We started the day pretty flat, as the euro (EUR) traded at 1.32 and gold was in a holding pattern at $1,643, neither of which showed any direction. All of the other currencies were either trading at break-even or very close, so the markets were obviously waiting for something. The first bit of market-moving material was staring us down right out of the gate yesterday morning, which was the durable goods figure from March, and it wasn’t pretty.

The headline durable goods number decreased 4.2%, which is the most since January 2009, as demand for transportation equipment, namely aircraft, fell quite a bit from February’s robust numbers.

Orders for aircraft, which can be volatile from month to month, do act as a gauge for the broad domestic and global economy, but I think the auto portion of transportation is more telling of the domestic and local economies. Bookings for cars and associated parts increased only 0.1%, which was quite lower than last month’s 2% rise, but they at least held steady.

Still, it was a mixed bag at best. The durable goods minus transportation fell 1.1% from the revised 1.9% gain in February. The piece of the puzzle and the spin that had economists talking was the goods shipped portion, which is one of the components in calculating GDP. The gauge of shipped goods actually increased 2.6% and has some calling for a higher than expected first-quarter GDP reading. We won’t have to wait long, as the initial reading is due tomorrow morning.

The markets all but overlooked the fall in durable goods, as nothing really moved and the currencies were still sitting in the same place before the report was released. While it was a light day in the data department as far as the number of reports, the focus of the day fell squarely on the shoulders of the Fed. That’s right, the Fed rate meeting was yesterday, so everyone was sitting on seat’s edge just waiting to see what would happen.

Of course, it wasn’t the rate decision itself that held the market hostage, but instead, the sound bites that would follow garnered all of the attention. The rate decision was announced at 11:30 Central time, so I looked up at the currency screens shortly thereafter and saw that gold was down about $15 and that silver was trying to stay above $30. I wasn’t expecting any earth-changing developments, so it took me for surprise.

I saw rates remained on hold, so it wasn’t that. As it turned out, there was a knee-jerk reaction immediately following the meeting to the fact that unemployment forecasts were reduced and no additional stimulus measures were announced or planned. In fact, the unemployment rate estimate was reduced down to a range of 7.8-8.0% by year-end from January’s projection of 8.2-8.5%. Oddly enough, the currency market didn’t have much of a reaction and seemed unfazed by the initial release.

About an hour later, it was Bernanke’s turn on stage, as he spoke at the proceeding press conference and reversed previous thoughts that QE3 was all but out of the picture. I think the big headline from Bernanke was his announcement that the Fed is prepared to do more, if needed, to make sure the recovery continues and that inflation stays close to target. In other words, additional stimulus is still on the table, and the recent strides forward aren’t enough to rule out future action.

For the most part, everything he explained yesterday didn’t change much from the past several meetings, as the European crisis remains a concern, economic growth is expected to moderately continue in the coming quarters and unemployment isn’t falling as fast as they would like. As quickly as gold lost ground prior to the press conference, it quickly climbed back to where it began the day, since QE3 wasn’t totally removed as an option after all.

The last notable news bits from the meeting were a couple more revisions to growth and inflation. We did see an upward revision to GDP this year, from a range of 2.2-2.7% to 2.4-2.9%, so it looks as if the Fed is hopeful jobs growth will continue moving in the right direction. They also increased the inflation outlook to 1.9-2.0% and acknowledged it has picked up due to higher oil and gas prices.

They still maintain gas prices will affect inflation only temporarily, but I’m not sure how that would be the case if they expect continued expansion in the U.S. economy. Speaking of oil, we did see it rise back above $104 after the higher growth outlook, so U.S. demand still remains in the driver’s seat when it comes to price action. I think I’ve gone on long enough with the Fed meeting, so let’s take a look and see what reports are due today.

We’ll see the usual Thursday reports on weekly initial jobless claims and the continuing claims number, both of which are supposed to show slight improvement from last week. The initial claims are expected to come in at 375,000, but with the constant revisions, it’s tough to maintain a firm comparison point. With that said, we’re still far from a range needed to firmly put a dent in what I would consider the most telling and important economic figure. The March jobs numbers of 120,000 sure doesn’t go far in my book to justify the Fed’s rosier employment outlook.

We will also see the results of pending home sales from March, another area of concern by the Fed. Housing has been flailing around with no sense of direction as prices continue falling, albeit at a much-slower pace than in the past, but purchases have been slow to rise as buyers try to guess the market bottom. The estimates I’ve seen aren’t much to write about, but maybe that summerlike weather in March coaxed more buyers into signing contracts.

Other than that, we get a gauge of consumer confidence and a regional manufacturing report, so it looks as if today will be a balancing act between that ever-present lake of lava that is employment and housing. Depending how those reports turn out, we could see the market remain in a holding pattern until tomorrow, since we get some big reports. We’ll see the initial printing of first-quarter GDP, personal consumption and inflation, so this trio certainly has enough clout to hold the market captive until then.

As I mentioned earlier, the currencies remained in a very tight range, so there isn’t much to talk about on the currency front today. In fact, yesterday turned out to be one of the narrower trading days that we’ve seen lately, as the euro floated within a 0.5% window between the high and low of the day. Usually, we’ll see at least a full-cent deviation throughout the course of a given day, but that wasn’t the case.

Since the Fed left the door open for QE3 if needed, the dollar did finish down on the day, but by only a small margin. The top currencies were all commodity-based, as the rand (CHF) broke away from the pack with a 0.7% gain.

The rest of the currencies ranged from break-even to slight gains, as the Aussie (AUD) and Canadian dollars (CAD) took the silver and bronze medals, respectively. The only sizable moves came from gold and silver, when they fell 0.7% and 2.25% immediately following the rate announcement, but they did regain all lost ground by the time I left the office last night. The rise in equities kept most currencies in positive territories to finish the day.

I did see where S&P lowered India’s sovereign credit outlook to negative from stable, citing slower economic and investment growth, along with a wider current account deficit as the rationale.

While the actual rating was not downgraded, they did say if steps to reduce structural fiscal deficits and improvement in the investment climate are taken, they will re-evaluate. The Indian finance minister quickly stepped in to say that reforms are on track and economic growth should remain intact, but only time will tell. Surprisingly enough, the rupee (INR) actually finished slightly higher on the day.

Other than that, the only other development I saw before I called it a day was in New Zealand. The central bank met late in the afternoon, our time, and kept rates on hold as expected. The statement released after the meeting said the economy is still growing at a slower pace and inflation isn’t presenting any problems, so rates will probably be on hold for quite a while. The central bank governor, who is known for talking the currency down, went on the say that if the exchange rate remains strong and isn’t justified by stronger data, they might reassess the rate outlook. In other words, nothing new here, since he frequently expresses concern of a strong currency.

As I came in this morning, everything is trading in yesterday’s clothes, and there is an ever-so-slight bias to sell the dollar so far. There aren’t many headlines to speak of, but we did see a report on European economic confidence fall more than expected, as more austerity and economic uncertainty loom on the horizon. Even though the U.K. economy slipped back into recession following yesterday’s negative GDP print, we saw a report of investor sentiment rise this morning.

Then there was this… If Congress and President Barack Obama can’t agree on extending some of the tax breaks set to expire at year-end, the U.S. economy will be harmed so greatly that there is nothing the Federal Reserve can do to compensate for it, Chairman Ben Bernanke said.

“If no action were to be taken by the fiscal authorities, the size of the fiscal cliff is such that there’s absolutely no chance that the Federal Reserve could or would have any ability to offset that effect on the economy,” he said. I saw this article in Bloomberg this morning, so hopefully this is yet another wake-up call to get things under control.

To recap…We started the day with the worst durable goods print since January 2009, but the markets were focused on the Fed rate meeting. They did keep rates on hold, as we expected, but an increased economic growth forecast initially sent some investors calling for no more QE3. Once Bernanke held the press conference, he said additional stimulus is an option if the economy stumbles. Gold and silver went for a ride around the block, but the currencies stayed home. S&P lowered India’s outlook, and New Zealand kept rates on hold.

Mike Meyer
for The Daily Reckoning

QE3 Still an Option originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

The dollar-buying frenzy did subside, but we didn’t see a total reversal that would offset the damage from Tuesday and Wednesday. I guess you could say the U.S. dollar party got a warning for being a little too loud, but it hasn’t gotten broken up just yet. I think the novelty of the Fed statements have started to wear away, and investors are looking for more confirmation that QE3 really has been relegated back to the basement and additional data before they go much further. That’s not to say we could see some safe-haven buying here and there, but I think it would be a while before the Fed could officially rule out additional stimulus measures.

With that being said, we could see more emphasis placed on the U.S. economic reports over the next couple of months as investors try and gauge where things actually stand, with the caveat that problems in Europe don’t flare up. While data have seen improvement in certain areas, there hasn’t been enough, in my opinion, to demonstrate the economy has the traction to carry on without the safety net of government stimulus.

