The weekly jobs numbers give a boost to the US$...
Daily Pfennig

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In This Issue.

* Weekly jobs data bolsters the US$...

* EU policy makers switch focus to growth...

* Metals selling is mainly based in the ETFs...

* A nod to my favorite Irishman...

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

The weekly jobs numbers give a boost to the US$...

Good day...Top of the morning to ya! I know, I'm a bit early but I'm ½ Irish and absolutely love St. Patricks day, so I figured I can start celebrating a bit early. Heck, the CFO of Guinness' parent company Diageo North America was the guest on this morning's Squawk Box, so everyone is getting started a bit early (more on my ties to Guinness in the last paragraph). Folks in the US administration are certainly celebrating after the weekly jobs indicated the labor recovery in the US has some legs.

The number of initial claims for state unemployment benefits dropped by 10,000 to 332k vs. economists expectations of 350k. The four week moving average for new claims, which is a much better measure of the trend fell 2,750 to 346,750 which is the lowest level in five years. In a nod to Chuck, I dug around for any 'adjustments' or 'estimates' which were used for yesterday's weekly report and could find none, so I do think the report really does indicate the labor market is improving.

An improving labor market should be good for the US$ for a couple of reasons. First, the Fed has tied their monetary policy to the unemployment rate with a goal of 6.5% (still a big drop from the current 7.7%). While 6.5% may still be a long way off, currency traders typically try to get out in front of the Fed, and want to be positioned well before the Fed makes their first move. Stimulus is bad for the dollar since it equates to the Fed printing money and therefore driving the value of the dollar lower. Any news which would indicate the Fed will be pulling stimulus back away from the markets should be positive for the dollar.

And second, an improving labor market will lead to a stronger US economy through higher taxes on both wages and sales - more people earning equates to more money for the government and less spending on social programs (we have more of our citizens pulling their weight).

Again, we are still a long way away from a 'strong' or even what would be considered a 'stable' labor market here in the US. We will need the initial claims to fall another 50k before we get back to a more 'normal' job market, the number of people still receiving benefits is still above 3 million. But a labor market recovery is a good thing for the US$ and investors definitely need to keep an eye on the jobs data in the coming months.

Mike Meyer helped me out this morning and sent me the following information on the US data reports which will be moving the markets this morning:

All of the US economic data will be out in the open before most of us reach for that second cup of coffee, so let's take a look and see what's on tap. I guess I'll start with the Empire manufacturing report from March, which is a measure of manufacturing activity in the New York region. Its expected to come in right around last month's figure of 10, which was the highest since May 2012. While we're looking at the manufacturing sector, we also have the February Industrial Production numbers that are expected to show an increase from the contraction we saw in January.

If we use the higher ISM Manufacturing number and recent retail/consumption reports as a precursor, I would say Feb's industrial production would have the potential for overshooting the expected rise of 0.4%. The closely tied Capacity Utilization report is also expected to show an increase to 79.4%. With all of this euphoria floating around and the Dow Jones flirting with new record highs, I would say the first printing of the March U. of Michigan Confidence report should really kick some tail. Not that anybody cares about this report anymore, but the January TIC flows are expected to show a decrease and remain well below levels needed to support our deficits. Since the Fed just prints money when needed, this report has fallen from the graces of many economists.

Other than that, we get the CPI numbers from February. We'll see how the markets react to this one, but core inflation as well as the CPI are both expected to show increases. You know our feelings on this report, but it is, what it is. I'm interested to see if the markets will initially try pricing in any imminent stimulus removal assuming the report does actually report an increase. We know the government isn't going to raise rates at any point in the foreseeable future, but we'll see if there's any chatter as to the likelihood of a reduction in the $85 billion that's still getting pumped in on a monthly basis.

Chris again, a big thanks to Mike for all his help in getting the Pfennig out while I'm on the road. His last point gets back to the Fed and when investors think they will start pulling money back off the table. The Fed definitely holds all of the cards in this market, as we have become dependent on their steady stream of cheap cash.

The dollar actually headed higher today on expectations the CPI numbers will show inflation is in check. The euro climbed back above $1.30 after EU leaders endorsed 'structural budgetary assessments' which basically means they have agreed to roll back austerity demands for many of their members. France, Spain, and Portugal will be given extra time to bring down deficits. It is interesting that the focus of the Eurozone has shifted away from 'crisis mode' and instead have started to focus on growth again. This is actually a good thing, and another indication that the sovereign debt crisis is hopefully in the rear-view mirror.

But the EU leaders still have a lot of work with unemployment remaining very high (predicted to average 12.2% in 2013) and a GDP which remains in a contraction (predicted to be -.3% in 2013).

The Pound Sterling has become a bit of a whipping boy for currency traders, and rightfully so with many indicators pointing toward a triple dip recession. But the Pound strengthened a bit overnight after BOE Governor Mervyn King assured the markets that policy makers are not trying to weaken the currency. "Markets determine the level of exchange rate, not us" King said in an interview yesterday. King may have been successful in jawboning the currency higher in the short term, but the markets will continue to move the currency lower as the BOE continues to increase their QE efforts. Don't be faked out by the pounds move higher today, I sure wouldn't buy into it.

Speaking of weakening their currency, Japan's political parties confirmed Haruhiko Kuroda as the next BOJ Governor. This was widely expected, and will insure that the BOJ continues on their quest to get inflation in Japan to climb to 2%. These officials still believe the value of the yen is too high, and will continue feeding liquidity into their markets in order to force the value of the yen lower and attempting to make inflation rise.

