Interest rate was the phrase that pays...
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In This Issue...

* Weekly jobs print better

* Gold and silver hit highs

* Bailout vs. interest rates

* Singapore inflation

And Now, Today's Pfennig For Your Thoughts!

Interest rate was the phrase that pays...

Good day...and a Fabulous Friday to one and all. This turned out to be an interesting week with plenty of ups and downs along with a hair pin turn thrown into the mix as the markets took a roller coaster ride all week long. The selling pressures from Wednesday were quickly put into the rear view mirror yesterday and all of the currencies, except for the pound sterling, finished either on the positive side or at breakeven. I'll dive deeper into currencies here in a bit, but first let's see how our economic reports from yesterday turned out.

I feel like I've been the bearer of bad news lately as most of the reports that came out this week showed some type of disappointment, so I'll start out with one that didn't have a black cloud hanging over it. The weekly jobs numbers on all counts showed improvement, albeit a gradual improvement, but I'll take it. Initial jobless claims came in better than expected and fell by 5,000 down to 382k last week with the four week moving average falling to 385,250, the lowest level since July 2008.

Continuing claims followed suit as the figure improved by 2k and came in at 3.72 million, which is the lowest figure since September 2008. We even saw improvement in the all important emergency and extended payments category as that number dropped by 13k down to 4.34 million. While this isn't exactly earth shattering news, it at least made some progress and will hopefully translate into something sustainable going forward. Progress in employment is what's needed to kick start the economy, but that's a very steep hill to climb at this point.

Moving on to the not so rosy results, durable goods orders didn't come through as expected and actually posted losses on both the aggregate and ex-transportation reports. The February numbers came in at -0.9% and -0.6% respectively instead of the projected 1.2% and 2% figures. This has raised some eyebrows as to the sustainability of the rebound in business sentiment, but the strong manufacturing numbers still have many overlooking this report.

The poor showing was attributed largely to a decline in demand for military equipment, but even if we factor out that portion, we still would have been in the same boat. Demand from emerging markets and Asia have provided the spark thus far, so we just need capital spending both on the business and personal level to catch on.

Finally, we had a measure of consumer confidence, called the Bloomberg Consumer Comfort Index, that came in lower than expected as well. It looks like the higher food prices that we've seen along with rising gas prices are starting to take their toll on the average household. Staying in the same category, we have the final results of the U. of Michigan confidence report due out this morning. While the stock market has traditionally been a big part of the feelings of confidence, rising prices are offsetting investors' rising portfolio values. It just seems to sting that much more when you actually have to reach into your pocket and pay more, especially for stuff like gas.

The rest of the reports released this morning will just give us the final printing of 4th quarter GDP, personal consumption, along with core PCE, which is the Fed's favorite inflation gauge. Most of the reports are supposed to show no change from the previous revisions but the GDP figure is expected to tick up a bit to 3% from 2.8%. It doesn't look like there will be too much in the way of excitement coming our way from this data, so bring on the 1st quarter stats.

As I mentioned at the beginning, it was a roller coaster type of day for both gold and silver and there was a good possibility that you missed it if you happened to blink. We began the day at modest gains with gold trading at just under $1,440 and silver around $37.75 but quickly rose to some historical highs. Gold traded up to a new record high of $1,447.82 and silver touched a 31 year high at $38.1650, all by 10 am. Once lunch time rolled around, they were trading flat as if nothing happened and actually traded at losses on the day by 3 pm. Like I said, it was a narrow window of excitement and then a healthy round of profit taking ensued, which was true in both senses of the word.

I'm sure there was a nice collection of black box trades, especially in silver since there was such a large drop, clustered around $38. As I was walking out the door last night, silver was barely hanging in the $37 handle and was just another day in the life of this safe haven environment. I saw an economist calling for $5,000 gold in the next 3 to 4 years on the back of inflation and currency debasement, however, I would say that's on the overzealous side, but who knows. It wouldn't be something that I'm hoping for because the world would need to be in a very bad place to see something like that.

The US dollar was again pushed aside yesterday and we actually saw a nice little run up in the currency market. I was definitely surprised to see the euro trade into the 1.42 handle yesterday, especially since the ink on the stories about Portugal weren't even dry yet. Let's look at the chain of events. Yields on Portuguese debt have risen high enough to bring into question the country's solvency, the nation's Prime Minister resigned yesterday, speculation they will need to be bailed out is running rampant, and now Spain is beginning to make its way into the headlines.

