The debt ceiling debate kicks off in a big way...
Daily Pfennig

Blog Subscription Form

  • Email Notifications


In This Issue.

* Debt ceiling debate shifts into high gear...

* Retail sales slow but steady in the US...

* Technical factors call for an increase in the euro...

* Precious metals continue to rebound...

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

The debt ceiling debate kicks off in a big way...

Good day. I made it through Monday and I'm actually looking forward to having a great Tuesday! I will be writing the Pfennig again tomorrow but them I'm off to Colorado with my family so Mike Meyer will take over the writing responsibilities at the end of the week. My 'Sunday Pfennig' certainly seemed to generate some good conversation on the blog, I would encourage Pfennig readers to comment if something you read generates a reaction, one of the main reasons we get up early in the morning to write is to try and stimulate some good 'online conversations' regarding what is happening in the markets.

Did all of you catch President Obama's press conference on the debt ceiling debate yesterday morning? If you missed it, Treasury Secretary Geithner pretty much repeated it later in the day in an interview on Bloomberg and then Fed Chairman Ben Bernanke again spoke on the topic last night in Ann Arbor, MI. Not surprisingly, all three of these 'talking heads' were singing from the same song sheet. 'same as it ever was, same as it ever was, same as it ever was'. (thought I would throw that one in for Chuck.)

All three warned congress against letting the debt ceiling debate become another 'fiscal cliff' debacle. As they all correctly pointed out, the debt ceiling will absolutely have to be raised again, as we have already spent the money which this new debt is financing. Bernanke did an excellent job of explaining this to the folks in Ann Arbor last night: "Not raising the debt ceiling is like a family, which is trying to improve its credit rating saying, 'Oh, I know how we can save money; we won't pay our credit bills.'. It is very important that Congress takes the necessary action to raise the debt ceiling to avoid a situation where our government doesn't pay its bills." The President went on to say raising the debt ceiling is NOT akin to authorizing more spending, and that the debt which we are paying on is money which Congress has already authorized. On these points I think Bernanke, Geithner, and the President are right, America has to pay its bills, and congress gets a share in the blame for running these bills up.

But before you all start to typing a response to that crazy Gaffney who is advocating for more debt, hear me out. I am absolutely not supporting more spending or a continued increase in the massive amount of debt which we have accumulated. Many of you will remember my anecdote about the broken sewer line and raising the debt ceiling; I definitely think we should be reaching for the shovels instead of 'raising the roof'. But again the debt is money which has already been spent, and we have to meet our obligations.

I do understand where the Republicans are coming from, and they feel the debt ceiling is the only way they are going to be able to start forcing a slowdown in the level of spending which continues to grow. When you have a teenager who continually hits their credit limit on their credit card, the first thing you do is take away the credit card, and you definitely do NOT go out and get them another one so they can keep up their spendthrift ways. The Republicans are trying to use the debt ceiling debate to take away the credit card.

So I agree with forcing spending cuts on Congress and the Administration, as they just don't seem capable of spending cuts without them being forced. But the markets cannot and should not have to withstand another round of 'default roulette'.

So the debate has begun, but the markets largely brushed all the posturing aside (for now) and with no data releases, the dollar traded through Monday without much direction. Today the data cupboard is chock full, so the markets will definitely have something to trade off of. Retail sales for the month of December will lead things off, and the economists are calling for a very slight decrease in the overall level of sales compared to the month previous. The year end budget battle is expected to have worried consumers enough to weaken the final holiday shopping push. We will also get the PPI data which is expected to show prices have eased slightly when compared to a year ago. The PPI for December is expected to show a 1.4% increase in prices compared to a 1.5% increase during the month of November. The Ex food and energy numbers are expected to show a larger 2.1% increase YOY. Still, inflation continues to look like it is being held back by the lack of jobs and worries over the fragile economy.

Numbers released in Europe showed Euro-area industrial production unexpectedly fell in November adding to signs that the recession across the Atlantic probably deepened during the last quarter of 2012. Output dropped .3% from October when it declined at a revised 1%; so at least the numbers were slightly improved. Economists had forecast a slight increase, so the euro should have felt some selling pressure. But the 'good vibes' which were sent the Euro's way last week by ECB President Draghi's comments seem to continue to keep the single currency well bid. The euro held on to the $1.33 handle, but did trade down from the lofty levels of yesterday.

Technical analysts are predicting the Euro may continue to climb to $1.3835 after breaching resistance levels last week, according to a client note from analysts over at Credit Suisse Group AG. The 14-month high represents a 50 percent long-term Fibonnacci retracement, according to the analyst.

