Dollar Falls as U.S. Consumer Confidence Increases

Good day… Hopefully this will reach everyone today. We have been having some computer problems causing some major delays in the delivery of your Pfennig. As Chuck always says, if you need your Pfennig, just go to our website where it is posted each morning as soon as I hit the send button. For those of you who feel the need, the website also has an archive, so you can all read what I had to say yesterday. But enough about our email problems, you all want to know what is happening in the markets.

The dollar began the day trading in a fairly tight range, but a fairly large jump in U.S. consumer confidence sent the U.S. dollar tumbling. Yes, the old ‘opposite’ trading pattern has begun again. When we have good news regarding the United States and global economies, the U.S. dollar gets sold. But when the data is bad, the dollar is purchased as a safe haven. Yesterday both pieces of data released in the U.S. were more positive than most economists expected, so the dollar gave back some of its recent ‘safe haven’ gains.

The currencies ended up with their best day in a week versus the U.S. dollar, as the commodity currencies of New Zealand (NZD), Australia (AUD), Norway (NOK), South Africa (ZAR), and Canada (CAD) led the way higher. Even the Mexican peso (MXN), which has been beat down as of late was able to claw back a 1% gain vs. the U.S. dollar. Only the Japanese yen (JPY) moved lower, (I wrote a few paragraphs on the my feeling regarding the yen in yesterday’s Pfennig which most of you probably missed).

A positive consumer confidence number has convinced traders that the U.S. consumer is becoming optimistic again. It is believed that these higher confidence numbers will carry over to increased retail sales and a bottoming of the global recession. Yesterday’s consumer confidence numbers surprised even the most optimistic economists, coming in at a five month high of 39.2. The report paralleled figures from public opinion polls that have been indicating U.S. consumers are feeling better about the economy, and the prospect of new jobs. A drop in mortgage rates and the bounce in equity markets during the month of March certainly helped to boost consumers’ feelings. But many (including myself) think the equity market bounce is probably a ‘suckers rally’, and unemployment is nowhere near bottoming in the United States. Not that I want to throw water on the U.S. consumers’ new found confidence, but I think we will likely see reality set back in and confidence move back down in mid summer.

The other piece of data released yesterday showed housing prices declined at a slower rate in February than in the first month of 2009. The decline slowed to 18.63% from an adjusted 19% in January. The headlines mostly reported that the decline in home price slowed in February for the first time since 2007. Yes, we did see slowdown in the decline, but should we really be celebrating an 18.63% drop in housing prices? I think the optimists are being a bit too optimistic, as unemployment will continue to climb, keeping buyers from qualifying for new home loans. Unlike many in the popular media, I don’t see where we have hit a bottom in the housing market yet, and don’t expect us to find that bottom until late this year. Until then, the U.S. economy will continue to struggle.

Kristin Kuchem, who made my day by bringing me a latte yesterday morning (THANKS KRISTIN!!), sent me the following quote regarding the housing data: “The number of vacant homes – including foreclosures, properties for sale and vacation properties – jumped to a record 19.1 million in the first quarter as the recession sapped demand for real estate, the U.S. Census Bureau said in a report Monday. The number of homes that stood unoccupied rose from 18.6 million a year earlier. The U.S. financial crisis and falling prices have shattered the confidence of homebuyers. The percentage of people who said they plan to buy a home in the next six months dropped to a 26-year low in March, according to the Conference Board in New York, Bloomberg reported.” Hardly a sign that the housing market has bottomed!

Data released later today will give us a picture of how the US economy did over the first quarter. First quarter U.S. GDP is scheduled to be released later this morning, and is expected to show the economy plunged close to 5%. This would be better than the 6.3% contraction in the last three months of 2008, so I expect the media to spin it just like they did with the housing data yesterday. We will hear all about how the US economic slowdown is turning, and we will undoubtedly hear several predictions of a rebound by the end of 2009. But with another negative GDP number in the 1st quarter, the recession that began in December 2007 will be the longest since the Great Depression. And not to sound overly negative (which I seem today) but the employment data scheduled for release tomorrow morning will likely show further deterioration in the US job market – not a good sign for the near term future of the US economy.

