Mike Meyer

Good day. This will take care of my call from the bullpen for now, so Chris will have the ball for the next couple of weeks until Chuck returns at the end of the month. The summertime heat finally loosened its grip on St. Louis yesterday, and the dollar strength, which had a tight hold in the markets earlier in the week, saw some pullback. We didn’t see much action in the overnight markets Thursday morning, so everything was fairly flat when I sat down at my desk.

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

Mike Meyer
  • fritz

    easy on the red bull there, pal.
    all that typical media jibber jabber and nothing worthwhile in the 1500 word sentence.
    not enough brain cells in all of media combined to recognize that 23M $10/hr jobs will not produce recovery in the US.
    at least you have your editor fooled.

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