Both Consumer Confidence and Leading Indicators surprise on the upside.
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In This Issue.

* US data sends the dollar higher...

* Could the Fed begin the end of bond their bond buying???

* Chinese home prices rise.

* Gold continues to see selling .

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

Both Consumer Confidence and Leading Indicators surprise on the upside.

Good day. Storms knocked the power out at my house last night, so I woke a bit later than I wanted to and had to scramble to get ready by the light of my phone (yes, I have finally caught up with the rest of my family and have become dependent on my phone for more than just phone calls). I saw a number of branches littering the roads on the drive in, so the wind must have been pretty strong. The weather man said we will be getting more storms this morning, I hope Chuck was able to sneak out of here down to Houston for his 'regularly scheduled maintenance' with his docs down there.

The dollar continued to power its way higher on Friday as both the confidence report and Leading Indicators showed the US economy will continue to improve. As both Mike and Chuck suggested last week, the markets have been all about the growth story here in the US and that has boosted the dollar. Friday's data supported the recent 'love fest' for the US$ as the U of Michigan Confidence reading came in at 83.7 compared to expectations of 77.9 and substantially higher than last month's reading of 76.4. This was the best reading since the summer of 2007 and shows the resiliency of Americans as they have faced down a combination of higher taxes and federal spending cuts. Many believe the increase in confidence is a direct result of the record levels of the US equity markets and the beginning of a housing recovery. I guess all the work the Fed has been doing in keeping the printing presses in overdrive is beginning to show up in the attitudes of US consumers. But I still worry about the labor market here in the US, and while confidence can certainly be pushed higher along with the stock market, you can't 'spend' confidence at the store, so we continue to need to see more improvement in the labor markets.

The leading indicators were also released on Friday and painted a fairly rosy picture for the near term future of the US economy. The Conference Board's gauge of the economic outlook for the next 3 to 6 months climbed .6% in April, a big turn-around from a .2% drop in March. Economists had predicted the leading indicators to come in at a .2% increase so the markets were surprised by the strength of Friday's data. This strong reading supports the thought that the US economy will start to pick up steam in the second half of this year which could mean an early end to the quantitative easing efforts of our Federal Reserve.

This thought is what has been rallying the dollar over the past few weeks, as more Fed heads have been talking about beginning an exit from the $85 billion monthly bond buying program which began in September of last year. Fed Bank of San Francisco President John Williams made the speaking circuit rounds at the end of last week suggesting the central bank may begin to taper the bond buying sooner rather than later. This is a big change for Williams who is generally seen as a dove when it comes to monetary policy. Williams joins three other Federal Reserve regional bank presidents who have been calling for phasing out the month purchase of mortgage backed securities. Dallas President Richard Fisher, Philadelphia President Charles Plosser, and Richmond President Jeffery Lacker have all been calling for an end to the bond buying. "It's not good for the bank to be holding lots of mortgage paper" Plosser said on Friday. Fisher warned that if the bond buying continues at the current levels, the Fed could eventually be buying up to 100 percent of the MBS issuance which is "not only excessive, but also potentially disruptive to the proper functioning of the MBS market." The FOMC will release minutes of its April 30th meeting on Wednesday, and traders and economists will be looking for indications that an end of QE is starting to come into focus.

We won't have any big data releases here in the US today, nor any tomorrow so the markets will have to look overseas for any news on the global economy. Fed Chairman Ben Bernanke will testify before the Joint Economic Committee this Wednesday which could produce some good 'Pfennig pfodder' as our congressional leaders push him for more information on when he plans on ending QE. Chuck should have plenty to write about as the end of the week will be chock-full-o data. We get the existing homes data on Wednesday followed by the weekly jobs claims and some more housing data on Thursday. These housing numbers have taken on an even greater importance with the positive data we saw on Friday. If the housing data comes in strong, it would support the thought that the US economy will be able to withstand the reduction of federal spending which will accompany the end of QE. And Friday we will close out the week with April's reading of durable goods orders which are predicted to show a positive 1.5% increase after a fairly large drop in March.

In Europe, car sales rose in April for the first time since September of 2011 adding to signs that the latest recession in Europe may be short-lived. Another report showed consumer confidence in Europe increased in April to the highest level since July of last year. Last weeks trade data showed European exports expanded 3.4% from a month earlier as the EU trade surplus widened to 8.1 billion euros from just 1.6 billion euros in February. German auto sales finally showed an increase, jumping 3.8% in April ending five consecutive months of falling sales. The largest increases were in the UK where registrations increased 15% and in Spain where they were up over 11%. Both France and Italy showed drops in the number of cars sold. Interest rate reductions by the ECB were given some credit in turning around the auto data, and ECB President Mario Draghi said he is still considering further cuts if the economic outlook deteriorates. But with rates near zero, any additional cuts could move rates some rates below zero, and the overall impact of negative interest rates is still largely unknown for an economy the size of Europe.