We did have several reports to talk about from yesterday morning, so let’s jump right in. Starting with the producer price index — or wholesale inflation — the annualized figure did fall, as expected, in February to 3.3%, from the previous reading of 4.1%, and marked the slowest year-over-year gain since 2010. We saw the same thing with the cost of imported goods as the annual figure dropped lower; however, the monthly figure for both PPI and the import index gave us much-higher readings than the previous reports. In fact, wholesale prices rose 0.4% from January and reflected the highest increase in five months.

The Labor Department prints three monthly inflation reports, two of which we’ve already seen, so today we see the final gauge of inflation for February through the consumer price index. The CPI numbers are expected to fall in line with the other reports by showing no year-over-year inflation but are expected to show a monthly increase. The headline CPI number is expected to rise 0.4% in February, but core inflation is forecast to remain flat. The only problem with the core calculation is that both food and energy are taken out of the equation, which happens to be the two most frequently used consumer products.

Although the Fed stated oil will push up inflation temporarily, it’ll be interesting to see just how temporary this scenario plays out, especially if demand really does pick up. Moving over to the employment side of things, the jobs environment demonstrated another week of a step in the right direction, as initial jobless claims fell to 351,000, the lowest level in four years, from last week’s upward revision to 365,000. The four-week moving average, which is typically a less-volatile figure, held firm at just under 356,000. The number of people collecting unemployment benefits, which doesn’t include extended benefits, decreased to 3.34 million.

With employment continuing to head in the right direction, the Bloomberg Consumer Comfort report yielded the highest level since March 2008. The equity markets have been on the rise over the past several months, so seeing positive returns on those portfolio statements also goes a long way in making someone feel a little better. The University of Michigan confidence report will be released this morning, so I’m sure we’ll see another pickup in the happy factor.

The TIC flows, which measure international demand for longer-term U.S. financial instruments, surged in January to $101 billion. The markets used to pay attention and actually consider this a must-see report, but the Fed pretty much threw water all over it when they kicked the printing presses into high gear. Anyway, thoughts of whether Greece would default or get another bailout spurred the safe-haven movement into U.S. Treasuries, so that pretty much explains the rise. Other than that, nothing new, as China and Japan still own over $2 trillion worth of Treasuries combined.

Rounding out the remaining data reports from yesterday, the regional manufacturing figures both increased to multimonth highs and points to a rise in the national report, the ISM, which is due on April 2. The other reports that I haven’t touched on include industrial production and capacity utilization. If the secondary manufacturing reports and other indications hold true, we should see improvement in both figures. Looking ahead to next week, it’s shaping up to be a fairly slow week in the data department, as it will pretty much be dominated by February housing numbers.

As I mentioned earlier, the U.S. dollar lost ground yesterday, even though we had some positive economic numbers that could have kept the rally going. It looks like investors were willing to again venture out into the riskier asset arena, as equities rose along with the major currencies. The trend that’s been in place for quite some time, which consists of positive U.S. or global economic news promoting a weaker dollar, was back in the ring. I’m sure some of the cheaper prices, namely in gold and silver, enticed investors to get off the couch.

The New Zealand dollar (NZD) topped the charts by turning in a nearly 1.25% performance. An increase in February manufacturing to almost a two-year high gave the kiwi an extra shot and gave investors a reason to pick up the currency at a seven-week low. We’re starting to see better economic data coming out of New Zealand, but the much-larger economy from Australia often casts a shadow they can’t escape.

The Swiss franc (CHF) remained near the top of the currency returns leader board yesterday by gaining just over 1%. The SNB, Swiss National Bank, met yesterday and kept interest rates on hold, as expected. There wasn’t any earth-shattering news surrounding the meeting, but they did express a more upbeat attitude regarding the economy. The SNB raised its growth forecast for this year by predicting GDP will rise 0.8%, instead of the previous estimate of 0.5%, and pushed away the prospects of a recession.

The SNB also reiterated they will defend the 1.20 per euro ceiling that was established in September with the utmost determination. They don’t want to appear overly optimistic and attract too much attention, so continuing to fly under the radar is where policymakers would like to stay. While fourth-quarter GDP and investor confidence has risen recently, the central bank is still concerned about deflation derailing the recent economic stabilization.

One of the statements from the SNB explained that while the high value of the franc continues to present enormous challenges to the economy, the minimum exchange rate is having an impact. They went on to say the ceiling has reduced the extreme exchange rate volatility and has given business leaders a better basis for planning. In the end, any currency appreciation will be met with government intervention and economic policy changes look to be a long ways down the road, so there’s no reason to spend much time here in the foreseeable future.

The Norwegian krone (NOK), interestingly enough, finished in the top five after its dismal performance on Wednesday. They did report a record trade surplus in February as rising oil prices boosted exports, but it looks as though speculators were trying to crack the code as the government’s pain threshold on currency gains. The central bank indicated after the rate cut on Wednesday they intend on keeping rates on hold for the rest of the year unless justified otherwise.

Policymakers indicated on Wednesday they don’t defend a specific krone level and that interest rate policy will only respond to the extent that the exchange rate affects the inflation outlook. Most of the currencies had solid returns yesterday anyway, so I’m not so sure that speculators trying to break the central bank’s resolve was the prime player. Nonetheless, these were some of the news headlines floating around yesterday and had some investors thinking about another Swiss type of situation.

The Canadian dollar (CAD) didn’t have the same returns as New Zealand or Norway, but it did remain in positive territory and got close to breaking back into the $1.01 handle. On the data side of the table, existing home sales in February rose 1.4% and the average home price climbed 2%. We also saw a Canadian consumer confidence poll rise to its highest level in a year.

The higher oil prices and positive U.S. data are starting to feed through to the Canadian economy, not to mention two fundamental pillars of strength, which include a commodity-based economy and a healthy fiscal position. As I was sifting through the news last night, I saw a story that traders now have over a 50% chance that we could see a rate hike by year-end. That scenario might be a stretch given the Bank of Canada likes to follow in the Fed’s footsteps when it comes to rate decisions, but just seeing that thought kicked around says a lot about the Canadian economy.

Gold and silver saw some renewed life yesterday as they both traded up around 1% throughout the day. Since they have gotten beat up this week, it looks like the buying-on-dips crowd were stirring around and scooped up the metals at cheaper prices. I also saw where physical gold demand from India yesterday was at the highest level since January of last year, so I’m sure that helped as well.

As I came in this morning, the overnight markets didn’t really give us any solid direction, as everything traded in a fairly tight range. If anything, the dollar has strengthened this morning, but nothing to write home about. There weren’t any global economic reports that held any market-moving weight, but we did see a measure of European exports rise for a third month in January. If we look back to December and January, the euro was under some selling pressure from the Greek-related anxieties, so I’m sure that went a long way toward helping exporters with a cheaper euro.

Then, evidence of a global economic recovery is real, but the level of optimism it has created deserves skepticism, according to The Economist. Growth is likely to be slower this year than last. In the U.S., stimulus should focus on higher wages, affordable housing, increased health care spending and pensions. “If policymakers get it wrong again, the recovery could yet turn to dust,” the magazine notes.

To recap: The dollar couldn’t keep the party going, as most of the major currencies appreciated throughout the day. Consumer confidence displayed another rise as the labor market continues to show life. We saw another drop in the initial jobless claims figure, and regional manufacturing reports continue to show improvement. The New Zealand dollar rose against the U.S. dollar as domestic manufacturing increased to a two-year high and the SNB kept rates on hold while reiterating their commitment to the currency ceiling. The Norwegian krone appreciated despite Wednesday’s rate cut, and the odds of a rate hike in Canada increased to over 50%.

Mike Meyer
for The Daily Reckoning

US Employment Figures Continue to Improve originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

Saying goodbye to my winter attire isn’t the wisest decision, but it’s definitely tempting. It appears the markets were looking for any type of excuse to jump on the U.S. bandwagon and see how far it would take them. We didn’t see any remnants of the choppy trading pattern from Tuesday, so it was an all-out rout by the dollar from the time we fired up the currency screens in the morning until we left for the evening. Did we have any reports that would have sent the dollar into orbit yesterday? No, not really. The party that began yesterday after the Fed meeting was still going full force and was still celebrating their upbeat outlook.

I’m always up for a good party, but when you see that guy who overindulged on punch running around with a lampshade on his head, you know it won’t be long before things start to wind down. When that guy comes out of the woodwork is anyone’s guess, but it’s usually just a matter of time. I think the same can be said with this dollar strength. The markets have such a short-term memory these days that going from one extreme to the other isn’t outside the norm, and investors have no problem bailing midstream. It’s just something to keep in the back or your mind while dealing with this market volatility.

We saw only a handful of economic reports yesterday, which included weekly mortgage applications, the import price index and the fourth-quarter current account balance. The mortgage app figures are considered secondary and very volatile, but nonetheless, they did fall 2.4%. I don’t know if you’ve paid much attention to the bond yields, but they have really shot up recently, so that doesn’t spell good news for those looking to refinance or buy a home. Bond yields have been all over the place as well, with the 10-year sitting on a four-month high, but it wouldn’t surprise me to see them turn on a dime. I’m sure the Fed isn’t exactly thrilled to see them jump over 27% since the end of January.

