Retail sales in the US double analysts expectations...
Daily Pfennig

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In This Issue.

* Retail sales in the US propel the dollar higher...

* Euro Industrial production disappoints...

* Norges bank pushes back any rate hikes...

* BOJ Governor approved by parliment...

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

Retail sales in the US double analysts expectations...

Good day... We have a new Pope. The Catholic church welcomed Pope Francis who is the first pontiff from Latin America and is also the first Jesuit elected Pope. I think it is very interesting that the new leader of the Catholic faith is from the emerging market. Interesting but not surprising, as Latin America, Africa, and Asia are where the Catholic faith is growing the fastest right now. This is just another indication of the growing power of the emerging markets' influence.

The markets didn't need any divine intervention yesterday as the surprisingly strong US retail sales numbers gave equities all the fuel needed to keep them aloft at record high levels. The growth of sales at US retailers more than doubled analysts estimates in February. Advance Retail Sales increased 1.1% in February vs. an adjusted .2% increase the previous month. This was the largest gain in five months, and absolutely blew away even the most optimistic projections. The more stable 'less Autos' number also doubled estimates, increasing 1% vs. an adjusted .4% increase in January. The adjustments to January's numbers, doubling the previous readings, made these increases all the more impressive. Apparently US consumers were absolutely unfazed by the payroll tax increase that took effect in January, and these shoppers also ignored all of the budget drama originating from Washington DC. A jump in gasoline prices contributed to the jump in sales, but consumers also increased purchases at Home Depot, Costco, and non-store retailers on the internet.

These strong retail sales numbers will translate into better projections for GDP growth, as retail sales are one of the components used to calculate gross domestic product. We will likely see Wall Street economists announcing increases in their GDP forecasts, which should give even more of a boost to the US markets. International investors are again looking to the US to lead the global recovery, shifting some of their attention away from China. Recent data would certainly indicate the US will outperform most of the other major economies, with growth in China and Europe slowing while US growth continues to accelerate. But as you know, sentiment can change quickly, and the US recovery is still dependent on the easy money policies of the FED. I still worry what will happen once the Fed starts to slow down the printing presses (if ever).

The retail sales numbers dominated the markets yesterday, but we also got information on Business Inventories which increased at twice the expected pace. Companies stocked up, increasing inventories 1% compared to economists' expectations of a .5% rise. The Monthly budget statement was also released and to nobody's surprise the Fed ran a deficit of over $203.5 billion for the month of February. Today we will get the PPI data along with the weekly jobs numbers and Current Account balance. The PPI and Jobs data is expected to be positive, with Producer prices increasing at a .7% MoM rate and 1.8% YoY. As I pointed out in yesterday's TTWT, our current account balance is still worrying to anyone who really looks at it as we are projected to continue to post a quarterly deficit of over $112 billion. However, I predict that the media will focus on the PPI and jobs data, ignoring the Current Account number (most are in the 'Deficits Don't Matter' camp).

The positive data helped keep the dollar on an upward trajectory as we have moved away from the 'safe haven' trading and have shifted back toward fundamentals. I had a reader ask just that question yesterday: 'why is the dollar rallying on good economic data in the US? Last year the dollar always rallied on bad economic data but now it is rallying on good news, what gives? Yes, the dollar's direction can be confusing at times. Last year investors were worried and sought shelter in US bonds any time bad economic data was released by any of the major economies. The dollar was a 'safe haven' bet and international investors actually increased purchases of dollars whenever the data showed the global economic recovery was in danger. But investor sentiment has improved, and now investors have shifted back to give more weight to underlying economic fundamentals when evaluating currencies. The dollar has also benefitted from a move back into the US equity markets as international investors have simply shifted their 'safe haven' investments out of US bonds and into US equities. This is what has driven the bond yields up to 2.05%, but there is still a long way for these yields to move (more on that in today's TTWT).

News out of Europe has also helped keep the dollar rallying. Figures released from the EU's statistics office today showed euro-areal industrial output fell more than economists forecast in January. Industrial production fell .4% during January following a revised increase of .9% in the last month of 2012. Economists were surprised by this drop as most had predicted the number would be flat. The euro was helped a bit by Ireland's first successful bond auction since being bailed out in 2010. The Irish issued 5 billion euros worth of 10 year bonds at yields below where the Italian and Spanish bonds are trading. Demand was good which is another sign the Irish economy is out of the 'critical' phase of their recovery.

The Swiss National Bank cut their forecasts for inflation and reiterated their pledge to keep defending their currency limit of 1.20 CHF/Euro. The Swiss central bank also kept the band for interest rates at zero to .25%. Policy makers at the SNB have given no indication that they will be willing to ease the euro peg as they continue to see risks in the European markets. The peg was designed to keep investors from shifting out of the euro into the Swiss franc for safe haven purposes. And SNB policy makers still don't believe the euro-area is out of danger, and therefore want to keep the peg in place for the foreseeable future. "Downside risks to the Swiss economy remain considerable," it said in a statement. "There is a risk that tensions in the euro area will increase again."

The Norwegian krone slumped a bit overnight after the Norges Bank signaled they may cut interest rates later this year. The bank kept rates unchanged at their monthly meeting, and pushed back the possibility of future rate increases. "The analyses suggest that the key policy rate be kept low longer than previously anticipated," Governor Oeystein Olsen said today in a statement. "The first increase in the key policy rate is now projected to take place in spring 2014." Policy makers at the Norgest Bank cut rates in 2011 and 2012 trying to keep a lid on appreciation to the krone as investors looked to it for shelter from the euro crisis. The bank also adjusted their forecasts for growth and inflation, projecting growth at 2.75% this year from 3.5% in 2012, and they predict inflation will hold below their 2.5% target through 2016.

