the currency higher, but China and New Zealand will now exchange currency directly with each other to help reduce transaction costs and make commerce more efficient. The list keeps getting longer of those that have these direct trading agreements with China and will just keep growing and growing. Chinese government officials indicated their desire to carry on with financial market reform, so this latest agreement along with the larger trade band clearly indicates they are taking the necessary steps to internationalize the currency.
The Aussie followed closely behind after the minutes of the RBA (Reserve Bank of Australia) revealed policy makers see more signs that record low interest rates are working. They went on to say the most prudent course was like to be a period of stability in interest rates and that timely indicators were consistent with some improvement in economic conditions over recent months. While they still made reference to the fact the Aussie remains high according to historical standards, it looks like those who switched gears from more rate cut calls to that being a thing of the past seem justified at this point. As a result, the Aussie was trading well into the .91 handle as I left the office last night.
The Canadian dollar took another hit and finished up at the bottom of the pile by losing nearly .8% yesterday after some not so flattering comments from the central bank governor. The head of Bank of Canada, Stephen Poloz, came off as sounding more dovish than previous by saying he can't rule out an interest rate cut if the economy gets worse. He also indicated first quarter GDP will probably come in lower than previously expected. I think markets ignored the fact that it's a possibility when evaluating the interest rate environment and were trying to price in an interest rate cut. At the same time, January factory sales jumped to the highest level in nearly a year in January so its not total defeat in Canada right now.
As I came in this morning, the dollar is marginally higher against most currencies as we get closer to the Fed meeting. The pound sterling is the only currency so far that's in positive territory after the Finance Minister increased growth forecasts and the unemployment rate held steady at 7.2%. Most economists see a continuation of pro-growth measures so that has also given some support. Look for the market to remain range bound leading up the Fed meeting since there are some question marks as to their forward guidance.
For What It's Worth.According to a survey, Americans are more optimistic about having enough money for a comfortable retirement, despite making no progress toward increasing savings, according to a survey by the Employee Benefit Research Institute. Workers very confident about a comfortable retirement increased from 13% last year to 18% this year. Employees or spouses saving for retirement declined from 66% last year to 64% this year, the survey found. This makes no sense to me, but they didn't ask for my opinion.
To recap.No surprises with inflation as the government keeps telling us that we have no inflation. We both know that here in the real world, inflation is all around us. The housing numbers came in as expected with building permits showing a slight increase while the TIC data missed the mark. Its all about the Fed today as we make sure tapering continues and we get to see if the Fed changes their forward guidance approach. Putin said he doesn't have any intention of trying to gain control of other nations, so risk aversion faded. China and New Zealand enter into a direct currency exchange agreement while Australia indicates the economy is progressing. The Canadian central bank did the opposite and warned of slower growth and a possible rate cut.
Currencies today 3/19/14. American Style: A$ .9115, kiwi .8615, C$ .8939, euro 1.3921, sterling 1.6638, Swiss $1.1443. European Style: rand 10.6880, krone 5.9721, SEK 6.3419, forint 222.93, zloty 3.0167, koruna 19.709, RUB 36.0865, yen 101.50, sing 1.2652, HKD 7.7637, INR 60.95, China 6.1351, pesos 13.1577, BRL 2.3315, Dollar Index 79.442, Oil $99.55, 10-year 2.67%, Silver $20.73, Platinum $1.456.50, Palladium $769.50, and Gold. $1,345.95.
That's it for today.Well, since you're reading this, I didn't win the Mega Millions jackpot last night which means you get me for another couple of days. Its already Hump Day so we're cruising right on through the week. I have to often stop and think about which day it is whenever I write since I'm constantly living in yesterday, today, and tomorrow so it can take me a minute, especially when I wake up even earlier than normal. I have a couple of interviews to do this afternoon, so I need to not only get ready for them but also to get the day started. Until tomorrow, Have a Great Day!
Assistant Vice President
EverBank World Markets