Finally, we had the fourth-quarter current account deficit grow to $124.1 billion, which marked the biggest shortfall in three years. The balance for 2011 widened to $473.4 billion, or 3.1% of GDP, and came in much higher than the estimated $115 billion figure. If we do see the type of increased expansion that investors have been hanging their hats on over the past few days, then I would expect to see this number continue to rise.

We have a full day in the data department today, as there are a couple of regional manufacturing reports, wholesale inflation and the TIC (Treasury international capital) flows from January. I don’t think the market will pay much attention to those, but the only wild card that I can see would be the weekly jobs numbers. If we see a better-than-expected result, investors may feel vindicated on their rosier outlook and continue to party on with the dollar. I haven’t seen much that would indicate a sharp rise, but if the report disappoints, we could see things settle down a bit.

Speaking of jobs, Chuck sent this tidbit while he was sitting in the airport yesterday morning:

“I saw this in today’s post. Talk about the book-cookers coming clean! The BLS originally said that St Louis had created 2,500 jobs in 2011. And the civic leaders were gushing, slapping each other on the back for the ‘job well done.’

“Well, a funny thing happened on the way to the forum. The BLS now has revised the numbers to show that St. Louis actually lost 3,900 jobs instead! OK, I’ve heard of revisions, but by this wide of a percentage margin? Oh, and this was reported on the back pages of the paper, hidden away in a corner hoping that no one would see it!

“But I did!”

Thanks again for the info, Chuck. Seeing a report like that is so frustrating. Investors use this type of information to make important decisions not only in real time, but also in regard to the future, so it’s no wonder we see market volatility on the rise.

Anyway, let’s move on the currency market before my blood pressure begins to rise. While the dollar rose against every single major currency, except for the Indian rupee (INR), a good portion of them took a sizable fall. The worst of the worst, which included both the Norwegian krone (NOK) and South African rand (ZAR), got caught with a stiff right jab as they were sitting on 2%-plus losses for most of the day. The general optimism surrounding the U.S. economy set the wheels in motion, but economic reports released in each country sent them over the edge and battling for last place throughout the day.

Beginning with South Africa, retail sales growth rose at the slowest pace in six months, as it fell to 3.9% in January, from the previous reading of 8.7%. The rise in January inflation to a two-year high was blamed for a majority of the slowdown as rising food, fuel and utility prices kept a lid on consumer spending. This goes along with what I was talking about yesterday regarding fuel prices in the U.S. potentially impacting future retail sales figures if consumers are forced to pay more at the pump.

The domestic retail industry has played a major role in the economy over the past year, so its much-larger-than expected fall led some investors to believe a rate cut might be needed at some point. Interest rates have remained near record lows since November 2010, when they were cut to the current 5.5%, but any rate cuts would send investors packing, as the interest rate differential has been the primary motivation to own rand. The $40 drop in gold prices didn’t help either, but there was also speculation the South African central bank has been in the market buying dollars at an increased rate.

The Norwegian krone fell to a five-week low against the dollar, and fell by the most in six months against the euro, as Norges Bank, their central bank, unexpectedly cut interest rates by 0.25%, to 1.5%. The krone was already in the hole to start the day as economists were just expecting to see a downward revision to their rate forecast, but the decision to actually move took many by surprise. The currency fell nearly 1.5% in a couple of hours and ended the day with over a 2% loss. Coupled with the 0.5% cut in December and continued government concern over a strong currency, the market took this cut to heart.

Policymakers are in a tough spot. The higher krone has been spurred by the economy’s relatively solid fundamentals. If it wasn’t an escape from the eurozone to a neighboring AAA-rated country, it was economic resilience underpinned by the oil industry attracting investors from all over the world. We have recently seen improvement in both manufacturing and consumer confidence reports, so it’s not like a poorly performing economy justified the cut. In fact, the already low internal interest rate environment has given rise to the housing and domestic credit markets, so this move will just feed the fire.

The Norwegian government has long been critical of its disproportionate currency appreciation compared with the euro, as most of their trade is with the eurozone. The stronger krone has kept inflation in the background, so the central bank would rather give manufacturers some breathing room by cutting rates and lessening the appeal to investors seeking yield than worry about the impact of easy money. It’s a delicate balancing act, as the krone was trading at a nine-year high versus the euro, but I have confidence policymakers have the ability to remain on the tightrope without falling.

It wasn’t a pretty picture on the currency screens as I was on my way home last night. The only currency that went against the grain, interestingly enough, was the Indian rupee. From what I could find, it looked as though investors were pleased with the lower-than-expected report of manufacturing inflation. This report fueled speculation the central bank would have some scope to cut interest rates in order to help bolster economic growth. Also, real returns for foreign investors were being eaten up by the higher inflation, so thoughts of higher capital inflows were on the table. The reasons for rate cuts were, obviously, different, but the market reaction to the cut in Norway certainly wasn’t positive.

Both gold and silver took another hit as speculation for QE3 hopped in the back seat after the Fed meeting. Gold fell another 1.5%, to $1,645, and silver was trying to hold onto the $32 handle when all was said and done. Even though both metals have seen a reduction in buying, silver is still up 15% so far this year and gold has seen a rise of about 5%. If the Fed doesn’t end up taking additional measures, the damage has already been done as far as the previous influx of capital into the market in the form of QE1 and QE2.

The same rationale was being applied to the market perceptions of most currencies in that if the Fed doesn’t pump more dollars into circulation, then a systemic reason for a weak dollar has been removed. I think most rational investors can look past this as being a motivation for buying the dollar. The fundamentals that have applied constant pressure on the dollar over the past several years are still present, if not worse, so looking long term paints a different picture than what has been portrayed this week.

As I came in this morning, the dollar buying frenzy has finally subsided, as the only currency in negative territory is the pound sterling (GBP). The currency is sitting on only a fractional loss at the moment, but Fitch Ratings was at it again by changing Britain’s outlook to negative from stable and threatening its AAA status. They went on to say the decision reflects the very limited fiscal space to absorb further economic shocks in light of such elevated debt levels and a potentially weaker than currently forecast economic recovery.

Then, Goldman Sachs shares plummeted 3.4% on Wednesday, cutting its market value by $2.15 billion, after The New York Times published an article by a Goldman executive criticizing the firm’s treatment of its clients and a “decline in the firm’s moral fiber.” London-based executive Greg Smith said he was resigning after 12 years with the firm.

To recap… It was another day in the sun for the US dollar as a spillover effect from Tuesday’s Fed meeting was in full force. The question then becomes how long with this last. There wasn’t much data yesterday, of which the current account deficit widened, but we’ll see our fair share today. The South African rand and Norwegian krone both fell by over 2%, but all of the currencies ended the day in negative territory except for the rupee. Diminished thoughts of QE3 spurred a selloff in metals as well.

Mike Meyer
for The Daily Reckoning

Fed Meeting Spillover Aids US Dollar Strength originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

While the mainstream media do not put much focus on this, I usually take a moment to glance at the “ex auto and gas” figure to get a deeper sense of where things stand. This report painted a different picture than the headline report. We did see it come in at a higher-than-expected 0.6%, but it was actually lower than the 1% revision to January. The initial figure from January was 0.6%, so even if we took that higher revision out of the equation, we didn’t see the same type of movement. While vehicle sales did have a good month, it looks to me that higher gas prices are starting to play a bigger role.

Consumers can deal with higher fuel prices in the short run, but if we continue to see oil prices rise, there will be a competition for that discretionary income. I think the priority for most people will be to keep the gas needle from hitting “E.” rather than buying a new summer wardrobe, so it’ll be interesting to see how things progress over the next few months. I don’t see too many scenarios on the horizon that would keep a lid on oil prices, except for another round of global growth worries. I went on a tangent there, so I’ll steer us back on track.

Moving on to the other data reports from yesterday, we saw confidence among small-business owners climb to a one-year high in February, as profits have been on the rise. At the same time, the report also revealed they weren’t as keen on the economy as a whole. Expectations for better business conditions over the next six months fell, as did intentions of making additional capital purchases, so it turned out to be a mixed bag. Once the data cupboards were drained, the markets remained in a holding pattern until early afternoon, when the results of the Fed meeting finally hit the airwaves.

Chuck sent me some thoughts on the Fed’s meeting and more before he heads down to south Florida for his annual spring training pilgrimage, so here you go:

“Well, the Fed’s FOMC meeting ended yesterday with the Fed leaving rates unchanged (there was one Fed Head that voted to raise rates!), and refused to offer any information on future programs that are being tossed around to bolster the economy. In their assessment of the economy, the Fed Heads acknowledged improvements in the labor market, but did put out the caution flag saying risks remain that inflation could rise temporarily because of recent increases in oil and gas prices.

