European growth is 'on fire'
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In This Issue.

* European growth surprises on the upside

* Real rates drive currencies

* US jobs data weak again

* Norges bank increases rates

And, Now, Today's Pfennig For Your Thoughts!

European growth is 'on fire'

Good day and welcome to Friday the 13th. I'm actually not at all superstitious, and 13 is one of my favorite numbers so I was thinking today was going to be a good one. But I ran into all kinds of problems getting this Pfennig out the door this morning, as I was getting a 'server error' message. Hopefully our IT guys down in Jacksonville will get it figured out soon, or today's Pfennig will be 'old news' by the time you read it!

I want to start the day off by wishing Lori Mucho and Aaron Stevenson a happy birthday! Yes, they both are celebrating birthdays today on Friday the 13th. Aaron is back from his trip out to Las Vegas where he got to attend the Money Show with Chuck. We welcome him back, as Mike is out today attending his grandfather's funeral. We used to be treated with a cake on the desk whenever it was someone's birthday, but we have grown too big, so we will just have to settle with a celebratory bagel (a Friday tradition!).

Most of the major currencies had a good day vs. the dollar yesterday and the continued to appreciate in early European trading as data showed the two major European economies are firing on all cylinders. Oil climbed back above $100 and both gold and silver had nice rallies. Bargain hunters are providing support to the precious metals at the $1,500 and $35 levels. We have a lot to talk about today, so let me get right to it.

The big story on the news wires this morning is the growth data released in Europe. German gross domestic product jumped 1.5% from the fourth quarter and the French GDP rose 1 percent, both exceeding economists' expectations. France's economy grew at the fastest pace in almost 5 years and the GDP number almost doubled expectations. These 'big 2' economies of Europe caused growth in the 17-nation Euro region to accelerate to .8% for the 1st quarter of 2011. The good growth numbers will certainly increase pressure on the ECB to raise interest rates. While the sovereign debt crisis will continue to be a dark cloud hovering over the euro, investors will be more willing to hold the euro with expectations of a rate increase.

The European Commission raised its inflation forecast for the euro region and projected the economy will gather strength next year. According to the European Economic Forecast which the EC released this morning, inflation in the euro region will average 2.6% instead of a previously projected 2.2%.

Both Chuck and I try to keep an eye on the longer term trends, both of us have in this game long enough to know the short term trends are for gamblers. But the longer term trends in the currency markets are much easier to call. One of the most important factors driving currency trends is interest rate differentials, and more importantly real interest rate differentials. There is a difference. While nominal interest rates catch people's attention, real interest rates (the nominal rate less the inflation rate) is what is most important. For example, you may be able to get a 25% interest rate on deposits in 'country X', but inflation in 'country X' is running at 30% so the real rate of return in the local currency is NEGATIVE. This is why we encourage investors to not just look at the nominal interest rates being paid, but at the underlying economic fundamentals, and especially the inflation rate expectations.

This is why we like those countries with central banks who are hawkish on inflation. When the central bank is raising rates to combat inflation, real rates will remain positive. But if the central bank is 'behind' inflation and raising rates after inflation has already started heating up, real rates will go negative, and the currency will suffer.

The weekly jobs data released yesterday showed 434k applied for initial jobless claims, slightly higher than expected. Continuing claims also increased to 3,756,000. Other reports showed producer prices increased at a faster pace than expected and retail sales were slower. Purchases by US consumers increased .5%, the smallest gain since July of last year. As expected, most of the increased spending occurred at gas stations and grocery stores. Furniture, appliance, and electronic dealers saw a decrease in sales. While the FOMC may not be worried about inflation in food and energy, I think these latest figures show that consumers are going to continue feeling the pinch from high fuel and food prices.

Today we will see the official CPI data which again is expected to show inflation in the US is well under control. Prices are predicted to have rose just 3.1% YOY and the number which the FOMC watches most closely, CPI ex Food and Energy, is expected to have risen just 1.3% YOY. I report these numbers with a slight feeling of guilt, as deep down I don't believe they are correct. The folks over at Shadow Stats have done an excellent job of compiling the data showing what inflation would be running if we used the traditional calculation methods. You can see what I believe is a much more accurate picture of the 'true' inflation rate at .

