Ben Leaves Us Guessing on QE3
The storm clouds moved back over the dollar on Friday after Fed Chairman Ben Bernanke said he wouldn’t rule out another round of QE. As Chuck let everyone know on Friday, he will be out for an extended period continuing his battle, but as usual, he left me with plenty of ammunition for today’s Pfennig. So take it away, Chuck!
I told you all last week that Big Ben Bernanke wasn’t going to repeat his 2010 Jackson Hole speech and announce another round of stimulus for the economy. I also told you that the event risk was downward if Big Ben left a sour taste in the mouths of those that thought he would announce more stimulus here. And soon after his speech, the euro (EUR), which had traded up to 1.2625, plunged, and gold and silver saw unwinding of trades that were made in hopes that the stimulus would be announced.
But then they read what he had to say, and the currencies and metals were getting bought up again a turnaround in less than an hour! Here’s my take on what he said — and no, he didn’t follow my script. I think Big Ben left little doubt that he is looking to the next policy meeting in September (Sept. 12) to announce more stimulus. I had told you that is what I thought would happen, and so far, I was bang on. I guess all that remains to be seen is what happens on Sept. 12!
So we get to play this game for the next eight days. Will he or won’t he? I say he will. The Fed heads only have the same arrows previously used in their quiver, folks. Big Ben has nothing up his sleeve that’s not been tried, so he’ll go back to the well. At least he knows that QE underpins the stock market and keeps rates low. It doesn’t do anything else — no wait! It does weaken the dollar. But as I’ve told you for years now, we need a cheaper dollar to pay down debt servicing with cheaper dollars.
I completely forgot last week to mention a couple of things. My mind must have been in another place, I guess. But on Thursday, it was my good friend and former latte buddy Michelle’s birthday! I can’t believe I forgot! UGH! And then on Friday, it was the perfect trifecta, as our office coordinator called it pay day, three-day weekend ahead and the Review & Focus arrived!
I hope the markets don’t get all ahead of themselves the next eight days, but knowing the markets, I know in my heart of hearts that they will. UGH! That means it will be a “buy the rumor (stimulus) and sell the fact” scenario. Just so you know. And one more thing before I turn it back over to Chris…
At one point on Friday afternoon, I walked out to the desk and asked everyone if there was anything that was going to stop gold? The price of gold started moving higher once Big Ben said that more stimulus would be announced at the September meeting. But in the afternoon, it was a rubber band shot higher! At one point, I looked down and it was up $25. Then five minutes later, it was up $30. Then five minutes after that, it was $32. Crazy! But there are a lot of pent-up buyers here, folks. They’ve been waiting for gold to break out of its summer slumber. And apparently, Friday was that day!
Chris again. I got to spend some time with Chuck and his family on Saturday, watching the Cardinals game out on his pool deck while he smoked some pork butts and bacon-wrapped turkey breasts. Chuck always hosts a big Labor Day party, and from the amount of meat he was cooking, this was going to be one big party!
As Chuck mentioned, the currencies and gold certainly got the party started early on Friday afternoon, as investors are again convinced we will see some sort of stimulus later this month. The data released on Friday morning didn’t help the dollar, as reports showed demand for U.S. capital goods dropped in July and business activity in the U.S. expanded at a slower pace in August. The Institute for Supply Management reported its business barometer fell to 53 from 53.7 in July. Economists had predicted a reading of 53.2, so the number was a bit disappointing, but a reading above 50 still indicates expansion. The Commerce department’s durable goods report showed a 4% decrease in spending on nonmilitary capital goods. Again, the number was disappointing, as economists were predicting a smaller 3.4% decline.
This week, the markets will be anxiously awaiting Friday’s U.S. payrolls number for August. Bernanke and the rest of the members of the FOMC will certainly be keying on this number during their meeting next week. Economists have forecast 125,000 jobs were added in August, following an increase of 163,000 in July. Chairman Ben pointed out the damage 8%-plus unemployment is having on the U.S. economic recovery, and even with the projected increase in jobs, the unemployment rate will stay above 8%. So there is a good chance we will see additional action by the Fed no matter if the jobs number comes in strong on Friday.
And we will get plenty of data here in the U.S. prior to Friday. We start out the week with the ISM manufacturing and prices paid data, both of which are expected to have increased in August. And later today, we will see the vehicle sales information for last month, which are expected to be flat when compared with July. Tomorrow is a pretty dead data day, with just the MBA mortgage app number. Thursday will bring the weekly jobs numbers, which are expected to reflect another 370,000 workers filed first-time jobless claims last week. The ADP employment change report will also be released on Thursday, giving traders an indication of what to expect on Friday. The ADP number was identical to payroll number last month, and Thursday’s ADP report is expected to show a drop in the number of jobs added during August. Both Chuck and I think additional stimulus is a done deal, but Friday’s numbers could solidify the rest of the market’s opinion.
Looking at a currency score card for August shows the Norwegian krone (NOK) was the biggest gainer versus the U.S. dollar in August, with a rise of over 4%. I spoke at the San Francisco MoneyShow a couple of weeks ago and pointed out the rock-solid fundamentals of Norway’s economy. Norway’s second-quarter GDP came in at an emerging markets-like 5.0 annualized increase versus the previous quarter. Their current account balance as a percentage of GDP is an impressive 13.9%, second only to Singapore, which boasts a 22.1% surplus. (By the way, Switzerland rounds out the top three when it comes to current account balance versus GDP, at 13.4%.) And last, but not least, Norway has the best budget balance as a percentage of GDP of any of the currencies we track, with a budget surplus of 15.4%. This is the largest budget surplus of any AAA-rated nation, and the country has no net debt.
