Good day. The dollar continued to benefit from the troubles in Europe yesterday, adding to its weekly gains. The dollar index, which tracks the major currencies versus the U.S. dollar, is up 1.86% in the past five days as investors seek the shelter of the U.S. Treasury market.
I was talking to Mike last night, preparing for this morning’s Pfennig, and we agreed that all of this dollar buying is starting to look a bit overdone. At some point, the markets will figure they have “priced in” the Greek exit and will again start to trade on fundamentals.
Speaking of economic fundamentals, we got a ton of data released in the U.S. yesterday, and most of the numbers surprised on the upside. Housing starts and industrial production exceeded forecasts in April. Starts rose 717,000 versus an adjusted 699,000 in March. With the adjustment to last month’s numbers, the percentage gain in housing starts was 2.6% versus an expected 4.7% increase, but the numbers were still positive, which is all the markets focused on.
Building permits, a number that is a bit more forward-looking, were a bit mixed. Last month’s permit number was increased to 769,000, making April’s number of 715,000 look worse. April’s permit number was 7% lower than the March number versus expectations of a 4.5% drop. All in all, the housing numbers show a bit of an improvement in this very important sector of the U.S. economy.
My mortgage guy (I have my mortgage with EverBank, of course!) contacted me yesterday to let me know rates had dropped enough to make refinancing a good option for me. As I mentioned in the opening paragraph, much of the “safe haven” flows back into the U.S. dollar have been funneled into the U.S. Treasury markets.
This fresh round of bond buying has pushed interest rates down, which is obviously helping to support the housing market. The average rate on a 30-year fixed mortgage fell to an all-time low of 3.83% last week, and the average 15-year rate dropped to an all-time low also, according to Freddie Mac.
Another report released yesterday showed industrial production climbed 1.1%, the most since December 2010. The industrial production number was propelled by gains in auto sales, which were the strongest in four years. Half of the gain in factory output in April was due to a 3.9% surge in vehicle sales, according to today’s data. Utility use also increased during April, climbing the most in two years.
In addition, we got the capacity utilization numbers for April, which increased to 79.2%, the highest since April 2008. Chuck always watches this number closely, as it is a very good indication of whether businesses are using all of their production facilities. A rise of this number above 80 is typically an indication that the economy is “running on all cylinders.” We are not quite there, but certainly getting closer!
The combination of an uptick in housing and auto sales was great news for the U.S. economy, and would typically have led to a surge in the equity markets, as these are two of the most important pillars of the U.S. economy. But the stock markets were down here in the U.S., as investors continued to worry about the eurozone crisis.
Data released in Europe yesterday showed inflation slowed last month, and exports dropped in March as the region’s fiscal crisis undermined the economy. The eurozone crisis was also on the minds of the Fed policymakers during their last meeting.
Minutes from the FOMC meeting at the end of April showed members were worried about a loss of momentum in global growth caused by the European crisis. The members of the FOMC “indicated that additional monetary policy accommodation could be necessary if the economic recovery lost momentum or the downside risks to the forecast became great enough.” The minutes also pointed out the “fiscal cliff” that the U.S. economy is approaching at year-end, as U.S. lawmakers have to agree on a budget before automatic spending cuts kick in.
We will get a few more pieces of data released this morning, including the weekly jobs numbers and leading indicators. The jobs data are expected to show another 365,000 increase in weekly claims, a bit lower than last week’s 367,000 increase. The numbers of jobless claims have been steadily drifting lower since peaking in March 2009.
I spent a lot of ink this morning on the data releases here in the U.S., so I better move back to the currency markets, which have been dominated by events in Europe. The big news yesterday was an announcement by the ECB that they would temporarily stop lending to some Greek banks in order to limit its risk. ECB President Mario Draghi signaled the ECB would not compromise on key principles in order to keep Greece in the euro (EUR). The ECB said it will push the responsibility for keeping the Greek banks liquid back onto the Greek central bank until they have sufficiently boosted their capital. The announcement was meant as a warning shot for the other peripheral eurozone banks, but lending will probably resume shortly. “Once the recapitalization process is finalized, and we expect this to be finalized soon, the banks will regain access to standard Eurosystem refinancing operations,” the ECB said in an emailed statement.
Draghi fired another shot at Greek leaders with his first acknowledgment that Greece could leave the monetary union. He said while the bank’s “strong preference” is that Greece stays in the 17-nation euro area, the ECB will continue to preserve “the integrity of our balance sheet.” As I mentioned yesterday, the Greeks will go back to the polls on June 17 in what many are now seeing as a vote to exit or remain in the euro.
Chancellor Angela Merkel hosted the new French President Francois Hollande on the day of his inauguration. That just amazes me that the new French president would travel to Berlin on his first day in office. It definitely shows you exactly where the seat of power in Europe is located. I also think it is a sign that Hollande will be much more inclined to cooperate with his German neighbors than some of his election rhetoric indicated. And it wasn’t an easy trip for Hollande to make, as his plane was struck by lightning, forcing a return to Paris to board a second flight to the German capitol.
During the press conference at the end of their meeting, Merkel and Hollande sounded as if they would get along and work together to solve the Greek crisis. Hollande definitely looks like a better partner for Merkel than the last French president, and the two look like they have already started down the path of compromise concerning Greece. The European leaders said they would consider measures to spur economic growth in Greece as long as voters there committed to the austerity demanded to stay in the euro. Hollande affirmed at the closing of his visit that “we have a common task” to accomplish. “Greece can stay in the euro area,” and “Greek citizens will be voting on exactly that.”
Chuck sent me a note yesterday morning suggesting the Australian dollar (AUD) may be oversold: “A charts friend of mine sent me a note indicating the Aussie dollar is showing oversold on the RSI readings. RSI stands for relative strength index, and my research shows that the A$ has reached current RSI levels four times since 2010 and each time, A$ has bounced off these levels. So… maybe the sun will begin to shine in the A$ again soon.”
I watched the Aussie dollar continue to slide after reading Chuck’s email and thought his chartist friend had probably misread something. But as I turned on the screens this morning, I saw both the AUD and NZD have turned around and begun to move higher. These two currencies were helped by Asian stock markets, which headed for their first advance in seven days. A feeling that the U.S. Fed could introduce another round of stimulus also helped buoy these commodity-based currencies.
To recap: The U.S. data released yesterday indicated the economy is still in a “recovery” mode. An increase in housing starts and industrial production showed two of the most important pillars of the U.S. economy, housing and the automobile industry, had stabilized. Another release showed capacity utilization increased to get close to 80. The crisis in Europe continues, as some Greek banks were “cut off” by the ECB. The new French president traveled to Germany, and from the look of things, the leaders are going to show a united front in their battle to save the euro. And finally, the AUD and NZD look like they are oversold, according to the charts.
Chris Gaffneyfor The Daily Reckoning
Chris Gaffney is vice president of EverBank World Markets and the alternate author of the popular Daily Pfenning newsletter. Mr. Gaffney has been involved in the global marketplace since 1987, and is director of sales for EverBank World Markets. The Daily Pfennig is delivered via e-mail to tens of thousands of market watchers globally, providing commentary that allows them to stay on top of economic, currency, and market happenings. He is a Chartered Financial Analyst and holds degrees in accounting and finance from Washington University in St. Louis.
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