Bernanke delays taking action until September...
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In This Issue.

* Bernanke decides to wait

* Focus on ECB

* Gold continues to decline

* Swiss Independence Day

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

Bernanke delays taking action until September...

Good day. We made it past the first day of central bank announcements without much bloodshed in the markets, but we could be in for some increased volatility today as we wait for an announcement by the leader of the ECB, Mario Draghi. As you will see in the currency wrap-up, the dollar remained in a fairly narrow range yesterday, steadily dropping through most of the morning before gapping higher immediately following the FOMC announcement. But the markets have much higher expectations of Mr. Draghi, and I'm just not sure he is going to be able to deliver what traders are looking for. But before I start on the ECB, let me first focus on what the FOMC had to say yesterday.

The FOMC announcement was basically a confirmation of the status quo, with the committee stating they 'will provide additional accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.' And that 'Economic activity decelerated somewhat over the first half of this year.' Not exactly a positive spin on things, but things are still not bad enough for the Fed to feel that they had to increase their stimulative efforts.

I guess Bernanke and his team are happy enough with flat consumer spending, 8.2% unemployment, and stubbornly slow growth. Data released yesterday before the Fed announcement certainly didn't project a solid US economy. The ISM Manufacturing index slipped below 50 which indicates manufacturing is contracting here in the US. This confirms all of the data I shared with readers yesterday showing manufacturing is slowing across the globe. The labor market is probably the biggest thorn in Bernanke's side right now, as the unemployment rate just doesn't seem to budge. Yesterday we got the ADP employment change for July which came in at 163k, slightly higher than expectations but still below last month's revised increase of 172k jobs. Today we will get the weekly jobless claims which are expected to show an increase back up to 370k, and increase of just under 20,000 newly unemployed. The markets will probably look past this weekly number and focus on Friday's Change in Nonfarm Payroll number which is expected to show an increase of 100,000 for the month of July. (It is easy to get confused with all of these different jobs numbers; the ADP and Friday's change in Nonfarm Payrolls are estimates of the number of newly employed, so a higher number is good. But the weekly jobless claims which come out each Thursday is an estimate of the number of initial jobless claims filed, so a higher number on this data is bad).

There doesn't seem much Bernanke can do to stimulate the labor market. Rates are as low as they can get on the short end of the curve, and while the longer rates can probably come down slightly I really question what impact another .25% drop in mortgage rates will have on the labor markets. Employers in the US just have too many outstanding questions regarding the direction of our economy, and FOMC has nothing they can do about the three biggest generators of uncertainty: US elections in November, the Euro crisis, and the automatic spending cuts we face at the end of the year. Employers aren't going to be willing to hire more workers without knowing what their tax liabilities are going to be and with the dramatic 'fiscal cliff' awaiting the US at the end of this year. Congress and the administration need to address these two issues, and until that happens Bernanke and his compatriots at the Fed aren't going to have much they can do to help the labor markets.

As I stated in yesterday's Pfennig, both currency and equity investors had been increasing their bets that the Fed would be boosting their efforts to kick-start our economy, so the lack of action caused stocks to fall and the US$ to increase. But these moves were partially offset by expectations that the ECB would be forced to act after the ECB President Mario Draghi's assurances of support last week. The euro actually recovered a bit in the Asian markets after dropping down immediately following the non-action by the FOMC.

Currency investors are definitely expecting some action from Draghi, and these expectations are, in my opinion, dangerously high. ECB officials will definitely keep the benchmark interest rate at a record low, but the markets are looking for Draghi to make a dramatic policy announcement following the rate announcement. One possibility is that Draghi would be able to announce there is an agreement to grant the 'rescue fund' a banking license, allowing it to directly enter the bond markets to provide liquidity. He could also announce an increase in the bond purchase program already in place by the ECB. Neither of these actions are currently backed by the powerful Germans, and the risk remains that Draghi will not be able to convince ECB members to take action. On the day following Draghi's assurances that the ECB will do whatever it takes to support the euro, Bundesbank officials reiterated their opposition to any increase in ECB bond purchases, and also discounted the talk of granting a banking license to the permanent rescue fund, the European Stability Mechanism. Just yesterday Budesbank President Jens Weidmann said the 'ECB shouldn't overstep its mandate'.

One thing is certain, Draghi has to produce something which can be considered a 'game changer'. Again, I believe the risk is that the ECB President will fail to deliver and may have to resort to more of the same jawboning. The markets won't be as kind as they were last week, and the euro could be in for a drop today. Hopefully I am wrong, and the ECB members will reach consensus on some action, but the risk is high for a disappointment.

The Bank of England is conducting their meeting today also, and has largely been overshadowed by the much more important ECB meeting. BOE officials will likely maintain their current stimulus programs, essentially printing money by issuing debt and then buying the bonds back in the open markets. They increased this quantitative easing program by 50 billion pounds last month, but the impact of this increase is still unknown. The UK economy has recently fallen deeper into a double dip recession, and the events over across the English Channel certainly isn't helping the BOE steer the economy out of trouble. Morgan Stanly cut its UK outlook yesterday, projecting the UK economy will shrink .5% in 2012. Both Morgan Stanley and economists at Barclays forecast the BOE will cut its key rate in November and expand QE during the same month. The pound continues to weaken vs. the euro and is one of only 4 major currencies which have dropped vs. the US$ over the past week.