These stellar economic fundamentals form a very strong base for the Norwegian krone, and perhaps the move we saw during the month of August is a sign the markets are beginning to shift back toward trading on the fundamentals. But with the euro debt crisis, the U.S. elections and the possibility of another round of stimulus, macro events will probably remain in the driver’s seat for the remainder of 2012. Also, the Norwegian government announced Friday that it would be increasing foreign currency purchases next month, as higher oil prices have them in the enviable position of holding too much krone. The increase in krone sales should help keep a lid on the Norwegian currency… for now.
The worst performer versus the U.S. dollar in August? It was the Australian dollar (AUD), which was down 1.72% on a combination of technical factors and increased worries over China’s slowdown. As Chuck pointed out last week, the Aussie dollar has been slipping, and the technicals are pointing toward lower prices. It breached a key support level last week, slipping below its 200-day moving average; and some charts are now showing it will continue to drop to parity.
The RBA helped the Aussie dollar out a bit over the weekend after they decided to leave interest rates unchanged. Many investors worried that the Reserve Bank would look to cut the benchmark interest rate, which is currently among the highest in the developed world.
The direction for the Aussie dollar will continue to be dominated by news regarding the Chinese economy, so investors were eagerly awaiting the release of the Chinese PMI (purchasing managers index) over the weekend. The PMI data was mixed, with the HSBC manufacturing PMI falling to 47.6, from last month’s reading of 49.3 while the nonmanufacturing PMI number remained strong at a reading of 56.3, versus last month’s 55.6. I for one don’t buy the “hard landing” for the Chinese economy, and I think we will continue to see a commodity bull market in the longer term. That, along with some of the developed world’s highest interest rates, should provide support for the Aussie dollar, but I am also smart enough to not stand in front of a moving train. A drop to parity would certainly present what some would consider a good value for this commodity-based currency.
Another commodity-based currency that traded higher last week was the Canadian dollar (CAD). Chuck pointed to the Canadian currency as one of the three he thinks investors should consider, and data released on Friday support his view. Canada’s GDP grew at a 1.8% annualized rate during the second quarter, matching the first quarter’s revised figure. Economists had predicted growth to slow to 1.6% during the second quarter, so the loonie rallied on the better-than-expected figure. The recent gains in oil prices have also contributed to the loonie’s recent rebound.
I got through a majority of today’s Pfennig without writing about the euro, a sure sign that things are settling down across the pond. The euro continues to cling to the $1.26 level as investors increase expectations the ECB will be joining the U.S. with another round of stimulus this month. The resilience of the euro is a bit surprising, as most analysts had predicted the euro would be at much-weaker levels. The median year-end estimate of more than 50 analysts conducted by Bloomberg predicted the euro would be trading at $1.22, well below the current level. But traders and the analysts don’t seem to be singing from the same song sheet, and the traders are the ones with the money, so the euro remains well bid.
The rating agencies seem to be siding with the analysts, as Moody’s cut the EU’s rating outlook to negative over the weekend. Moody’s lowered the outlook on EU’s Aaa long-term bond rating from stable to negative, citing what it sees as risks to Germany, France, the U.K. and the Netherlands. These four countries make up 45% of the EU’s budget revenue, and Moody’s feels their exposure to the euro-area debt crisis will continue to weigh on their economies.
In other European news, the Swiss economy unexpectedly contracted in the second quarter. GDP in Switzerland declined 0.1% from the first quarter, when it had a small 0.5% rise. Switzerland is heavily dependent on exports into Europe, and the SNB has pegged the Swiss franc to the euro in order to try and keep their goods competitively priced. But the peg couldn’t make up for the European slowdown, which is driving Swiss exports lower. Indicators for the second half of the year are currently mixed, and SNB leaders have vowed to keep the Swiss/euro peg in place.
Then There Was This: I was searching for a “Then There Was This” story this morning and asked Mike Meyer for some help. He suggested something on the Jackson Hole economic conference, which I searched on and came across this interesting article. Just how did the Jackson Hole summit become such a big deal every year? According to an AP story written by Paul Wiseman, Former Fed Chairman Paul Volcker was the reason. Apparently, Volcker was (and probably still is) an avid trout fisherman. The K.C. Fed wanted to attract Volcker to their annual economic summit, and fly-fishing in Jackson Hole was what they dangled in front of the former Fed head:
“The event now draws 140 people every year, including some of the biggest names in economics and finance. They come to enjoy breathtaking views of the Grand Teton mountain range and Jackson Lake, to hike and fish and to engage in intellectual combat in the halls of the Jackson Lake Lodge.
“‘Jackson Hole provides a nice opportunity for central bankers to let down their hair a bit — only figuratively speaking, of course — and mingle with other members of their tribe and a few academics in an informal setting,’ says Eswar Prasad, a Cornell University professor who will speak on a Jackson Hole panel this year.
“One annual tradition is the Friday night barbecue. There, some of the world’s most high-powered economists don cowboy hats, string ties and other Western gear and sometimes join in a line dance.”
My next question is exactly who pays for this boondoggle? You can read the entire story here.
To recap: Chuck shares his thoughts on Ben’s Friday speech; the markets are still questioning whether we will see another round of QE, but we think yes. Gold moved higher on Friday on uncertainty regarding future stimulus. Investors will be looking toward Friday’s payroll numbers to give them a clearer picture. Norway continues to have some outstanding fundamentals, which drove the krone to the No. 1 performer versus the U.S. dollar during the month of August. The Australian dollar was the worst performer, and technicals point to further weakness, but the RBA seems to have put a floor under it by leaving rates unchanged. Moody’s cut the EU’s rating outlook to negative, and the Swiss economy unexpectedly contracted during the second quarter.