Risk on continues to dominate...
Daily Pfennig

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In This Issue...

* European bond yields fall...

* Housing data on the rise...

* Euro took honors...

* Swiss franc changes course...

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

Risk on continues to dominate...

Good day...and welcome to another Friday morning. We actually get a three day weekend with the observance of MLK Day on Monday, so I have that to carry me throughout the day. I can't remember who was talking about this on the desk yesterday, but the conversation was about the return of day light savings coming up on the horizon. At first glance, it seems quite a while before we get to that point but it's only about six weeks away. I need to stop procrastinating and just get to the task at hand.

Well, the financial markets did end up breaking out of that tight trading range yesterday and, for the most part, turned in a decent day. We started off on the right foot during the European trading session following a successful Spanish bond auction. As I mentioned yesterday morning, the lower yields that we've been seeing from these peripheral nations has gone a long way in calming market fears that bailout after bailout will be needed. As yields fall, the government issuing the debt will have a smaller obligation when it comes to servicing the bonds. In other words, they aren't spending all of their money to just keep up with interest payments.

The Spanish bond auction was just the latest to yield positive results and they do nothing but fan the flames of a risk on environment. The ECB also said that the eurozone economy should begin to pull itself out of recession later this year once the delayed effects of the various accommodative monetary policies take hold. As you can see, the pump was already primed for good news when the US markets opened up for business. We did have a handful of economic data in the states to evaluate, so let's take a look.

The first bit of data came in the way of December housing starts and building permits, both of which carried the torch of good news. Housing starts in 2012 rose the most since 2008 and came in at an annual pace of 954k. This also represented a 12.1% rise from November, so it was definitely a good way to end the year. To put this into perspective, the peak in 2005 was 2.07 million and the average from the year 2000 through 2004 was about 1.74 million. The numbers also revealed that a growing percentage of those breaking ground are doing so for multi-family homes.

Building permits also moved in the right direction, albeit nowhere near as nice as starts, but we did see an increase in the potential for future construction. Permits rose to an annual 903k pace in December compared to the revised November figure of 900k. I saw some rumblings that the housing starts number may have been skewed to the upside due to favorable weather conditions, but most economists are still looking at this data as proof the housing market has finally turned the page.

While I agree that housing has already bottomed, I still think there are plenty of speed bumps in the way before we can once again set the cruise control. One of those speed bumps just happens to be associated with the next report to discuss. Since it was Thursday, we had the initial jobless and continuing claims from earlier this month. The headline figure for those filing initial jobless claims dropped to 335k, down from the previous report of 372k, and represented the lowest reading since January 2008.

In an interview with a representative from the Labor Department, it was said the drop may reflect the difficulty that the government has in adjusting the data after the holidays when seasonal workers are cut loose. I'm not exactly sure why this spokesman was compelled to explain. Are they trying to say this could be an anomaly or are they saying those figures just aren't accurate? Either way, the impression that I'm left with is not to expect this as a run rate. The continuing claims number wasn't so good.

Those receiving traditional unemployment rose by 87k to just over 3.21 million. Keep in mind this figure doesn't take into account those who have exhausted traditional benefits and are now collecting emergency and extended payments. This segment increased by 68k to 2.06 million. It's one thing to see the initial claims improve, but it's another to see that more than offset by a rise in continuing claims. As you can see, the news today was good and not so good, but the media took the housing numbers and decided to run with it.

The next two reports are secondary, but at least worth taking a look. The Bloomberg consumer comfort index fell last week to the lowest level in three months. It seems the reversion of the payroll tax break back to 6.2% is hitting consumers and the constant uncertainties surrounding the government's handling of the fiscal cliff have some on edge. The part of the report that caught my eye was the consumer purchase gauge. Those who felt it was good time to buy something fell to the lowest level since September. Again, this is a small time report but I find it useful to see where things stand.

The final data point yesterday came in the way of the Philly Fed Index, which measures manufacturing in the Philadelphia region. The report showed that area's manufacturing has contracted so far in January by falling to -5.8 from the previous reading of 4.6. As you would expect, most of the individual components such as new orders and employment showed deterioration. The same report for the New York area showed declines as well, but we still have a couple of weeks before we see if those will correlate with the national ISM report on February 1st.

As we head into this morning, the U of Michigan consumer confidence report will be released right about the time most will be refreshing their morning cup of coffee. Last month's figure took a nose dive to the lowest reading since July on account of the whole fiscal cliff mess, but we'll see if that same crowd was able to put that behind them. If I had to call it, I'll say the rise in stocks so far this year is enough to steal the show so look for a rise in confidence so far this month.

Moving on to the currency market, we did see a larger swing than we did over the past couple of days, but it was confined to just a few currencies. In fact, the damage was already done by the time I got to work yesterday morning as the euro was in the top spot and remained that way when I was packing up to go home. I have already covered the reasons, but the euro finished the day with just under a 0.75% gain. When the euro has been mentioned over the past several months, we would also need to think of the Danish krone and Swiss franc since they have traded as close to lock step as you can get.