The commodity currencies were back on the rally train, as both oil and precious metals moved higher. The Canadian dollar bounced back from an earlier slump as oil climbed back above $100 after dropping as much as 3 percent in intraday trading. The higher oil prices also helped the Norwegian krone which is ending the week as the best performing currency vs. the US$ (up nearly 1%). The Norges bank raised interest rates fo4r the first time in a year, increasing their overnight deposit rate by .25%. Governor Olsen increased expectations of further rate increases during the press conference following the rate decision. The bank is forecasting two more quarter point increases this year. As I indicated earlier, a hawkish central bank should support higher currency levels, and this increase in rates along with expectations of further rate increases will keep the Norwegian currencies among the best performers vs. the US$.

In contrast to the Norges bank, South Africa's central bank left its benchmark rate unchanged for a third meeting. The monetary policy committee is more worried about unemployment than rising prices, and the data would indicate they should be worried. Unemployment in Africa's largest economy has been a stubbornly high 25%, and the central bank was unanimous in its decision to keep rates at a 30 year low. The problem is that inflation is creeping up above their target, so their decision is going to continue to get more difficult in the coming quarters.

Gold, South Africa's #1 export, gained for a second day as investors looked for alternatives to the euro and US$. Gold has been moving inversely to the US$, and yesterday's sell off in the dollar was matched by a move back above $1,500 for gold. Gold is an excellent 'uncertainty hedge', and could see more buyers as the European debt woes increase. Silver, as has been the pattern lately, was more volatile than gold, increasing 4.3% to over $36 per ounce in early London trading. Even with this sharp increase, silver is still down .79% on the week while gold was up .73% in the past 5 days.

A currency I haven't wrote much about this week is the Indian rupee. Last week the Reserve Bank of India raised interest rates for the ninth time in 15 months and a report yesterday indicates further rate increases may be needed. India's industrial production grew at the fastest pace in five months in March, increasing 7.3% from an adjusted 3.7% gain in February. Inflation in India is among the highest in all of Asia, so the higher industrial production numbers will likely encourage the Reserve Bank to continue to increase rates.

As the weekends, most of the currencies are trading fairly close to the levels we started at. It has been a volatile week with commodity and equity markets bouncing around like a brand new superball. But the underlying weak dollar trend still seems to be in place, and the global recovery seems to be on track.

To recap: Growth in both Germany and France surprised economists as both countries are firing on all cylinders. Investors need to look at 'real rates' instead of just wanting to invest in high yielders. US jobs data was weaker than expected, and PPI showed producer prices are increasing faster than predicted. Norway's central bank raised rates, while South Africa's left them unchanged. Both Gold and Silver seem to have found a support level, and the commodities helped rally the CAD$, NOK, and AUD$.

Currencies today 5/13/11. American Style: A$ $1.0681, kiwi .7929, C$ $1.0376, euro 1.4276, sterling 1.6261, Swiss $1.1283, . European Style: rand 6.9285, krone 5.4889, SEK 6.2994, forint 186.88, zloty 2.7413, koruna 17.0725, RUB 27.896, yen 80.71, sing 1.2408, HKD 7.7707, INR 44.865, China 6.4981, pesos 11.6287, BRL 1.6198, dollar index 75.072, Oil $100.01, 10-year 3.22%, Silver $35.635, and Gold $1,508.70

That's it for today. I was able to sneak out a bit earlier than usual last night and catch my daughter Lauren's basketball game. Lauren ended up being the high scorer in the game as her team won for the first time this year. Today is a big day for Lauren as it is 'field day' at her school. She was showing me her t-shirt which features a big #6 on the back. Living legend Stan Musial is going to be the honorary captain of Lauren's field day team, so they are all wearing Stan's number today. Unfortunately the weatherman is calling for more storms for today and most of the weekend, I just hope it slows up enough for Lauren and her classmates to get outside. Hope everyone has a fantastic Friday and a wonderful weekend!!

Chris Gaffney, CFA

Vice President

EverBank World Markets



Posted 05-13-2011 11:11 AM by Chuck Butler