It was all about the global growth picture...
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In This Issue.

* Global growth in question...

* Where's the inflation...

* Beige Book shows color...

* Merkel not impressed...

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

It was all about the global growth picture...

Good day...and welcome to another Thursday. As Chris mentioned yesterday, I'll be at master control for the rest of the week as he enjoys an extended weekend on the ski slopes and then Chuck should rejoin us again on Tuesday. In the mean time, I'll do my best to keep you up to date on the markets, so without further ado, let's get right to it.

It turned out to be another fairly quiet day in most of the markets yesterday so there isn't much to speak of regarding individual currencies. Instead, the movement was broad based and headline driven since global economic data wasn't all that plentiful. I guess you could say the news of the day surrounded the not so encouraging announcement from the World Bank that its global growth forecast for 2013 was cut from a June estimate of 3% down to the current projection of 2.4%. The global economy is estimated to have expanded 2.3% last year, so they are pretty much calling for a repeat of 2012.

The World Bank cited austerity measures, high unemployment, and low business confidence in the larger economies as having an adverse impact and ultimately contributing to a lower growth picture. In a report, they said the recovery that was anticipated in June's forecast is being pushed a little further back into the second quarter. It went on to say the overall global economic environment remains fragile and is prone to further disappointment, but is less skewed to the downside than it has been over the past several years. I would say that's a fair assessment and basically coincides with our thoughts of an uneven global recovery.

The tepid outlook from the World Bank's semi-annual report set the trading tone yesterday and kept everything in a very tight range. We're starting to see the fourth quarter earnings reports come out, so volatility could pick up if we have any surprises. Still, question marks surrounding the global economy remain and we haven't even seen resolution to the debt ceiling or how it will be addressed. I think Chuck's Comfortably Numb description is appropriate in this instance.

Moving on to the US economic data from yesterday, everything was roughly in line with expectations. We began with a warm up, i.e. last week's mortgage apps, and showed a continued rise as the average 30 and 15 year interest rates remained steady. The reports came in waves yesterday so next in line were the December consumer inflation numbers. You already know my thoughts about the validity of those inflation reports, but the government says there was no inflation in December as the monthly CPI was 0.0%, up from November's reading of -0.3%.

If we recall, core inflation takes food and energy costs out of the equation, and matched the previous monthly figure of 0.1%. If we look at the year over year numbers, which happens to be 2012 year end, we see CPI rose 1.7% and core inflation increased 1.9% in 2012. Unless I'm looking at this backwards, this report tells us that inflation is actually lower if we factor both food and energy into the picture. I know gas prices have fallen somewhat, but what about groceries. I don't know about you, but my supermarket receipts haven't gotten any smaller.

I was reviewing my personal budget a couple of weeks ago and I just couldn't find anything that would indicate inflation only increased 1.7% last year. The average over the past ten years has been about 2.4%, but the figures posted on seem a lot more realistic. I know we've pointed to this website quite a few times in the past, but if you haven't yet, check it out. In the end, the government is telling us there isn't any inflation but those of us in the real world see it much differently. About the only thing that I get out of this is that interest rates aren't going anywhere anytime soon.

Sorry for the rant, but the impacts of inflation are always right in front of us. All we have to do is open our wallet to get a current measurement. The next bit of data doesn't get any airtime anymore, but we still like to keep an eye on this report. The November gauge of foreign investment, via the TIC flows, showed international investment in US financial assets increased considerably from October, which resulted in net sales. The net purchases of long term assets came to $52.3 billion while the total net flows including short term securities amounted to $27.8 billion.

According to the Treasury, China remained in the top spot of foreign holders of Treasuries with $1.17 trillion, followed by Japan with $1.13 trillion. Anyway, the report used to be a way to get a pulse on financing the US debt, but the Fed has all but made this report obsolete with the billions it uses to buy Treasuries. Next up, we had industrial production and capacity utilization stepping into the batter's box.

December output within the industrial sector increased for a second month as production rose 0.3%, compared to November's figure of 1.0%. It looks like vehicle production was a big contributor this month with business equipment providing some back up. Manufacturing production also showed positive movement as it increased 0.8% in December. These reports have some economists calling for sustainment throughout 2013, but if global growth slows as much as the World Bank thinks, we may run into some problems later in the year.

Capacity utilization, which is another manufacturing measure, came in right where it was expected at 78.8% so nothing much to talk about there. Homebuilder confidence remained at a six year high of 47, and takes into account their perception of current sales along with their outlook for the next six months. Like many reports, 50 represents that line in the sand which separates positive from negative but it has come a long way from its low of 8 back in January 2009. Speaking of housing data, I'll briefly jump ship to today's data reports.

It's a relatively quiet day in the data department, but we will see the results of December housing starts and building permits. Since I was already talking about housing, I thought I would mention that both reports are expected to see some improvement. We'll also get the usual initial jobless and continuing claims, along with some consumer confidence measurements and the Philly Fed report. All in all, nothing earth moving but it will be interesting to see how those housing reports turn out.