“Hmmm… I go back to about a year ago. Didn’t Big Ben tell us that the rising inflation we saw then was ‘only transitory’? Well, the US consumer has to feel as though that inflation has transitioned into their pockets!

“Moving on — for these are not the droids we’re looking for. Look who’s touting currency diversification. You wouldn’t guess in a million years, we used to say as kids, but back in 1995, the US dollar was under pressure, and then US Treasury Secretary Robert Rubin made it a point to say that ‘a strong dollar is in the best interest of the US.’ In other words, he was telling anyone that was courageous enough to short the dollar, that the US would not stand idly by. This scared the bejeebers out of the markets, and soon we were experiencing a strong dollar trend.

“Well, just the other day, Robert Rubin — yes, that same Robert Rubin from 1995 — said he has too much of his personal investments in the currency.

“A ‘disproportionate amount’ of his assets is in cash, and he ‘should be more allocated away from the dollar,’ Rubin, 73, said the other day in a speech at the TradeTech conference in New York. He said he also was ‘greatly overweighed’ in private equity and had investments in hedge funds.

“And before I hand it back over to Mike… You all know that I’ve said quite a few times recently that I believe that the economy is presently in the ‘eye of the storm,’ and that the bad stuff on the other side would be worse than the original storm in 2008. Well, here’s a story that plays well with that thought.

“The global liquidity cycle has already rolled over. Assuming that no fresh action is taken, world economic growth will peak within a couple of months, and then fade in the second half of the year — with grim implications for Europe’s Latin bloc.

“Data collected by Simon Ward at Henderson Global Investors show that M-1 money supply growth in the big G-7 economies and leading E-7 emerging powers buckled over the winter.

“The gauge — known as six-month real narrow money — peaked at 5.1pc in November. It dropped to 3.6pc in January, and to 2.1pc in February.

“This is comparable with falls seen in mid-2008 in the months leading up to the Great Recession, and which caught central banks so badly off guard.

“‘The speed of the drop-off is worrying. This acts with a six-month lag time, so we can expect global growth to peak in May. There may be a sharp slowdown in the second half,’ said Mr. Ward.

“And with that, I wanted to wean you slowly away from my writing, so this will serve as the last official words you hear from me for the next two weeks! I’m not even taking my laptop with me! So back to Mike!”

Thanks for those departing words. As Chuck mentioned, the Fed still kept global concerns on the table, but investors seemed to parlay the better retail numbers with the acknowledgement of labor improvement by the Fed into an official improvement stance. It wasn’t too long ago that policymakers actually lowered their forecasts, but the April meeting will have more teeth, as they offer up an update to their official economic assessment followed by commentary from Bernanke.

Moving over to the currency market, I guess you could call it a choppy day, but the dollar index did remain positive throughout the session. Remember, the euro (EUR) comprises a majority of this measure, followed by the yen (JPY), so it doesn’t give a true sense of the overall market.

Focusing on the euro for a moment, we did see some positive news that helped to keep the currency in a 1.31 handle until the Fed meeting pushed it back into the 1.30 range. German investor confidence rose more than forecast in March and marked the fourth straight increase. As some of the doomsday scenarios surrounding the debt crisis have eased a bit, at least for the moment, investors felt a little more comfortable.

Speaking of the debt crisis, Fitch decided to raise the Greek credit rating four levels, to B-, from the previous rating of restricted default. The new government bonds were given this B- rating while outstanding debt not governed by Greek law has a C rating until settlement in April. Fitch said in a statement that completion of the exchange has cured the rating default event, and the distressed debt exchange along with the losses imposed on bondholders have significantly improved Greece’s debt service profile and reduced the risk for a recurrence of near-term repayment difficulties on the new Greek government securities.

Fitch also decided to give Greece a stable outlook, which seems a little overzealous to me. It almost reminds me of credit card companies sending invites to those who recently filed bankruptcy, which is a risky proposition. While it may be a while before things could get back to where they were, the propensity still remains. Hopefully, this was a final wake-up call and the train stays on track. Just to wrap this up, Fitch did acknowledge default risk is still elevated and challenges remain, so it looks like they’re trying to cover both sides of the plate.

The dollar strength was primarily confined to a handful of assets, which also included the Japanese yen. The yen fell to nearly a one-year low as it briefly traded into the 83 handle. We saw the currency begin to fall last month as policymakers unexpectedly boosted the bond buying program, but the trend has gained steam as the Bank of Japan continues to take steps in tackling deflation. Chuck has warned about the yen’s shaky foundation for a while, so this shouldn’t be a surprise, but its nearly 1% loss yesterday made it the worst-performing currency.

Gold was the other unfortunate asset that got smacked around a little bit. It ended the day around $1,675, losing about $25, but the majority of the loss came after the Fed meeting. In fact, gold was hovering around positive territory early on, but lost its luster when investors saw rays of light shining through the US economy. You would think acknowledgement of higher inflation would be enough to support its pricing, but the rose-colored glasses in the US and Europe kept gold in the red.

Speaking of the Mexican peso (MXN), it turned in the best performance of the day by rising just over 0.75%. The majority of its rise resulted from a free ride on the US data train, but they did see industrial production rise in January. Again, there is just too much risk associated with the underlying economy, but I thought I would at least give an update, as promised. The Canadian dollar also took a free ride as the pro-North American trade carried the currency to just under a 0.5% gain. While there weren’t any data out of Canada, they at least have supportive fundamentals.

The Australian (AUD) and New Zealand dollars (NZD) both posted gains as higher stock prices provided some wind for their sales. We did have some stronger housing and food price numbers out of New Zealand that gave the currency an extra push to finish the day in second place, but both currencies — more so the Aussie — are also proxies for global growth, so thoughts of sustained improvement in the US definitely helped. All in all, it turned out to be a good day for currencies tied to North America and higher global growth, but not so good a day for safe havens, such as gold.

As I came in this morning, the dollar held onto its relative strength from yesterday, as all of the major currencies, including China, are in the red. Gold has taken another hit so far this morning and is down $15. It looks like the euphoria in the markets spurred by the Fed has rolled over into early trading, and there isn’t much on the docket today that would appear to turn the tide. Barring any rogue headlines about the European debt crisis, it looks like the table is set for the US dollar.

Then there was this: The Federal Reserve announced that 15 of the 19 biggest financial institutions in the US have the capital to survive a deep recession. “When you put banks under the kind of dramatic scenarios that the Fed did — and they are still doing well — it tells you how well capitalized the majority of the banks are coming out of this downturn,” said Michael Scanlon, a senior equity analyst at Manulife Asset Management. However, signs remain that the financial industry hasn’t completely recovered from the global financial crisis.

To recap: Retail sales in the US kick-started the dollar, as overall sales rose to a five-month high of 1.1%, but continually high gas prices could steal from consumer discretionary spending. Small-business sentiment did rise, but owners are still hesitant to go all in with the economy as a whole. Chuck gives us some thoughts on the Fed meeting. the currency market was choppy at best, although the dollar did see strength. Euros, yen and gold took a hit as US economic optimism took hold and currencies associated with global growth saw a decent day.

Mike Meyer
for The Daily Reckoning

Investors React Positively as Retail Sales Increase originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

All of this turmoil has caused the euro to drop about 2 cents so far this morning and is now just trying to hold onto the 1.36 handle. The markets have been so very fickle over the past couple of months that things could easily turn on a dime in US trading if there are any positive comments or developments that come out of Europe as the day progresses. We saw this happen yesterday as the markets were pleased with the decision from the Italian Prime Minister, Silvio Berlusconi, to step down.

His decision wasn’t necessarily of his own will, but instead, it seems that pressure from the markets had backed him into a corner and forced his hand. He was also on the receiving end of a strong round of criticism, both internally and externally, so the calls for his resignation have grown louder and louder. Italian borrowing costs have risen sharply over the past several days as the interest rates on bonds have risen to the highest level since joining the euro (EUR).

The currency market has, in turn, marked the euro down quite a bit this morning since the Italian economy can be thrown in the too big to bail out category as they don’t see a clear plan for appropriate austerity measures. The rising yields have cast fears with investors that Italy won’t have the ability to meet the interest obligations, and therefore, need some type of bailout or a default would result. Austerity measures are currently the topic of discussion for Italian politics, so I’m sure there won’t be a shortage of things to talk about.

Moving over to the United States, it’s going to be another quiet day as we only have the weekly gauge of mortgage applications and the measure of September inventories to contend with, so not much to speak of today. We’ll see data tomorrow that will actually have some teeth with the September trade balance and the October budget statement, although the markets are all but comfortable with these disappointing figures. We’ll also see if the weekly jobs numbers can remain south of that stubborn number of 400K or if this was just a temporary jump.

With the euro down about 1.5% this morning, all of the other currencies, except for the yen (JPY), are showing up in the red column. We have the Swedish krona (SEK), Norwegian krone (NOK), and South African rand (ZAR) bringing up the rear this morning. Since the euro pretty much sets the direction for most of the other European currencies, Sweden and Norway have been pushed down even though they aren’t a part of what’s wrong in Europe. Since a majority of their trade is within the European Union, they get punished as if they were a part of the euro and are labeled as such. I wouldn’t say that its justified, but it’s just market perception and eventually fundamentals will prevail.