These same technical factors also show the US$ may start to climb vs. the Canadian dollar after a key support level remained in place. The US$ avoided slipping below 98.26 CAD/$, and the Fibonnacci numbers now indicate the dollar could appreciate to 1.004 CAD/$, a level which represents the 50 percent retracement of its previous decline.

Readers have to know that I am personally a bull on the loonie over the longer term, but I do pay some attention to these technical factors over the shorter term. One thing which I think should support a higher Canadian dollar over time is interest rate differentials. The Bank of Canada is expected to be one of the few central banks who will be raising rates this year, and as the global economy recovers, interest rate differentials will again become important to currency investors. And many of the currency strategists at the 'big banks' agree with my thoughts. HSBC sees the currency trading at .94 CAD/US$ by year end (remember the CAD is typically quoted in the currency markets using European terms, so a move lower is actually an appreciation of the currency).

Another commodity based currency which is poised for a move higher is the New Zealand dollar or 'kiwi'. New Zealand business confidence surged to the highest level in over a year according to a private survey released yesterday. A net 20% of the companies surveyed last quarter said they expect the economy to improve in 2013. More demand from a growing 'Chinese consumer' should bolster agriculture exports into Asia, and New Zealand is still the globes largest dairy exporter. And the RBNZ is another central bank which is expected to increase rates this year. The determining factor regarding a rate increase in 2013 will be inflation which is forecast to accelerate to 1.6% by the end of this year. New Zealand's jobless rate remains stubbornly high, a factor which could keep the RBNZ from moving on rates until the end of the year.

The Aussie dollar continued to slide back from last weeks quick surge, but the currency continues to hold around $1.055. Traders are a bit worried by a report to be released later this week which may show an increase in unemployment.

The South African rand recovered slightly from its sharp drop last week following a cut in its ratings by Fitch. The cut to BBB, the second lowest investment grade, was due to a widening budget deficit and rising unemployment. News overnight of a fairly large layoff by Anglo American Platinum Ltd. didn't help the rand. I guess the folks over at Anglo decided to shut down their platinum mine after the White House decided against issuing the $1 trillion dollar coin. But seriously, the South African economy is dominated by the mining industry, and any shutdown/strike will definitely hurt the prospects for a recovery in the trade and budget deficits.

While we are speaking about the metals, gold had another decent day yesterday, pushing up about $15 per ounce. The shiny metal has been slowly erasing the big drop which occurred at the start of the year, and is finally back above where 2013 began. Silver has pretty much mirrored the trading pattern of gold, and is also up slightly this morning.

Running late this morning, so I will skip the TTWT section. I promise to have a good one for you tomorrow!

To recap. All three of the administrations 'talking heads' were hard at work yesterday laying out their negotiating position on the debt ceiling. Basically it is 'just do it' and we can talk about spending cuts later. Retail sales increased in December, but at a slower pace than the previous month. Data showed the Euro-area manufacturing has stalled, and the recession continues. Technical factors show the euro will likely rise, and the Canadian dollar will fall in the short term. But I still think interest rate differentials will push the Canadian dollar higher in the medium term. Interest rates could also push the kiwi higher along with more demand from China. And the precious metals moved higher, erasing the losses booked during the first few trading days of 2013.

Currencies today 1/15/13. American Style: A$ $1.0549, kiwi .8423, C$ $1.015, euro 1.3345, sterling 1.6061, Swiss $1.0788. European Style: rand 8.7642, krone 5.5164, SEK 6.4623, forint 220.57, zloty 3.0859, koruna 19.1917, RUB 30.2353, yen 88.69, sing 1.2252, HKD 7.7529, INR 54.6125, China 6.2157, pesos 12.6532, BRL 2.0353, Dollar Index 79.586, Oil $94.07, 10-year 1.83%, Silver $31.26, Gold $1,681.14, and Platinum $1,692.15.

That's it for today. I had a relatively late night up at my son's high school last night, and I am expecting another late one tonight as we have parent / teacher conferences at my daughter's school. I will sound like a 'proud papa' but both of my kids are doing very well in school so these conferences are actually kind of fun. The winter is back, and temperatures are back near single digits again this morning. I wish I were down in sunny Florida with Chuck right now!! Thanks for reading the Pfennig and I hope you all have a Terrific Tuesday!!

Chris Gaffney, CFA

Vice President

EverBank World Markets



Posted 01-15-2013 11:58 AM by Chuck Butler
Related Articles and Posts