The Aussie dollar continued to climb yesterday after reports showed an increase in retail sales and trade. Sales in June climbed 1 percent after a .8% increase during the previous month according to a report released by the Bureau of Statistics today. The Australian economy continues to be driven by exports, and the trade surplus had a healthy increase to A$9 million compared to predictions of a deficit of A$375 million. The slowdown in China hasn't had as dramatic of an impact on the Australian economy as some had expected. But the Aussie dollar is still subject to 'risk off' days, and the gains we have seen over the past few days could be quickly wiped away if the ECB disappoints the markets.

Power seems to have been restored to most of India but the rupee continued to fall after India's central bank governor said inflation remains too high. The Reserve Bank of India kept its benchmark rate unchanged during their power-outage shortened meeting on July 31. The monetary authority raised its inflation forecast for the year and lowered the growth estimates from 7.3% to 6.5%. The Asian markets have not had much good news lately, as manufacturing numbers continue to decline having a dramatic impact on these export driven economies.

We did get one bit of positive news from Asia with the release of a report showing Singapore's unemployment rate unexpectedly fell last quarter. The seasonally adjusted jobless rate fell to 2 percent vs. an estimate by Bloomberg News of 2.2%. Singapore continues to impress investors by going 'against the grain'. Industrial output and exports rose more than economists estimated in June and their housing market also remains strong. Singapore's central bank uses currency prices to fight inflation instead of the traditional weapon of interest rate increases, so positive news on the economy usually leads to increases in the Singapore dollar.

Gold continued to slide yesterday, falling below $1,600 for the first time in a week. I searched for some direction on what gold will do in the near term, and can report that most analysts agree the price will be moving, but there is no agreement on the direction of the price changes. The only three analysts to correctly predict gold's slump last quarter are split on what will happen during the next few months. Analysts at Westpac say prices will continue to drop, while those at Commerzbank and ANZ predict a rise to record levels within a year.

Reading through their reports, they all have fairly good arguments to support their views. As Chuck has always said, it is difficult to predict the long term direction of the currency and metals markets, and nearly impossible to call the short term directions. Investors are best to gather as much information as they can and try to find a strategy which they can implement over a long term horizon.

We will be participating in a great event this September where investors will be able to benefit from the insights of some very smart people including our own Chuck Butler and Frank Trotter along with Dr. Steve Sjuggerud, HS Dent's Rodney Johnson, and Money Map's Keith Fitz-Gerald. Certainly sounds like they have put together a pretty impressive brain trust to share their thoughts on these volatile markets. Pfennig readers get a big discount of $325 off the registration fee if you sign up before August 11th. You can read more about the event and register at the following link:

Then there was this. Yesterday was Swiss Independence Day. My focus on getting the Pfennig out the door yesterday morning kept me from noticing the preparations being made for our celebration of the Swiss Independence day. Our top Business FX Advisor, Agnes Rentsch Brady is from Switzerland, so she wanted to share the celebration of her home country with all of us here at EverBank.

She brought in Croissants to celebrate the French part of Switzerland, chocolates to celebrate the German areas, and finally made very strong Italian Espressos which were enjoyed by everyone. She also shared the following story on the founding of Switzerland which I thought Pfennig readers would enjoy. So take it away Agnes.

The Founding of Helvetica on 1st of August 1291 & our own " Robin Hood":

In 1291 on the very famous Field called "Rütliwiese" Uri, Schwyz & Unterwalden ( these are "Cantons" and it's the equivalent to States) swore an oat together and "Helvetica" was born.

However: the King of "Habsburg" ( Germany), called Rudolf von Habsburg had his Deputies collect more and more Taxes from the people around him. One of the most aggressive and evil one was Gessler: his intention was to get favor in the eyes of the King and therefore, the new founded little Helvetica was on top of his list to collect more taxes. But the brave Helvetians stood strong, with Wilhelm Tell as their Leader: Gessler surrounded them and forced Tell to shoot an Apple of Walterli's ( Wilhelm Tell's little Boy) Head. Wilhelm Tell did it and shot the Apple in the middle and kept his son safe.

However, Gessler still put Tell under arrest and left with him and his soldiers in a boot to bring them to "Küsnacht" ( a little town near Zurich) - as a big Storm arrived, Tell got free and made it to the other side where he waited on Gessler on the only passage from the lake up to Küsnacht: there, he shot him and set the way free for him and his fellow Helvetians to become more and more independent and stronger.

Today, Switzerland has 26 Cantons (States) still known for their independence and stubbornness!

SwissMiss Agnes

Thanks again to Agnes for sharing the celebration with all of us yesterday, when Agnes does something she always does it BIG!

To recap.

Currencies today 8/2/12. American Style: A$ $1.0509, kiwi .8117, C$ .9967, euro 1.2269, sterling 1.5544, Swiss $1.0209. European Style: rand 8.3107, krone 6.0232, SEK 6.7673, forint 228.63, zloty 3.3472, koruna 20.61, RUB 32.4038, yen 78.22, sing 1.2464, HKD 7.7555, INR 55.8412, China 6.3674, pesos 13.364, BRL 2.0443, Dollar Index 82.874, Oil $89.06, 10-year 1.52%, Silver $27.47, Gold $1,603.10, and Platinum $1,398.25.

That's it for today. I am dragging a bit this morning as was up late last night. My wife and I were asked to see The Zak Brown Band which played a concert last night. It was a great show, even with the hot temperatures; but it kept me out well past my normal bedtime. Congrats to the Cardinals who beat the Rockies again last night, hopefully we can complete the sweep tonight. Hope everyone has a Tub Thumping Thursday, and thanks for reading the Pfennig.

Chris Gaffney, CFA

Vice President

EverBank World Markets



Posted 08-02-2012 11:48 AM by Chuck Butler
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