This is definitely a risk-off type of day, so most of the financial markets find themselves in the red at this point. The high yielders, commodities, and stock futures are all off so far on thoughts global growth will wane and a European spawned credit freeze could ensue. As we have seen for the better part of this year, the markets take a statement or a situation and interpret it to one extreme or the other. In other words, one positive data report means the US economy is in the clear or as we see today, a roadblock or challenge in the Eurozone gets interpreted as a death blow for the currency and world economy.

Chris Gaffney sent me some thoughts to include, so here you go:

China’s efforts to tap the brakes seems to be working. Consumer inflation rose at an annual rate of just 5.5% in October, the smallest monthly increase in almost three years. A 5.5% inflation rate would certainly be of concern here in the US and in Europe, but China continues to have near double digit economic growth, so higher inflation would be expected. The government’s efforts to slow the Chinese economy were a source of a lot of market angst in the last several quarters, as many believed they would not be able to control price increases without forcing their economy into an abrupt slowdown. But this latest inflation reading indicates the government has been able to cool the price increases without halting economic growth. Chinese officials have also been helped out by the continued problems in Europe and the US, which have helped keep a lid on commodity prices.

These lower commodity prices have put pressure on the commodity currencies of Australia (AUD) and New Zealand (NZD). The Aussie dollar continued its decline yesterday, and has fallen almost 3% versus the US dollar during the first 9 days of November. China’s demand for Australia’s raw materials is likely to continue to fall in the near term which will continue to weigh on the value of the Aussie dollar.

But the declines in Aussie dollar and New Zealand dollar will probably be limited by the higher returns these countries offer. Even after the recent rate decrease, both Australia and New Zealand continue to offer investors a nice yield advantage over the currencies of Europe and the US dollar. These rate differentials should put a ‘floor’ under these two currencies, and limit the damage to investors’ currency portfolios.

Then there was this… All of the bad news flowing out of Europe lately has helped divert our attention away from just how bad things continue to be right here in the US, but a story appearing on CNBC’s website yesterday paints an ugly picture of the US housing market. The title says it all: “Half of US Mortgages are Effectively Underwater”. “Home prices continue to fall as a glut of bank-owned homes and lack of job growth continue to hold down the US housing market. The story states that 28.6 percent of the mortgages on single family homes are currently underwater. That equates to 14.6 million borrowers.”

But the story points out that many other homeowners have so little equity built up in their home that they don’t have the financial ability to move (no money for a down payment or moving expenses). Adding these homeowners into the calculation brings the total households ‘effectively’ underwater to over 50%. Not good news for anyone hoping a housing turn-around will help pull the US economy out of our current funk.

Thanks Chris for the fodder. So on that note, I’ll go ahead and wrap this up for today.

Mike Meyer
for The Daily Reckoning

Greek and Italian Turmoil Negatively Affect the Euro originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

As I mentioned yesterday, it was a data rich day, so let’s look at the tape and see what happened. But first, let’s see what Chuck had to say…

Well… Now you all can’t say that I didn’t tell you this was going to happen… First-quarter US economic growth slowed to 1.8%!!! Didn’t I tell you that 2010 was going to be the high for economic growth? Didn’t I tell you that without government stimulus, either through cash for clunkers, or whatever cockamamie scheme they were coming up with, the economy didn’t have legs?

And the Fed is going to pull the stimulus/financial cocaine away from the economy at the end of June? I would laugh out loud… But that would be insensitive! One of my fave lawmakers, and one of the few lawmakers that “has a clue”, Ron Paul, had this to say about Big Ben’s talk yesterday…

“It was more justification for a policy that doesn’t work. There was no explanation on how he’s going to get out of this. He did recognize, though, that price increases are significant and could be a problem in the future. It could be a significant problem for unemployment. He said it softly, but there were some words in there that convinced me that he knows that when inflation is admitted – I think it’s already here – but when he really admits it’s here, he’s really in a box. Because what he’ll have to do is raise interest rates, cut back on all the monetization of all this debt, buying all these securities, and then, in a weak economy, he’s in a mess.”

Yes, he’s in a mess, Bernanke that is… But… Remember what I told you about the end of QE2… It will fill the spirits of the dollar bugs for a couple of months, and then WHACK!

As Chuck just mentioned, the big news (and it wasn’t the royal wedding) was the initial showing of first quarter GDP here in the US. I guess the Fed’s downward revision of growth for this year on Wednesday afternoon was a foreshadow to the disappointment we saw yesterday. Most economists were looking for it to come in at 2%, but instead, fell to the slowest pace since the second quarter of last year and dropped quite a bit from last quarter’s 3.1% figure.

Dipping a little deeper into the figure, inventories rose at a $43.8 billion pace, compared with $16.2 billion in the fourth quarter. If we take inventories out of the picture, the economy would have only risen 0.8%. The housing/residential construction industry and the trade deficit both assumed their usual roles as they subtracted from GDP but manufacturing and durable goods spending more than provided the offset.

I found a comment from Bernanke’s press conference where he said that much of the slowdown in the first quarter is viewed by most on the committee as transitory. There he goes with that word again, transitory. As Chuck said, does he really believe the economy can stand up on its own without stimulus and shake the temporary slowdown that underperformed with the stimulus in place? Again, government spending has played a large role in our economic growth over the past couple of years and has displayed very little in terms of self-sustainability.

Moving on to the jobless claims, new applications for unemployment rose last week by 25K to 429K, which was the highest level in close to three months. While the four-week moving average on initial claims rose as well, we did see a drop in continuing claims by 68K to 3.64 million. Those collecting extended benefits also showed improvement by falling to 4.165 million, but there is still a lot of progress needed in this area to support a so-called moderate recovery.

We also had personal consumption for the first quarter rise more than expected by 2.7% but fell way short of the last figure of 4%. The Fed’s preferred gauge of inflation, core PCE, showed a higher-than-expected increase by rising 1.5%. Pending home sales showed mixed results as the monthly number rose by 5.1% but fell 11.5% year over year. Today will bring us personal income and spending along with some March inflation numbers.

If we sprinkle in some other secondary reports, such as the Chicago purchasing manager index, that gives us our day in data. Looking ahead to next week, we get our first look at the April jobs numbers with the ADP employment report, so that, coupled with factory orders, will be the focus leading us into the jobs jamboree on Friday. Other than that, there really isn’t too much on the data ticket here in the US as we kick off the first week of May.

Looking at the currency market, we had yet another day of retreat in the dollar as it declined for an eighth straight day. While returns were fairly tame for most currencies, we did see New Zealand (NZD) and Brazil (BRL) lose over 0.50% on the day as each had some type of less-than-ideal data that triggered a modest sell-off. The Brazilian real, which was the worst performer, saw a double whammy from slower credit growth and inflation.

Any inkling whatsoever that the pace of interest rate hikes may slow will send the real downward as this currency is a big destination for hot money, which are generally short term investors who are only looking for yield. Since this is still considered an emerging market, the rate differential is often used as a risk premium in that many investors would look past the currency if it weren’t for the interest rate.

Compare that logic to say, the Norwegian krone (NOK) or Swiss franc (CHF), where interest rates remain very low but are fundamentally sound. Total outstanding growth in Brazil only rose 1% in March and suggests higher interest rates are starting to filter through to the economy. Their broadest measure of inflation also rose less than expected by increasing 0.45%, which was the slowest monthly gain since last July. While the annual figure still increased by over 10.5%, it was still lower than the estimate of nearly 11%.

Inflation still remains well above their target so additional steps will definitely be needed to keep it under control, but the government likes to jawbone here and there in an attempt to convey that additional rate hikes really aren’t necessary and that they’ve already taken steps to address the issue. Moving on to a currency where inflation is not a problem, the New Zealand dollar came in second to last place.

The New Zealand central bank met yesterday and decided to keep rates on hold at the record low of 2.5% and looks to remain that way for the better part of this year. The central bank’s comments after the meeting are what stirred the pot. It’s not that he said anything earth shattering, but I guess he came off more dovish than what investors had hoped for.

Governor Bollard not only called the kiwi’s rise unwelcome, but also expressed that the outlook remains uncertain and given relatively low core inflation with continued economic disruption from the earthquakes, interest rates look to remain appropriate for some time. Again, the rise of the currency wasn’t necessarily due to strong fundamentals, but instead, it has been the carry trade and the fact that it’s getting grouped together with the Australian dollar.

As I came in this morning, the dollar index is flirting with its lowest level since July 2008. In fact, April will mark the fifth straight month of decline as interest rate expectations have risen in most countries except for the US. If we also take into account that risk seeking has steadily risen, the dollar didn’t have much of a chance, and that’s not even taking the underlying economic fundamentals into consideration.