It just seems like there are a lot more reasons to sell the euro right now than to buy it. I guess this could be a classic case of buy the rumor and sell the fact in regard to an ECB rate hike, as that was the focus of traders on the day. I think we're going to see this back and forth action as stronger European economic data and thoughts of rate hikes battle it out with the unresolved debt problems. We'll probably continue to see this until one or any of those issues are specifically addressed.

Even though Portugal hasn't even asked for a bailout, preliminary figures are already flying around as to how much they would need. Calculations have given a figure of between 50 billion and 70 billion euros, but I would say it will probably end up being more. Just to provide some perspective, Greece accepted a 110 billion euro package and Ireland received 85 billion, so I would say Portugal would be close to Greece if it did happen.

Also, I found these numbers interesting in regard to the scale of economies. Portugal makes up about 1.8% of the euro zone GDP, Ireland accounts for 1.8% as well, Greece makes up 2.3%, and Spain accounts for 10.1% of GDP. If we look at the two biggest nations, Germany and France, they contribute 30% and 21% respectively to GDP. So, just a little food for thought.

The pound sterling turned in another loser yesterday by falling about .75% and was just clinging to 1.61. It was just a few days ago where it was making news that a rate hike could be coming soon, but that has since taken on some water. The most recent crack were the February retail sales numbers coming in lower than expected at -0.8%. As long as the word rate hike is still used in conversation, we may see some support at 1.60.

I forgot to mention the Singapore dollar yesterday as we saw the all important inflation figures leading up to their next policy review meeting in April. While both the monthly and yearly figures moderated a bit in February, annual CPI is still running at 5% and well above their recently revised forecast of 3% to 4% for this year. We'll know a lot more as to how comfortable the government is with the price outlook going forward in just a few weeks. At this point, we still look for the government to remain comfortable with additional currency appreciation.

It's basically been a commodity and yield story all week, so I might as well finish with that. The New Zealand dollar was again among the tops yesterday as 4th quarter GDP came in more than expected at 0.2%. I know this doesn't look like something to get excited about, but when the expectations were a negative number that would have sent the economy into a technical recession, it doesn't look as bad as it sounds. This would also close the door on any additional rate cuts so traders were just happy to see a positive number.

Lastly, oil was trading between $105 and $106 so both the Norwegian krone and the Canadian dollar saw benefit from prices hovering around 30 month highs all day. We had unemployment in Norway drop to 3.2% from 3.3% as well as the general upward pressure of the euro providing a solid base for the krone to work from yesterday. The higher gold prices also gave an extra boost to Canada, so both currencies had decent days.

To recap...The weekly jobs numbers, and even the extended benefits figure, showed improvement, however, durable goods and a measure of consumer confidence disappointed. There isn't much out today as we only get final revisions on 4th quarter GDP and consumer confidence. Gold and silver traded at historical highs, although it was short lived due to a round of profit taking. Talk of higher rates from the ECB overshadowed a possible bailout for Portugal and more bad news out of England as retail sales fell. Singapore inflation showed moderation but still remains relatively high and commodity currencies once again took top honors.

Currencies today 3/25/11... American Style: A$ $1.0233, kiwi .7519, C$ $1.0255, euro 1.4165, sterling 1.6112, Swiss $1.0957, ... European Style: rand 6.8740, krone 5.5673, SEK 6.3396, forint 188.07, zloty 2.8345, koruna 17.3092, RUB 28.2810, yen 81.29, sing 1.2604, HKD 7.7940, INR 44.6638, China 6.5573, pesos 11.9552, BRL 1.6594, dollar index 75.77, Oil $105.81, 10-year 3.39%, Silver $ 37.51, and Gold... $1,434.32... and let's not forget to check out the debt:

That's it for today...I'm looking forward to a nice, relaxing weekend after a busy week here at the office. I wasn't able to catch any of the basketball games last night, but I did hear Duke lost last night so I'm sure there were plenty of brackets busted with that loss. I plan on watching tonight's games and then hopefully get a good workout at the gym tomorrow. Just think, this time next week is April Fool's so have you thought of a prank yet? I don't usually do anything but I know some people are all into it. Anyway, next week brings us Opening Day for our St. Louis Cardinals!! Well on that note, I need to get going because I'm running a little behind this morning...I'll just blame it on the snooze button. So, until next time...have a Great Day!!

Mike Meyer

Assistant Vice President

EverBank World Markets



Posted 03-25-2011 10:51 AM by Chuck Butler