One piece of data that would lend support to these predictions of a rebound is the personal consumption figure, which will also be released this morning. Consumption is predicted to show a slight rebound during the first quarter, after dropping at an average of 4.1% in the last half of 2008. Consumption probably ticked up as mortgage rates and gasoline prices fell. U.S. consumers were obviously in a positive mood during the first quarter, but will their optimism continue?

Later today the FOMC will be releasing their rate decision. Economists expect the U.S. central bank to announce a move down of just .125% in the benchmark rate. But the Fed will have to walk a fine line with the accompanying announcement. They will want to try and relay confidence in the rebound of the U.S. economy, but if they sound too positive, they could push up longer-term inflation expectations. Bond traders are still nervous (as they should be) about all of the money supply the Fed has pushed out into the markets. If the Fed makes a case that the economy is starting to recover, bond yields will likely jump up as investors increase inflation expectations. This increase in rates is exactly what the FOMC wants to avoid, as they have been buying US Treasuries in an attempt to keep rates down.

The Fed surprised the markets in March by stating that it would buy longer-term Treasuries as part of their ‘quantitative easing’. The Fed’s purchase of mortgage backed securities has been credited with helping to manufacture another mortgage refinance boom, and hopefully beginning a rebound in the US housing market. But I don’t expect the Fed to drop any additional bombshells with today’s announcement. In fact, they will likely be happy to just have their announcement be a non event, as the markets seem to be moving in their desired direction.

The euro (EUR) bounced up a full two cents versus the U.S. dollar overnight, benefiting from the general sell off of the U.S. dollar and a bounce in European confidence. The stimulus spending by European governments, along with slowing inflation, have boosted the mood of Europeans. An index of executive and consumer sentiment rose for the first time in nearly a year, the EC reported this morning. Another report showed European retail sales declined the least in 11 months in April. European consumer spending has been resilient in the first quarter and is definitely being helped by government stimulus.

Finally, a report released by the German Economy Ministry predicted the German economy will return to growth in 2010, helped by fiscal stimulus spending. The report also predicted the German economy would contract by 6% this year, much more than the previous estimates. The Ministry is predicting a global recovery beginning at the end of 2009, which they say will help propel the Eurozone back out of recession in 2010.

The Mexican peso gained slightly as the concerns over a global swine flu pandemic eased. Many now believe the swine flu will be contained in the next few weeks as governments across the globes have aggressively moved to stop the spread. But health officials in the U.S. say the swine flu is likely to rear its head again this fall/winter, which is the traditional flu season. Tourism to Mexico isn’t likely to recover quickly, as many vacationers have canceled plans and aren’t likely to change them again. I wouldn’t look for a sustained rally for the Mexican pesos, and wouldn’t suggest speculation in this currency.

As I stated in the opening section, both the Australian and New Zealand dollars rose overnight, ending two days of losses. Both currencies have moved back up fairly close to the levels they were trading at prior to the swine flu scare. While I would expect the Aussie dollar to hold on to these recent gains, the New Zealand dollar could be subject to additional selling pressures. New Zealand central bank Governor Alan Bollard will probably decide to cut rates by 50 basis points on Thursday, narrowing the interest rate differential of the kiwi vs. the U.S. dollar and euro.

Gold has moved back up along with all of the currencies, approaching the $900 level again. As I stated yesterday, these moves lower by the precious metals are, in my opinion, nothing more than excellent buying opportunities. Once the global recovery begins, inflation will spike and the price of these metals will likely spike up with it.

Running a bit long today, so I’ll end it there.

Currencies today 4/29/09: A$ .7196, kiwi .5703, C$ .8308, euro 1.3263, sterling 1.4751, Swiss .8798, rand 8.5424, krone 6.5851, SEK 8.1015, forint 218.14, zloty 3.3336, koruna 20.14, yen 96.88, sing 1.4856, HKD 7.7504, INR 50.09, China 6.8245, pesos 13.71, BRL 2.1846, dollar index 84.528, Oil $50.74, Silver $12.62, and Gold… $899.22

That’s it for today… the summerlike weather we have enjoyed the last few days was replaced with spring like showers and fog this morning. Thunderstorms are apparently on the way for this afternoon. Our email problems seem to be fixed, but it is still early and there is still plenty of time for the gremlins to show up! Hopefully all of you will be able to read this before dinner! Hope everyone has a wonderful Wednesday!!

The Daily Reckoning