To recap…The initial print of first quarter GDP came in lower than expected and doesn’t exactly lay the framework for the moderate recovery expected this year. First time jobless claims increased well above that hard-to-shake 400K mark while continuing claims fell. The dollar was lower for yet another day, but so were the New Zealand dollar and Brazilian real as recent data didn’t push the envelope for an immediate increase. Looking ahead to next week, we’ll see both factory orders and the results of April’s jobs numbers.

Mike Meyer
for The Daily Reckoning

First Quarter GDP Comes In Lower Than Expected originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

Before I head into the market movement, let me first get you up to speed on what actually happened with the Fed meeting. There really weren’t any curveballs thrown into the mix so it was pretty much what was expected. They kept the term “moderate pace” as the description of the economic recovery and continue to view inflation as temporary in nature. The cause of higher inflation is primarily being placed on the shoulders of commodities, namely oil, and food prices.

One of the obvious risks here is that commodity prices remain elevated for a longer period than what the Fed expects and has a broad spillover effect on the economy. Just ask the ECB about so called “transitory inflation.” They took the bull by the horns in an attempt to make sure they aren’t scrambling around when it’s too late. Commodities have also been tied to global growth. The trend has been higher growth feeding higher commodity prices and lower growth causing a fall in commodity prices. So does this mean the Fed expects lower growth?

I guess part of that question can be answered with the Fed’s reduction in their economic growth outlook. They lowered the range of expansion here in the US down to 3.1%-3.3% from the previous estimate given back in January of 3.4%-3.9%. The high end of January’s estimate seemed like wishful thinking anyway, but we would need to have global growth see the same type of downward revision if lower commodity prices would have any type of staying power.

The key focus surrounding the Fed meeting was QE2 and its future. While the end of round two in June was confirmed, Bernanke signaled that record stimulus will be maintained until job growth can stand on its own two feet and that a recovery is showing enough to withstand tighter credit. Chuck gave me some insight to share as well, so here you go…

Well, folks… Earlier this week I told you that: I expected the FOMC to say that they would be keeping the QE2 bond buying going until the scheduled end of June, and that they would keep interest rates unchanged. Yesterday, The US Federal Reserve signaled the end of its controversial $600 billion bond-buying program as planned, setting the stage for challenging decisions about whether to raise interest rates in the face of both high unemployment and looming threats of inflation.

Remember… I also told you that when it all ends, at the end of June, the markets are going to take it as a “sign” from the FOMC that everything is beautiful. When the markets feel this way, there could very well be a rush to the safe haven dollar once again, which would hurt currencies and commodities, including gold and silver… But it would only be a temporary scenario, lasting only as long as it takes for the markets to realize that the emperor has no clothes without stimulus… Which is when the Fed pulls QE back out of the closet, for the third round… and it’s at that point, that the dollar gets sold once again…

So, as an investor in currencies and commodities, you can stay the course, batten down the hatches and ride the storm out REO style… Or… You can sell ahead of June’s Close, and look to purchase again when the dust settles on this whole scenario…

Thanks to Chuck for sending those thoughts from way down south. I think I’ve gone on long enough about the Fed, so let’s move over to the durable goods numbers from yesterday. Demand for long lasting equipment rose higher than expected by posting a 2.5% increase and represented a third straight month of gains after the February figure was revised up to a positive 0.70%. Global demand and a weak dollar continue to keep factories busy on the export side but US companies have also been investing in capital equipment so far this year to take advantage of the new tax code that allows for 100% depreciation on certain items.

As I mentioned yesterday, the manufacturing sector has been one of the few areas of sustained improvement and should remain intact as long as global growth persists. There won’t be any shortage of data to look at today as we have the initial printing of first quarter GDP, personal consumption, and core PCE (which is an inflation measure). Since it’s a Thursday, we also have both the initial and continuing jobless claims, which are expected to show slight improvements. We then cap it all off with Bloomberg’s consumer comfort report and pending home sales. It looks like I’ll have a lot to talk about in the data department tomorrow.

Switching gears to the currencies, the dollar saw a significant round of selling yesterday as the dollar index traded below 73.30. The Fed announcement sent most of the currencies higher yesterday as confirmation interest rates in the US weren’t moving upward anytime soon. The rand (ZAR) turned in the best performance on the day by rising about 1.25% not only on interest rate differentials but also gold trading at new record highs. There were only two currencies that ended the day lower, which were the Japanese yen (JPY) and Brazilian real (BRL).

The yen lost about 0.75% yesterday as S&P cut Japan’s sovereign rating outlook. While it’s just the outlook and not an actual rating cut, S&P is concerned about the costs associated with the quake rebuilding efforts adding to their already heavy debt load. They estimate it could cost as much as 50 trillion yen ($611 billion) to rebuild and move the debt-to-GDP ratio up to 145% in 2013. If that wasn’t bad enough, retail sales for March fell the most in 13 years and could get even worse. Chuck also had some thoughts to share on Japan, so here he is…

Remember the Beatles song: I don’t want to spoil the party so I’ll go… I would hate my disappointment to show, there’s nothing for me here, so I’ll just disappear…?

That must have been the song they’ve been singing at the credit agencies for the past decade! But, now that the girl failed to show up for the party, they’ve decided to come to the party late! After downgrading the outlook to negative last week for the US… S&P followed up that bomb with another, downgrading Japan’s outlook to negative… Isn’t that sort of like pouring salt in one’s wound? S&P cited the earthquake in Japan as one of their reasons for the downgrade! Memo to S&P… Just like the US, Japan’s outlook should have been downgraded years ago!

If you haven’t had an opportunity to evaluate your yen holdings, if you have any at all, it might be time to consider a change while the yen is still relatively high. No need to go down with the ship, at least that’s my opinion, for what it’s worth.

Aside from the usual suspects involved with the high yield story, I’ll touch on the big reports from Australia and the UK yesterday. As I mentioned, we were waiting for the results of Australia’s first quarter inflation report to gauge the likelihood of the RBA coming back to the rate hike table sooner rather than later. Well, consumer prices rose the most in five years as the CPI index jumped 1.6% from last quarter while rising 3.3% year-over-year.

While some of this increase can be attributed to higher food prices from the floods a few months ago, core inflation increased more than expected and just highlights the need for vigilance on the part of the RBA. The central bank meets next week so we’ll see if they provide any commentary as to their comfort level regarding these rising figures. With that being said, the Aussie (AUD) broke yet another record by trading up to 1.0879. I even saw a report calling for it to rise into the 1.12 handle within the next six months.

Finally, we had the initial reporting of first quarter GDP out of Britain post a 0.50% gain, which offset the fourth quarter contraction of 0.50% and provided some relief in the markets because there was a real risk of a disappointing figure. It looks as though manufacturing and growth in the service industry gave the needed boost to take them out of negative territory.

Other than that, the euro (EUR) broke into the 1.48 handle and silver got an adrenaline shot that sent it back above $48 as I left for home last night. In fact, it was up over $2.50 as I was turning my screens off last night and it saw an incredible one day swing from its high and low on the day of around $3.50. A strong stomach was definitely needed for silver’s action so far this week. Did I mention gold broke away from $1,500 and moved to a new record high of $1,530?

As I came in this morning, the assault on the dollar continued in overnight trading as the dollar index dipped below 73 and is barely hanging on to that figure as I type. The rand and kiwi (NZD) are the only two at this point in negative territory, so we’ll see what kind of impact today’s data has on the market.

To recap…We finally saw the event that everyone was waiting for, which was Bernanke’s post Fed meeting commentary, and pretty much yielded the expected result. We’re going to see rates on hold for an extended period of time, QE2 will end in June, and the Fed continues to see moderate growth. Durable goods came in better than expected and we now get to see the initial printing of first quarter GDP. The dollar was sold once again across the board except against yen and the real. S&P downgraded Japan’s outlook and Australian inflation remains on the rise.

Mike Meyer
for The Daily Reckoning

S&P Cuts Japan’s Sovereign Rating Outlook originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

When trading opened in the US, silver was still holding on to the $46 handle but fell all the way down to $44.6550 before finally ending the day above $45. Volatility in silver is historically higher than gold simply because the market is smaller but other players have entered into the volatility equation as well. The huge run up in silver and $1,500 gold has attracted a new breed of investor, so volume has picked up significantly.

The relatively large price swings encouraged quite a bit more trading as opposed to the classic buy and hold investors who are using silver as a longer term inflation hedge. Since it hasn’t broken through that all-important line in the sand of $50, I think there was a bit of disappointment floating around, which encouraged some to take profits. In addition to those feelings of disappointment, there have also been thoughts of some type of correction swirling around the markets, which has some traders anxious as well. The bottom line is, expect this type of volatility to persist for a while.

Before I head into the currencies, let’s touch on the data releases in the US economy. We saw the results of the February S&P/Case-Shiller home price index and showed yet another decline. The index fell to 139.27, which was a 3.33% year over year drop, and was worse than what most economists had expected. In fact, we came dangerously close to eclipsing the six-year low that we saw back in April 2009. As home prices have fallen and can’t get up, calls for a double dip in housing are again becoming a grave concern.

