Weekly Jobs Data is Positive, Pushing the Dollar Lower

As mentioned in yesterday’s Pfennig, we had a long list of data released yesterday, and most of the numbers indicated that the US economy may be picking up a bit of steam. Producer prices came in right where they were expected, increasing 0.3% MOM and 5.7% YOY. The ‘core’ figure, (ex food and energy) is the one the Feds monitor and both showed modest increases over last month. The biggest surprise came in the form of the Empire Manufacturing number which came in at 9.53 on December versus 3.00 last month. This number reflects manufacturing activity in the NY region, but has a history of being very volatile and therefore an unreliable indicator of future manufacturing growth.

Initial jobless claims were 24K lower than expected last week, with 366K first time claims. Continuing claims increased slightly to 3603K versus last week’s adjusted 3599K, but the number was still lower than economists expected. Another big surprise came in the form of the Net Long-term TIC Flows which were expected to be $62.5 billion, just slightly lower than last month’s $68.3 billion. But the actual amount of International Capital coming into the US in October was just $4.8 billion! Demand for US debt fell in October as investors moved out of their ‘safe havens’, selling US Treasuries. But November brought renewed worries regarding the European debt crisis, so most economists believe the TIC data will be back up near $70 billion next month.

Capacity Utilization, which is one of our favorite indicators of future growth, came in right where it was expected: unchanged at 77.8%. The Industrial Production data was the sole piece of data which was negative, dropping 0.2% in November versus October’s 0.7% increase. But this was the last piece of data released yesterday, and the markets basically ignored it, focusing instead on the weekly jobless claims which for once showed a move in the right direction. The weekly numbers weren’t outstanding, but the equity markets are desperately looking for something to spark a ‘Santa Claus’ rally, so the pundits jumped all over the 19,000 fall in the number of applications for unemployment payments. It wasn’t as if we had more people going to work, but instead the stock jockeys are getting excited because the rate of firings is slowing down. But the markets were desperate for any good news, and jumped all over the better-than-expected weekly jobs numbers.

Chuck was busy trading for the last time in 2011 yesterday, but still took some time to analyze all of the numbers as the plethora of US data releases came across the Bloomberg. He sent me the following to include in this morning’s Pfennig; so here’s Chuck:

OK… Chris mentioned that Capacity Utilization fell 0.2%, from 78 to 77.8… I told the boys and girls on the desk that Capacity Utilization (Cap U) is one of the few forward-looking pieces of data, and when Cap U begins to bog down, it tells me that the economy is bogging down. We might not see it in other stuff for a couple of months, but we can see it right here, right now… And for the current stuff, Industrial Production decreased 0.2% in November… Yes, October’s number was strong (0.7%)… But you have to remember that in October, the economy was still breathing on the $2.1 trillion in stimulus that the Fed has put into the economy the past three years… And probably proved once again that a star burns brightest right before it burns out!

The number of hours worked is falling… And to me… The wheels are beginning to come off the economy again… And like Steve McCroskey in Airplane… The economy picked a bad time to have the wheels come off of it! This IS going to be an election year… Good luck with that!

Well… The TIC’s data gave us some interesting news yesterday. According to the US Treasury, China bought less Treasury debt (Treasuries) in October and their total foreign holdings of Treasuries dipped for the first time since July. China, the largest foreign holder of US Treasuries (remember our own Fed is the largest holder of our debt) bought 1.2% less in October to bring their total holdings to $1.13 trillion. Could this be a signal? Probably not, as we also saw declines in July and August, only to be reversed in September. But… This eventually is going to happen, folks. China will say no mas. And all hell will break loose. Are you ready for that to happen?

Remember years ago, in the fall, during Bonanza, Chevy would introduce their new lineup of cars? And they used to play that song… See the USA in a Chevrolet… OK… For people my age and older, that song is now in your head… Now use these words to that music…

Here we go again, deficit spend again, it’s the only thing our lawmakers know how to do…

Congressional negotiators signed off Thursday evening on a sweeping $1 trillion spending agreement for federal agencies, just 28 hours before a deadline that would have led to a government shutdown. Boy… Aren’t we lucky to have these guys working for us? Where else could you find lawmakers that were so willing to deficit spend to make our lives easier? Ahem… Did I hear someone say… Greece?

Thanks as always to Chuck for his thought provoking contribution to this morning’s Pfennig.

The dollar started falling after the data releases yesterday morning, and continued in overnight trading. Currency investors moved out of the ‘shelter’ of US dollar holdings and went hunting for yield. Those currencies with the greatest interest rate differentials were the leaders yesterday, with the New Zealand dollar (NZD), Aussie dollar (AUD), and Brazilian real (BRL) leading the way. Brazil’s real moved up over 1% versus the US dollar as the central bank said it will lend dollars to help exporters, adding to the supply of the US currency. The central bank will do ‘repos’ to add US liquidity to the markets, and pulling Brazilian reals out.

The Swiss franc (CHF) joined in the rally with the ‘high yielders’ after the Swiss National Bank stayed on the sidelines. Currency traders were expecting another move by the SNB to weaken the currency, but after they refrained from intervention, it gave traders a green light for further appreciation of the franc. The SNB kept the franc’s minimum exchange rate at 1.2 per euro and also maintained its benchmark rate at zero.

The euro rallied from an 11-month low against the dollar after Spain’s debt auction met with more buyers than supply. Spain sold more bonds than its maximum target at rates which were high, but still within expectations. The Spanish government was able to sell 6.03 billion euros of bonds compared with a maximum target of 3.5 billion euros. The yields were 5.545%, just slightly higher than the 5.433% it paid when it auctioned 10-year bonds at the end of October. Another report showed that European manufacturing and service industries contracted less this month than economists forecast.

One of the surprise moves by currencies on the day came from the Indian rupee (INR) which had been one of the worst performing currencies in Asia this year. The big move up in the rupee came after India’s central bank curbed trading in rupee forwards and Prime Minister Manmohan Singh pledged to open up the retail industry. The central bank said it would reduce the amount of open positions dealers can maintain overnight, helping to prevent speculators from pushing the currency lower.

Then there was this… Peter Mason sent me the same link to a story from our friends over at Casey Research regarding ‘Re-hypothecation’ which is the newest buzzword surrounding the fall of MF Global. This story does an excellent job of explaining what this word actually means, and clearing up some of the confusion regarding the competing claims for gold held at HSBC for customers and/or counterparties of MF Global.

Thanks to Peter for bringing this article to my attention. Peter joined EverBank last year as a member of our Infinity Elite Plus group, and has really been a great addition to our customer service team.

To recap… The bunch of data released yesterday in the US was not stellar, but the markets were looking for a reason to rally. Investors went hunting for yield and the NZD, AUD, and BRL all rallied. The Swiss National Bank stayed on the sidelines and allowed some appreciation for the CHF. The Indian government curbed forward trading, helping to bounce the rupee back up. And our friends over at Casey Research explain why ‘Re-hypothecation’ is the new buzzword.

Chris Gaffney
for The Daily Reckoning