The Japanese yen weakened for a second day as the lower house of parliament endorsed Prime Minister Abe's choice for the next central bank governor. Haruhiko Kuroda is likely to become the next leader of the BOJ, and is an advocated of increased stimulus. The yen had strengthened a bit after some opposition to Kuroda's appointment was raised, but now it looks as if Abe will be successful in installing a central bank leadership who is in favor of further monetary easing. The Japanese government will continue to push for more stimulus in their attempt to break out of their deflationary funk. All of this stimulus should continue to put pressure on the Japanese yen which has lost over 13.39% vs. the US$ over the past 3 months. I still believe the yen has further to fall, and additional stimulus will probably drive it back toward 100 yen/$.

The Australian dollar ticked up a bit in overnight trading as currency traders increased bets that interest rates will remain unchanged through the end of 2013. A report released this morning showed employment is growing faster than previously predicted, reducing pressure for additional rate cuts by the Reserve Bank of Australia. Employment in Australia grew by 71,500 workers in February from the previous month, when it increased by 13,100 workers. Economists had projected just a 10,000 increase, so the number was met with surprise. The unemployment rate held steady at 5.4%.

The new Reserve Bank of New Zealand Governor Graeme Wheeler complained about what he calls the 'overvaluation' of the New Zealand dollar in a statement released today after the RBNZ announced they would keep rates unchanged. Wheeler also put to rest any expectations of a rate cut in 2013 stating "We expect to keep the official cash rate unchanged through the end of the year". Some currency investors had been betting on a rate rise, pricing this increase into kiwi forwards. Now Wheeler is attempting to jawbone the value of the kiwi lower by reducing these expectations. But inflation in the housing sector is still worrying for the RBNZ and may force the central bank to raise rates sooner than they would like. Governor Wheeler was successful in getting the kiwi lower for now, but if inflation starts showing up we would likely see the kiwi return to higher levels.

Then there was this... We get a bunch of 'industry' publications delivered to the desk each day, most of them filled with story after story on where professional managers are putting their client's funds. Honestly we get so much information delivered to the desk, I sometimes just glance at the covers and don't even open the magazines up. But the picture on the cover of this week's InvestmentNews definitely caught my attention. The weekly magazine aimed at Financial Advisers had a picture of a bomb made up of several sticks of dynamite wrapped in US government bonds all attached to an alarm clock. The headline was even more intriguing: Tick, Tick...BOOM! What will your clients' portfolios look like when the bond bomb goes off?

The magazine's answer to that question was actually contained in several different articles, a few of which you can view online at . The top half of the centerfold was a timeline of highs and lows for the bond market spanning the years from 1967 through the present day. Pictures of Volcker, Greenspan, and Ben Bernanke are included along with captions explaining what drove the 10 year bond yields to their all time high of 15.81% yield in September of 1981. It is hard to believe that rates on 10 year bonds were once over 15% but it also is a bit of a wake-up call on just how abnormal today's 2% yields are in relation to historical averages. Chuck started warning readers about the 'bond bubble' over a year ago, and this bubble has only grown as the Fed continues to keep rates low. Tick, tick, tick ...

To recap. The retail sales numbers released yesterday indicate the US economy is recovering at a faster pace than expected. The dollar continued to strengthen on the good numbers, and the euro weakened after IP numbers were disappointing. Abe's choice for the next BOJ Governor was approved by parliament, all but guaranteeing monetary policy in Japan will remain super loose. And interest rate expectations were reduced in New Zealand, but increased in Australia causing the Aud$ to increase while the kiwi fell a bit. And my TTWT section highlighted the ticking time bomb which is the US bond market.

Currencies today 3/14/13. American Style: A$ $1.0345, kiwi .8177, C$ $.9733, euro 1.2927, sterling 1.4947, Swiss $1.0478. European Style: rand 9.2307, krone 5.81, SEK 6.4674, forint 236.35, zloty 3.2081, koruna 19.8155, RUB 30.7943, yen 96.39, sing 1.2519, HKD 7.7576, INR 54.35, China 6.2159, pesos 12.4258, BRL 1.9721, Dollar Index 83.075, Oil $92.25, 10-year 2.05%, Silver $28.7875, Gold $1,583.85, and Platinum $1,583.50.

That's it for today. I have a funeral to attend today after which I am off to Jacksonville for a full day of meetings tomorrow. Unfortunately I am not going to be able to head down to Tampa to watch the PGA tournament we are sponsoring; I'll just have to catch it on NBC this weekend. It will be great to see all of the EverBank logos which are apparently plastered all over the course. I looked at the Florida weather this morning before packing and was surprised to see the temps will only be in the 40's tonight when I get in. And I thought it was supposed to be warm in Florida! Christine just walked in with coffee YAHOO FOR ME!! Hope everyone has a Tub Thumping Thursday, and thanks for reading the Pfennig!

Chris Gaffney, CFA
SVP & Director of Sales
T. 314-951-1619
EverBank World Markets
8300 Eager Road, Ste. 700, St. Louis, MO. 63144

Chris Gaffney, CFA
Vice President
EverBank World Markets

Posted 03-14-2013 11:28 AM by Chuck Butler