There has been very little, if any, good news about the housing industry and the responsible factors don’t show any signs of easing. The supply of homes continuing to mount from foreclosures, homebuyers either not qualifying for loans or underwater to the point that they are handcuffed, a lack of sustainable and material job creation, and general economic uncertainty all point to a continuation of this trend. We even had Geithner seemingly throw his hand up in the air when he said that we’re just at the beginning of trying to figure out how to fix the mess.

Speaking of Geithner, Chuck sent me some thoughts last night…

“I saw a report yesterday that said, ‘Treasury Secretary Timothy Geithner said the US will never embrace a strategy to try to weaken the dollar for global trade advantage.’

“Hmmm… If that’s so, then why does he back his buddy, Ben Bernanke and his zero interest rates, his money printing, or debt monetization (A.K.A. quantitative easing 1&2)? Does he truly believe that those are things that would support the dollar? I hardly think so, folks… But it makes for good copy, eh?”

Thanks again, Chuck.

In the same breath, we also had April consumer confidence rise to a figure of 65.4 from March’s 63.8 showing. Just to give some perspective, the report averaged around 97 in the past expansion period so we are well below what would be considered good times. Having said that, I’m at a loss right now. Looking at all of the negative wealth created from the housing mess, sky high food and gas prices, unemployment at close to 9% (according to the government), a sluggish overall economy, and not much in the way of comforting news, I just don’t see much to be confident about.

While consumer confidence is still very fragile, it just goes to show you how important the stock market really is when it comes to this figure. I know the labor market has shown signs of improvement, but nothing sustainable at this point. Never mind the fact that jobless claims are still hovering around 400K and companies such as McDonald’s and Wal-Mart are warning of price increases. It seems like as long as we see our stock portfolio values rise, we can put the other things aside for the moment. I’m all for being confident, but I need a nice strong foundation before I walk across that bridge.

Today is going to be a big day in the data department. We’ll not only see the results of durable goods, of which manufacturing has been the glue holding the pieces together, but we also get the FOMC rate decision. Nobody is really looking at the interest rate, as it won’t move, but all eyes are on Bernanke and what he says at the press conference following the meeting. This will be the market mover today and his comments about QE2 will garner all of the focus, so I’ll have more on that tomorrow.

Moving over to the currency market, the dollar was sold pretty much across the board on thoughts the Fed will not only reiterate its stance to keep rates low for an extended period but also carry out the remainder of QE2 without any type of reduction. As long as Bernanke doesn’t throw us any curveballs, risk appetite should remain strong and investors should continue looking for higher yields elsewhere, which would perpetuate the bias to sell dollars.

There was a tie for the best performing currency yesterday as both the New Zealand dollar (NZD) and the South African rand (ZAR) both appreciated just under 1%. It looks as though the carry trade may have been the wind behind their sails, but thoughts that New Zealand will continue to recover as global growth continues to rise provided the foundation. The kiwi got another boost from the spillover effect of the Aussie trading just under 1.08. Interest rates aren’t expected to move anytime soon as the economy still remains in a fragile state and inflation remains tame, so its ratio to the Australian dollar (AUD) could have a larger influence on the direction of the currency.

I guess I should talk about the Aussie since I’m already there. We saw the currency trade at yet another record yesterday as it rose all the way to 1.0797. We have the first quarter inflation report due today so any signs of a pickup in consumer prices will just put additional pressure on the RBA to raise rates. We already have the strong labor market applying pressure in the way of wage inflation, so CPI would either advocate an imminent rate hike or push one out until later in the year.

The Norwegian krone (NOK) received the bronze medal as it came in third place by rising about 0.75% on the day. The same drivers were at work, in that it’s a commodity-based currency with interest rates projected to move higher. Throw in oil remaining at triple-digit levels and a higher euro, and you have the recipe for appreciation. Oh, and don’t forget its one of the most fundamentally sound economies in the world.

The Swiss franc (CHF), which is the best performing currency over the past year, appreciated yet again by rising over 0.50%. This time it wasn’t safe haven buying that sparked a rise but instead exports showing an increase in the first quarter. Adjusted foreign sales rose 6.1% from last quarter as increased demand from Asia and the Eurozone are adding to the Swiss economic momentum. The Swiss government raised its 2011 export forecast to 4.1% from 2.6% and is expected to climb even though the franc has continued to rise.

Other than that, most of the other currencies were either at breakeven or showed a modest appreciation. The pound sterling came in at a slight loss as factory orders fell in April and doubts continue mounting that interest rates will increase even though inflation is running well above their target. We get the initial report of first quarter GDP, which is expected to show an increase after the fourth quarter contraction, so that should set the tone for pounds today.

As I came in this morning, the dollar selling bias has largely remained intact but there hasn’t been much in the way of any large sweeping moves so it looks like the market doesn’t want to go one way or another until we hear from Bernanke. Silver has even seen restraint as it’s only down a few cents instead of the whole dollar incremental moves over the past several days.

To recap… Silver continued its volatile trading pattern as we saw nearly a $2.50 swing from its high and low of the day while gold held onto $1,500. Home prices continue to show weakness in housing and not much in the way of any improvement. Consumer confidence rose even though food and gas prices continue to rise while home prices continue to fall. The Fed meets today but all eyes are focused on what Bernanke says after the meeting. Interest rate differentials and commodity currencies again topped the list and Australian dollars hit yet another record.

Mike Meyer
for The Daily Reckoning

Expect Volatility in the Silver Price to Persist originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

The housing data out of the US didn’t exactly give investors feelings of comfort. In fact, sales of new homes in February fell out of bed by dropping 16.9% to a 250K annual pace, which is the slowest on record. At the same time, the median price fell 8.9% year over year to $202,100 from $221,900 in February and marked the lowest level since December 2003.

While the January figure was revised up to 301K, we didn’t even come close to the expected figure of 290K. New home purchases fell to record lows in three of the four regions, with the Northeast and Midwest leading the way by dropping 57% and 28% respectively. I know some of these horrible numbers are attributed to rough winter conditions, but the bleeding will continue as long as foreclosures keep climbing.

New home sales are often seen as a current barometer because the sale gets counted when the contract is signed instead of when the contract closes with a previously owned home, which account for about 90% of the housing market. We’ve already seen housing starts fall to nearly a two-year low in February and construction permits falling to a record low so there wasn’t much optimism to begin with, but this has opened some eyes to the fact that the overall economy still has a long way to go.

The other report from yesterday morning was the always volatile weekly mortgage application figure, which showed a gain of 2.7%. Lower interest rates were a contributing factor but the fact that home prices have been falling like a rock and approaching levels that seem like bargains have some trying to catch the bottom of the market. We need to remember that completing an application is one thing, but actually getting it approved is another.

Right out of the gate this morning, we have a few reports due out, which include February durable goods orders. The aggregate figure is expected to slow down to 1.2% from the revised January figure of 3.2%, however, the report excluding transportation is expected to show improvement from the previous figure of -3.0% up to positive 2%. Keep in mind that durable goods are products that are meant to last at least three years. Again, manufacturing has been one of the select few keeping the economy afloat.

Since it’s Thursday, we also get last week’s initial jobless claims as well as the continuing claims, both of which are expected to show marginal improvement. While the number of those collecting emergency and extended benefits doesn’t print, I think this is a very relevant figure and should be taken into consideration, as there are currently 4.36 million in this category. Employment is the foundation to the economy as a whole, so until we see a sustainable and meaningful improvement in labor, we’re going to continue seeing these soft housing numbers and the calls for continued stimulus measures.

As I mentioned at the top, it was a day for the US dollar relative to most currencies but we didn’t see any pullback in the commodities of gold, silver, or oil. In fact, as I left the office last night, gold was trading around $1,440 and silver was nearing the 30-year highs well above $37, so we also had a flavor of safe haven or flight to quality hitting the markets. It wasn’t an all-out aversion of risk or safe haven type of day as the stock market and a couple of currencies actually gained, but traders were more interested in selling anything Europe.

As I mentioned yesterday morning, the bad news started rolling out of Europe first thing as the minutes of the last Bank of England policy meeting suggested they aren’t as close as many thought to raising interest rates, by saying there was merit in waiting to see how the price of oil impacts the economy. I think the market may have gotten ahead of themselves in both interest rate expectations and driving the currency higher on Tuesday when it ran up to 1.64.

We also saw a government report yesterday morning that lowered 2011 growth expectations down to 1.7% from the last forecast of 2.1% in November. The BOE is in a position where it needs to maintain lower interest rates in order to make financing the debt more accommodating as well as providing stimulus to an economy that can’t stand on its own two feet. Anyway, the fact that policymakers signaled that rates weren’t going higher at this point made the pound (GBP) the worst performing currency on the day.

The other news out of Europe that discouraged investors was due to the fact that Portugal’s parliament rejected a deficit cutting plan along with EU leaders delaying their decision for funding a regional bailout system. After the announcement from Portugal, we saw the euro drop into the 1.40 handle and wasn’t showing any signs of stabilizing as I left the office last night. The news wasn’t released until late in the day, so the markets were pretty thin at that point.