Anyway, back to yesterday. The final bit of information to dissect was the Fed's Beige Book, which basically gives insight into each of the 12 districts. The overall tone was more positive than it has been in the past as it said economic activity expanded with all districts characterizing the pace of growth as either modest or moderate. The piece that didn't show much optimism pertained to the labor market, as it stated that it was mostly unchanged. The Fed kind of hinted at this overall theme during its last meeting when the hot rumor became the conclusion of its bond purchases at some point.

I've gone on long enough with the economic data thing, so let's take a look at the currency market. As I alluded to in the opening, the currencies traded in a very tight range yesterday. Even silver, which can be pretty volatile, traded with a $0.45 swing between the high and low of the day, and ended right where it began the day at $31.15. The biggest mover on the day was the Japanese yen, which actually gained for once, and did appreciate about 0.50%. Other than that, the other currencies finished up with fractional returns on both sides of the ledger.

There wasn't anything that necessarily justified the yen's gain other than traders under the opinion it may have moved too fast downward. Some have also tossed around the idea that its 2% inflation target and intervention are pretty much priced in at this point, but I still think the Japanese government will still have a long way to go in terms of feeling comfortable with the exchange rate. In other words, I don't see their attention being turned away from doing what they can to weaken the currency any time soon.

Second place went to the South African rand with a 0.2% gain against the dollar. See what I mean when I said a tight range. The rand had actually dropped to a six week low before it turned around a bit on a larger than expected rise in November retail sales. The economy could probably benefit from an interest rate cut, but inflation remaining on the high end of its target makes that an unlikely scenario at the moment. With that said, the central bank has been known to surprise the markets, but I still see too much volatility and too many question marks that would make this a viable currency to hold on its own merit.

The two currencies at the end of the line were the British pound and Brazilian real, which both lost about 0.3%. The lower global growth outlook was the main culprit, but again, not much of a move considering we were talking about the Brazilian real. Ty sent me an article from the Wall Street Journal where the Brazilian Finance Minister said in an interview they are trying to shift gears away from their restrictive policies and take a more hands off approach. Brazil has traditionally been a destination for hot money since interest rates have been historically higher than most, but we'll see how comfortable traders actually become after being burned once of twice over the years.

In other news, Angela Merkel cut the German economic growth forecast to 0.4% for this year, citing the austerity measures scattered throughout the eurozone, and is quite lower than the original estimate of 1%. I was surprised that we didn't see a larger reaction from the market since Germany is the largest eurozone economy, but it is what it is. How about some good news. Portugal's auction of 12 month bonds resulted in the lowest yield since April 2010 as the country continues in the right direction per the terms of the bailout package. Things are moving along, but please note we still have a very long road to travel in Europe before things are in the rear view mirror.

As I came in this morning, the currency market has at least broken out of the narrow range from yesterday as the yen has given up its gain from yesterday and then some. In fact, its trading well into the 89 handle and is currently sitting on just over a 1% loss on the day. The currency on top so far this morning is the euro, which is getting some love from a successful bond issuance in Spain. Yields have been moving downward so much of the heat placed on the ECB has faded away and contributed to calmer heads over the past several weeks. Other than that, the market is just waiting on that housing data.

Then There Was This...on a follow up to what Chris had indicated yesterday, I found a headline that Germany will repatriate gold to restore reserve confidence. Germany plans to have half of its gold reserves stored in Frankfurt by 2020. The ?27 billion worth will be shipped from the Bank of France and the Federal Reserve Bank of New York, but none stored at the Bank of England will be touched. "With this new storage plan, the Bundesbank is focusing on the two primary functions of the gold reserves: to build trust and confidence domestically, and the ability to exchange gold for foreign currencies," according to the central bank.

To recap...It was fairly quiet yesterday but the World Bank did cut its forecast for global growth this year down to 2.4% from 3%. This report did, however, keep a lid on the various financial markets. The government said there was no inflation in the month of December and the TIC flows showed some improvement. Reports show that manufacturing was on the rise and the Fed's Beige Book was more optimistic than it was previously. The currencies traded in a very tight range with the yen on top, but German GDP has been cut for 2013

Currencies today 1/17/13. American Style: A$ $1.0513, kiwi .8386, C$ $1.0130, euro 1.3369, sterling 1.6031, Swiss $1.0752. European Style: rand 8.7629, krone 5.5440, SEK 6.4689, forint 219.22, zloty 3.0834, koruna 19.10, RUB 30.2354, yen 89.46, sing 1.2244, HKD 7.7527, INR 54.39, China 6.2153, pesos 12.5690, BRL 2.0393, Dollar Index 79.65, Oil $94.52, 10-year 1.85%, Silver $31.49, Gold $1,682.50, and Platinum $1,687.80

That's it for today...Since Chris was talking about skiing yesterday, I tried to remember the last time I had been and came to the conclusion that it has been a couple of years at least. Time flies when you're having fun. I'm more of a beach person, but there's definitely something to be said about being on top of a mountain with a pair of skis strapped to your feet. I'm used to getting up early but not this early, so it was tough waking up this morning. Well, I have a whole pile of stuff that I need to get done right off the bat, so until tomorrow, Have a Great Day!!

Mike Meyer
Assistant Vice President
EverBank World Markets

Posted 01-17-2013 11:18 AM by Chuck Butler
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