Comfortably Numb...
Daily Pfennig

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In This Issue..

* Comfortably numb...

* Data confirms the US slowdown...

* NZD and AUD end the week with gains...

* Hungarian forint stabilizes...

And Now... Today's Pfennig!

Comfortably numb...

Good day...These dramatic swings in the markets are becoming so common place that a move of 400 pts by the Dow doesn't really garner much notice. After all, in the past five days, the Dow Jones average has had a trading range of almost 2,000 points, but after five dramatic days the stock market is trading almost exactly where it was a week ago. And the volatility in the equity markets has carried over to the currency markets, where we continued the roller coaster ride which began a few weeks ago.

Yesterday, the dollar began the day with a strong move up in early European trading. But a plethora of bad data released here in the US caused the greenback to reverse course, and it wiped out all of its earlier gains. But the bargain hunting rally in the stock market during the afternoon pulled the dollar along with it, and we ended the day with a dollar index which was slightly higher than the day before. Today is shaping up to be a similar trading pattern, as Europe has begun the day buying dollars vs. most of the major currencies.

The numbers which forced the dollar lower yesterday included US industrial output which fell 6 percent in the third quarter, the largest fall in output since 1991. The September Industrial Production number was expected to fall .8%, but shocked the markets with a drop of 2.8%. Capacity Utilization, one of Chuck's favorite gauges of the health of the US industry, fell over 2% from last months number and sits at just 76.4%. This is an important piece of data, as it shows companies are pulling back production, and output here in the US is currently nowhere near our full capacity. The collapse of US manufacturing was further illustrated by a factory index for the Philadelphia region which hit an 18-year low this month. The slowdown in the manufacturing sector has been well documented in the past few years, but what many thought was a bottom apparently was just a pause in a further move down.

The only bright spot in the data released yesterday was consumer prices, which rose less than expected on the back of falling oil prices. The government reported that annual CPI Ex Food & Energy climbed just 2.5% during the month of September. The faltering economy seems to be keeping a cap on inflation for now. But with the government printing presses working overtime to flood the markets with US$, expect inflation to take a dramatic jump up sometime in the not so distant future.

Initial jobless claims for the past week were actually slightly less than projected with 'only' 461,000 filing first time claims instead of 470,000. But continuing claims jumped to over 3.7 million, nearly surpassing the previous peak back in May 2003. The job market continues to slide, which will continue to dampen any hope of a quick turnaround for the US economy. Today's data isn't expected to do anything to alleviate fears of a prolonged recession here in the US, as housing starts are expected to be at a 17 year low and consumer confidence will likely show another drop.

The increase in volatility in the equity markets caused the Japanese yen to advance against both the dollar and the euro yesterday. The yen gained against 15 of the 16 most-active currencies yesterday as investors took a more defensive position following the poor US data releases. Investors have again started to reverse their 'carry trades', causing the yen to drop below 100 before moving back up. The Swiss franc also benefited from the carry trade reversal. This pattern of buying and selling Japanese yen and Swiss francs according to the perceived risk in the markets will likely continue, taking currency investors along for the ride.

The high yielding currencies sold off a bit yesterday, but will end the week as the best performers. Brazilian real is up 8.41% in the past five days, and the Australian dollar is up 5.25%. Now we just need about 4 more weeks like this one to gain back the losses which have occurred over the past 3 months. But I question if we will see the past week's gains continue, as most of them occurred as bargain hunters snatched up these currencies after dramatic drops. The performance of these two currencies in particular is going to depend on global demand for commodities. If the global recession deepens, the demand for raw materials could fall further, dragging these currencies down. But the Asian economies should at be at least partially insulated from the global slowdown, and their demand for raw materials should at least put a floor under these currencies.

Yesterday I informed readers about events in Hungary which had caused a dramatic fall in the forint. As I reported, the ECB stepped in yesterday and said it would support Hungary's money-market operations with a loan of as much as 5 billion euros. This, along with other emergency measures enacted by the National Bank of Hungary over the past few days have apparently assuaged the foreign exchange market. The Hungarian forint ended the NY trading day flat vs. the US$, indicating the worst may be over. Hungary has a 'near zero' chance of defaulting on its debt, central bank President Andras Simor said on state television yesterday. But the ratings agencies are still downgrading the currency. Fitch today cut its outlook on the nations debt rating to negative from stable.

Mexico's central bank will probably leave its benchmark interest rate unchanged today on concerns that a reduction to help a sagging economy would further depreciate the currency and fuel inflation. While a rate cut would help the economy resist a worldwide slowdown and credit crunch, it would work against the bank's efforts to prop up the weakening peso. The Mexican central bank has sold $11.2 billion worth of US$ since last week and purchased pesos in a bid to stem a rout in the currency. The peso tumbled to a record low last week and the central bank is scrambling to stop the slide. Both Mexico and Canada are exposed to the US recession, and each country is trying to shield their economies from further slowdowns in the US. The tumble in oil from its record highs in July have also impacted the Peso and Canadian dollar. The effects are more pronounced for Mexico, where oil accounts for more than a third of fiscal revenue.

Currencies today 10/17/08: A$ .6783, kiwi .6127, C$ .8385, euro 1.3407, sterling 1.7290, Swiss .8805, ISK 260.0, rand 10.4099, krone 6.6635, SEK 7.5087, forint 202.10, zloty 2.6878, koruna 18.824, yen 100.83, baht 34.26, sing 1.4821, HKD 7.7576, INR 48.89, China 6.8332, pesos 13.0449, BRL 2.1335, dollar index 82.59, Oil $71.03, Silver $9.66, and Gold... $794.28

That's it for today...I took my son along with a few others on the desk to a fantastic Blues game last night. The Blues won 6-1, and my son, Brendan, ended up getting a game puck which dropped right into our seats after flying over the boards. This could be the Blues season, as the youngsters which they recently added to the roster seem to have sparked some life into the old veterans. It is finally starting to feel like fall here in St. Louis, we could actually have a light frost overnight. Hopefully the market volatility will cool down a bit too! Hope everyone has a Fantastic Friday, and a wonderful weekend.

Chris Gaffney, CFA

Vice President

EverBank World Markets



Posted 10-17-2008 9:10 AM by Chuck Butler