Precious metals prices continue to remain at what I believe are discount levels. I did a bit of extra research on gold and silver last night in preparation for an interview I have scheduled with a Bloomberg reporter later this morning. What I found was that much of the selling which has occurred over the first couple months of this year has been in the ETFs. A record $4.1 billion of money was pulled out of gold ETFs in February, the largest month of outflows ever and almost twice the previous high. Investors who purchased these ETFs were seeking short term protection from all of the 'doomsday' scenarios surrounding the US budget negotiations and the crisis in Europe. With the sequester in the rear view mirror, and the European crisis remaining 'under control' these investors have decided to sell their ETFs in favor of shifting money into other equities.

The physical metals market is still well bid, with some indications we may see another 'squeeze' on certain coins. Our friends over at 'The 5' reminded their readers yesterday afternoon that the U.S. Mint suspended distribution of 2013 Silver Eagles only 10 days into the year. According to the US Mint, January sales set an all-time monthly record for Silver Eagles and these sales didn't slow down much last month when we saw highest sales volume ever for a February. As of this morning 1,601,500 bullion coins have been sold by the Mint during March and if this pace continues March will be another record setting month.

Speaking with Tim Smith, the Metals trader at EverBank, this foots with what we have been seeing from our clients. We have had very few clients selling physical metals, and the overall number of transactions is fairly close to our normal average, but the size of these transactions are down a bit.

It all comes back to the fact that ETF trading has caused metals prices to be more volatile and is definitely causing some 'abnormalities' in market prices. As Chuck suggests, investors should look at dips in the price of silver or gold as 'buying opportunities'.

Then there was this... Plane rides provide excellent time to get caught up on all of the reading which tends to pile up. And with a two hour layover on my trip down to Jacksonville yesterday afternoon I had plenty of time to do just that. As usual I came across what I think is an interesting piece of information for the TTWT section. The Federal Reserve is changing the timing of the policy statements issued after their FOMC meetings. Beginning with their meeting next week, the policy statement will be issued at 2 pm Eastern time. Chairman Bernanke will follow up the policy statement with a news conference at 2:30. Previously, nearly two hours passed between the time the policy statement was issued and Bernanke's press conference.

Apparently Chairman Bernanke wants to make sure the markets 'understand' the policy statement, and don't misinterpret the intent behind the written words. In other words, Bernanke wants to make sure he can spin the statement before the markets start to put their own spin on it. You will recall that one of the first things Chairman Bernanke pledged after assuming the position left vacant by Alan Greenspan was that he would make the FOMC decisions more transparent to investors. His predecessor was known for crafting policy statements which were difficult to interpret, with the press actually creating the term 'Greenspeak' to describe his language.

The FOMC will likely keep rates on hold for the remainder of the year, and I don't think we will get any surprise moves in interest rates. But the markets will constantly be attempting to decipher when the first move in rates will occur, making the accompanying policy statements all the more important. This is exactly why Chairman Bernanke is wanting to make sure the markets fully understand what the Fed's intentions are, and decreasing the time between the statement and his press conference is a way he can have more control on the markets. Kind of scary, but that is where we have ended up as we have become addicted to the 'crack' of easy money being supplied by the Fed.

To Recap. The jobs front continues to show improvement as the weekly jobless claims fell another 10k, with the four week moving average dropping to a 5 year low. Things have definitely been moving in the right direction, but we still have a long way to go before the Fed's 6.5% unemployment target. We have several data reports this morning, which includes the January TIC flows, the February consumer inflation numbers, capacity utilization, and industrial production/manufacturing, along with the March Empire manufacturing and U. of Michigan confidence reports. EU leaders seem willing to lengthen the leash and the BOE explains they aren't trying to weaken the pound. It appears as though many short term speculators who purchased precious metal ETFs as a way to hedge against the US budget issues and an escalation in the EU debt problems are feeling more comfortable by selling. This just gives those long term investors cheaper levels to buy.

Currencies today 3/15/13. American Style: A$ $1.0365, kiwi .8221, C$ $.9797, euro 1.3059, sterling 1.5155, Swiss $1.0604. European Style: rand 9.1814, krone 5.7765, SEK 6.4009, forint 233.46, zloty 3.1774, koruna 19.5636, RUB 30.6716, yen 96.08, sing 1.2488, HKD 7.7582, INR 54.0250, China 6.2170, pesos 12.4274, BRL 1.9717, Dollar Index 82.30, Oil $93.23, 10-year 2.03%, Silver $28.91, Gold $1,592.70, and Platinum $1,595.87.

That's it for today. Long time readers probably know what's coming, but we have a number of new readers so I will share my traditional St. Patricks Day story with everyone. As I mentioned in the opening paragraph, I am ½ Irish thanks to my father who passed away a couple of years ago just days before St. Patricks day. 5 of my father's brothers and his only sister stayed in St. Louis to raise their families, so St. Patrick's Day has always been a big party for the Gaffney family. My father is a first generation American; his father left his home in County Roscommon at the young age of 11 and rode his bike across Ireland to Dublin where he went to work at the Guinness factory in order to earn enough money to come to America. After a few years, he sailed away from England on a sister ship to the Titanic bound for New York. As the luck of the Irish would have it, a young Irish lass who would eventually become my grandmother was also on her way to America. Both ended up coming to St. Louis where they settled down and raised 6 boys and a girl. So each St. Patrick's day I raise a pint of Guinness, who financed my Grandpa's trip to this great land of opportunity. Happy St. Patrick's Day to all of you!

Chris Gaffney, CFA
Vice President
EverBank World Markets

Posted 03-15-2013 3:30 PM by Chuck Butler
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