The issue at hand is that yields remain at unsustainable levels and would technically force Portugal into insolvency. The ECB only recently stepped in to buy some debt in an attempt to keep it from going sky high, but this hands off approach is a clear sign to many that Portugal is very close to hitting the rescue fund for a bailout. This situation has been some time in the making so it doesn’t come as a complete surprise, but it still casts a shadow.

The more disappointing development came from speculation that final plans to overhaul the European Financial Stability Facility (EFSF) would be pushed off until June. This scenario was one of the stumbling blocks for the euro that Chuck was talking about a few weeks ago when the euro began to climb. We really need to see the establishment of the European Stability Mechanism, which requires a treaty change and provides much more scope in dealing with crisis situations, before the currency can break out.

There was really one currency yesterday that had any type of legs, and that was the Australian dollar (AUD). It seems traders were reducing bets that the government would cut interest rates next month, so we actually saw the Aussie rise about 0.4% on the day. We have the bi-annual Financial Stability Review coming out, so that should give us a bit more direction and at least some good sound bites to work from.

The New Zealand dollar (NZD) also posted a gain, but this time it was on its own merit. The current account deficit narrowed to 2.3% of GDP and was the lowest figure in 10 years. Much of this had to do with a lot of capital inflow for the earthquake rebuilding efforts and other one-time payments, so taking those out of the equation, the deficit stood at 4.1% of GDP. The good news, however, was that 4th quarter exports were up 20% from the same time last year.

As I came in this morning, the markets have at least stabilized and even reversed the selling we saw late in the afternoon. In fact, the only currencies down at this point are the pound sterling and Swiss franc (CHF) as all of the other currencies are on the positive side. It looks as though the debt problems in Europe are being overshadowed, at least for now, by thoughts of a rate hike from the ECB. The yields on Spanish debt haven’t shot up as of yet after Moody’s downgraded 30 Spanish banks, but I’m sure that won’t be too far behind as it seems like the market tends to focus their efforts and may concentrate on Spain once Portugal falls to the pressure.

To recap… New home sales were an even bigger disappointment than existing home sales as they fell to a record low and sales prices fell to the lowest level since December 2003. We have durable goods orders and the weekly jobs numbers to look at this morning. The BOE released the minutes of their last policy meeting and showed they may keep rates on hold longer than previously thought. The debt problems in Portugal look like they’re at a point where a bailout will be needed and a solid plan or mechanism to deal with crisis situations in Europe might be a couple of months away.

Mike Meyer
for The Daily Reckoning

New Home Sales Plunge originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

While only a handful of the major economies had any economic reports hit the airwaves yesterday, the US only had a couple of minor events. As I mentioned yesterday, the FHFA house price index (Federal Housing Finance Agency) was expected to re-affirm housing data that we saw a couple of days ago that didn’t show any bright spots. We saw the same disappointing data as prices came in below expectations by falling 0.30% from December and 3.9% from this time last year.

This data measures transactions of homes financed with mortgages backed by Fannie Mae or Freddie Mac. It was the same old rhetoric as to the cause, which would be foreclosures remaining at high levels that add to the already high supply of homes in the market. The fact that about 23% of homeowners with mortgages had negative equity in the fourth quarter acts like concrete shoes that’s keeping housing submerged. That is awfully close to 1 in 4 mortgages being underwater.

We also had manufacturing in the Richmond Fed district slow quite a bit more than expected, down to 20 from a figure of 25 back in February. Manufacturing has remained one of the few bright spots here in the US, but I guess last month was tough in that region. Maybe it was the weather, but in either case, this can be a volatile report so no need to spend much time on it.

We have a couple of things to look at this morning as weekly mortgage applications and new home sales are released. The mortgage application report can be all over the place and is highly sensitive to interest rates, so looking back to where the 10-year yields were trading, I would say look for a higher figure. While this does provide some insight as to expressed demand for a refi or purchase, there are many other reports that provide better data.

One of those reports would be the new home sales figures that we’ll also see out this morning. Again, same old story. Mounting foreclosures are causing problems as cheaper priced distressed homes that have been previously owned detract from sales of brand new homes. Builders have also cut back on the new home supply so home construction should remain on the low side. I think the majority of homebuilders aren’t very hopeful that 2011 is going to turn out much better than 2010.

The best performing currencies on the day were again the commodity currencies. While gold and silver didn’t do much of anything, they did stay on the high side as gold was trading around $1,425 and silver around $36.30 when I was packing my things to go home last night. Any increase in the Middle East tensions would look to be short-term price drivers.

Moving over to oil, we did see this commodity move higher on the day. While we currently have two cooks in the kitchen, which would be the tensions in Libya/Middle East and events in Japan giving direction, prices ended the day at $104. Increasing optimism out of Japan sent oil higher, as the markets looked past current events and more toward the rebuilding stages, which would boost demand for many commodities. Reports are also out that Japanese refineries are processing more oil that previously expected.

The dollar index traded in a tight range as it remained in the mid- to low-75 handle, bouncing from the low of 75.25, and held steady at the lowest levels since December 2009. Since the euro (EUR) accounts for a big proportion of the dollar index, the exchange rate hovering around 1.42 was certainly a contributor. Since risk tolerances have been rising, it looks as though the markets are seeking higher yielding currencies or economies where rates are at least in a position to rise.

One of the other nations that had some economic data to talk about was South Africa, whose rand (ZAR) appreciated the most on the day. Its 0.70% rise against the dollar was due to the fourth quarter current account deficit falling to the lowest level in seven years. The deficit fell to 0.6% of GDP from 3.1% in the third quarter and has narrowed from a figure of 7.1% in 2008. This has been a point of contention along with an overall unstable fundamental base as a whole for investors for quite some time.

I guess the big question mark now deals with the sustainability of this going forward. A closer look at the numbers show us that export volumes actually slowed in the fourth quarter, but its value rose by 5.5%. Couple that with import volumes shrinking for the first time in over a year as economic demand slowed, and we get the significant move that we saw. While it was positive news and is better than the alternative, we still see too much risk associated with the rand.

While the Australian (AUD) and New Zealand (NZD) dollars finished in second and third place respectively, the other currencies that did end the day on the positive side were all lumped together. Moving on to the United Kingdom, we saw inflation surprise on the upside and the pound (GBP) trade up to 1.64 for the first time since January 2010. The higher inflation has investors speculating as to when the BOE will finally raise interest rates. Economists were starting to price in a rate hike as soon as July instead of the previous estimate of August.

The CPI for February rose to 4.4%, which was higher than the estimate of 4.2% as well as the January figure of 4%, and represents the fastest pace in over two years. Consumer inflation is now more than double the government’s 2% target, and with commodity prices continuing to rise, there doesn’t seem to be much relief. Retail price inflation, a measure of the cost of living used in wage negotiations, rose to 5.5% and marked the fastest rise in almost 10 years. The UK is in a tough position because something has to be done about inflation but the economy isn’t exactly in a place to deal with higher interest rates.

Looking at one of the currencies that actually lost on the day, the Canadian dollar (CAD) had mixed results from their economic reports yesterday. We saw February leading indicators surprise on the upside by rising 0.8% to a nine-month high which was led by higher stock prices and manufacturing. The disappointment was the result of January retail sales as the aggregate figure and the measure less autos came in lower than expected.

If we take automobiles out of the equation, retail sales actually broke even from December, but it was still disappointing. The fact that oil was higher on the day helped limit the loss yesterday to around 0.25%. As I mentioned at the beginning, most of the currencies remained in a tight range all day, so I think investors will want to see more reports to get a better gauge of where the Canadian consumer actually stands.

Other than that, we had some trade figures from Switzerland that came out as well. The trade surplus widened to $2.8 billion in February as exports rose 4.2% due to higher demand from Europe and the Asian economies. As always following a positive report, we had the SNB making statements that downplayed the economy in an attempt to bring less light to the situation and hopefully make investors think twice about buying the currency. I wouldn’t say it’s working very well as the franc (CHF) trades at 7-year highs.

As I came in this morning, there really wasn’t any direction either way in overnight trading as everything is sitting where I left them last night. The Swiss franc has seen about a 0.50% gain and has risen the most against the dollar, so it looks as though risk aversion might pick up today. Other than that, the pound sterling is bringing up the rear so far today as the BOE minutes were released from their last meeting and showed policy markers voted 6-3 to keep rates on hold so thoughts of an imminent rate hike have subsided for the moment.

To recap… We had more housing figures yesterday, which was yet another report showing a decline in home prices, and we get to see the colors of February new home sales today. The commodities, led by oil, continued to pull the currencies along for a ride and the dollar index traded in a very tight range. The South African current account deficit narrowed by the most in 7 years, British inflation now lies at more than double their target, and Canada has mixed results.

Mike Meyer
for The Daily Reckoning

It’s All About Housing originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".