However, that has been changing lately for one of those currencies, namely the Swiss franc. In fact, the franc actually lost a bit yesterday and has deviated away from the euro's movement. Since September 2011, the Swiss National Bank (SNB) has set a cap of 1.20 per euro as to how high they would allow the franc to move. Well, this risk on attitude has chipped away at all of the safe haven buying that had caused a large run up in the franc and was last trading around 1.24 yesterday. This happens to be the best gift the SNB could have received. They have been shoveling money by the truck load into the market trying to defend that cap, but now the market is doing the work for them.

The Japanese yen was again the biggest loser for the same reasons and it traded into the 90 handle while losing over 1.5% on the day. Among the handful of currencies in the loss column, both the Australian dollar and New Zealand dollar were included. We saw a disappointing jobs report in Australia as payrolls fell 5,500 in December and the unemployment rate ticked up to 5.4%. While the labor market was key in the government's decision to cut rates last year, the full effects of those moves haven't yet made their way through the economy.

The general consensus is for rates to remain unchanged during the February meeting, but China continues to be the bellwether for the Aussie. Moving next door to New Zealand, inflation unexpectedly fell in the fourth quarter and just prolongs any thoughts of a rate hike. Even though nobody was really anticipating higher interest rates, it just triggered some sales and the currency fell about 0.5%. Besides the currencies I have mentioned, the others all ended the day with as close to no return as you can get. It was another sparse day for global economic data, but there has been quite a bit of chatter from the various Fed members.

After skimming through all of the spin and posturing, I came across something that really struck a nerve. The Fed Reserve of Atlanta President Lockhart said that he is asked by average Americans whether this long period of low interest rates will negatively impact people, especially bond holders. His answer was your typical political response of not really providing an answer. He said the best answer he can give is that the low rate policy is designed to bring the economy back to life, to nurture a recovery, and to get the economy growing. That's great and everything, but please answer the question.

That takes me to our friends over at the 5 Minute Forecast (http://5minforecast.agorafinancial.com/). Dave Gonigam had this to say...

Then there are the unintended consequences of "quantitative easing."

While Ben Bernanke routinely pulls his triceps patting himself on the back for jacking up stock prices, "Federal Reserve officials are voicing increased concern that record-low interest rates are overheating markets for assets from farmland to junk bonds," according to a Bloomberg story this morning.

Say it ain't so!

"Investors have been snapping up riskier assets since the Fed boosted its bond buying to reduce long-term borrowing costs after cutting its overnight rate target close to zero in December 2008."

And from the Fed's standpoint, there's not much they can do about it. They're caught in a trap. Or as our macro strategist Dan Amoss is fond of calling it, a roach motel - easy to enter, impossible to escape.

OK, Mike again. As I came in this morning, the dollar is hanging on to a slight gain but nothing really to speak of. The Asian and European trading sessions overnight were fairly calm, so unless we see something profound in the consumer confidence numbers this morning, it's shaping up to be a quiet day. I would have thought the markets would be up and running this morning since we had some good news out of China. Chinese GDP rose at an annual 7.9% clip in the 4th quarter, beating the previous figure of 7.4%, and represented the first expansion over the past two years. I guess we'll see if US traders will decide to run with the ball.

Then There Was This... An economic survey concurs with European Central Bank President Mario Draghi's assessment that "we are not at all seeing an early and strong recovery." Analysts expect eurozone growth to be stymied not only by austerity but also by the euro's strength. "Without a decisive resolution it will be hard to fully restore private-sector confidence and credit availability, and stimulate growth," according to a Goldman Sachs report. "As a result, 2013 promises to be another year of weakness for Europe's economy."

To recap...With another successful European bond auction, the markets were set up for a good day as I got to work yesterday morning. The good times kept rolling along with the housing numbers, but the weekly jobs numbers raised a red flag. While initial claims improved greatly, those who are accepting benefits (both traditional and extended) were on the rise. A secondary consumer confidence report and the Philly Fed Index both fell, but the U of Michigan report is expected to rise. The euro took the top spot among currencies while the Swiss franc was sold due to lower safe haven flows. The yen got smacked around once again while data in Australia and New Zealand disappointed. We then finished up with a little Fed speak.

Currencies today 1/18/13. American Style: A$ $1.0501, kiwi .8350, C$ $1.0095, euro 1.3348, sterling 1.5937, Swiss $1.0726. European Style: rand 8.8980, krone 5.5774, SEK 6.4935, forint 219.68, zloty 3.0955, koruna 19.2184, RUB 30.2578, yen 89.82, sing 1.2271, HKD 7.7529, INR 53.7065, China 6.2181, pesos 12.6020, BRL 2.0437, Dollar Index 79.81, Oil $95.41, 10-year 1.86%, Silver $31.80, Gold $1,690.35, and Platinum $1,691.75

That's it for today...Like I said at the beginning, it's a three day weekend for us so there won't be a Pfennig on Monday. We finally get to see the puck drop as the NHL season starts up this weekend for our St. Louis Blues. The first game is at home against the Red Wings, but I'll be at a wedding so I'm sure I'll take more than a few peeks at my phone throughout the night. We also have a big weekend of playoff football to see who will travel to the Big Easy for the Super Bowl. Speaking of football, how about the Notre Dame player who got caught up in that story about a made up girlfriend. That whole thing was just very odd. Anyway, I'll let you go for today, so until next time, Have a Great Day!!

Mike Meyer
Assistant Vice President
EverBank World Markets

Posted 01-18-2013 11:03 AM by Chuck Butler