The Japanese yen finally strengthened a bit after Japan's economic minister Akira Amari warned that further losses in the currency could negatively affect Japanese citizens. Amari suggested that the dramatic drop in the value of the Japanese yen has already corrected a lot of the imbalances in the Japanese economy. This was the first indication from a Japanese leader to suggest the Japanese yen is getting close to where they would like to see it. I guess the 20% move of the yen over the past six months is just about what the Japanese leaders were wanting, and they apparently would like to see the yen take a breather while the markets digest this huge move.

Staying in Asia, China's housing inflation accelerated to its fastest pace in two years. Average new home prices rose almost 5% from a year ago after a 3.6% increase last month. The rising prices add complexity to the job of Chinese leaders who would like to be able to spur a stronger overall economic recovery. These leaders have been trying to cool the housing market with measures aimed directly at this sector, but many thought these moves weren't broad enough to have a meaningful impact. Home prices continue to move higher in the large Chinese cities, with prices in Beijing rising 10.3% and Shanghai prices up 8.5% both of which were the fastest YOY gains since January of 2011. With property inflation edging higher, Chinese leaders will have less room to enact measures to try and stimulate their economy.

Closer to home, Mexico's peso fell again on Friday heading for its worst week since last June after data showed GDP rose at the slowest pace since 2009. GDP rose just .8% in the first quarter from a year earlier, much slower than Mexico's leaders would like to see. The data may force Mexico's central bank to cut rates which would definitely be a negative for the Mexican peso. Holders of the peso have enjoyed a nice 12% increase in the currency over the past year, partially due to the higher rates available to investors. A cut in rates, which could be seen to be necessary to stimulate the Mexican economy, would definitely be a negative for the Mexican peso.

And the Canadian dollar continued to get beat up on Friday as inflation data bolstered recent calls for relaxing monetary policy. Consumer prices in Canada rose just .4% in April down from a 1% increase the month before. This was the slowest pace of price increases in Canada since October of 2009. As Chuck suggested on Friday, the new Prime Minister Stephen Poloz has supported trade policies in the past which would seem to indicate he may reverse outgoing BOC Governor Mark Carney's bias toward higher interest rates. While most investors felt the BOC's next move would be higher, the change in leadership along with softer inflation data has many thinking rates could be headed lower.

Commodity currencies were softer across the board, as the Australian dollar, New Zealand dollar, and South African rand all followed the Canadian dollar down over the weekend. The slower global inflation is what seemed to be weighing on all of these currencies. A consumer confidence measure in New Zealand helped put a floor under the kiwi, showing confidence 'down under' climbed to a three year high. And another report showed producer prices in New Zealand rose .8% in the first quarter, the most since June of 2011.

Gold had another off day, dropping nearly $30 on Friday and another $10 over the weekend. With the dollar rising to nearly a 3 year high (according to the dollar index) there continues to be increased selling pressure on the precious metals, which have had an inverse relationship with the greenback. Talk of an exit from QE programs here in the US has added to the selling in gold, as inflation expectations seem to be softening. I still think these levels represent a great place to add or better yet start the accumulation of a position in the precious metals.

To recap. Data released on Friday sent the dollar higher as both the consumer confidence and leading indicators surprised on the upside. Fed heads are starting to discuss the exit from QE, and some believe we could now see a reduction in bond buying in the next few months. No data here in the US today or tomorrow, but the end of the week will bring Chuck plenty to write about. European car sales increased, perhaps the recession will be short lived? Chinese home prices shot higher, but Chinese leaders still want to stimulate their economy. And the commodity currencies all fell over the weekend as global inflation expectations caused a sell-off in precious metals and raw materials.

Currencies today 5/20/13. American Style: A$ $.97746, kiwi .8140, C$ .9723, euro 1.2859, sterling 1.5192, Swiss $1.0327. European Style: rand 9.4649, krone 5.8355, SEK 6.6724, forint 225.95, zloty 3.2522, koruna 20.3023, RUB 31.2895, yen 102.56, sing 1.2554, HKD 7.7622, INR 55.1062, China 6.1998, pesos 12.3216, BRL 2.0352, Dollar Index 84.042, Oil $95.53, 10-year 1.95%, Silver $21.685, Gold. $1,354.16, and Platinum $1,445.55.

That's it for today. Congratulations to all of the new graduates! I attended the high school graduation of my niece (and goddaughter) Meaghan yesterday evening. The event was held outdoors under the massive oak trees in front of her high school, and the weather cooperated to make it a wonderful event. Unfortunately the weather prediction isn't so good for the second phase of her graduation, the beautiful 'Maypole' dance which all of the senior girls are scheduled to perform this evening. They have been practicing for months now, and there is no 'indoor option' so I really hope the storms move through quickly and leave them a window of opportunity this evening. Meaghan graduated with honors, and is now on her way to Rhodes College where she will play field hockey and study psychology and art. Next week her twin brother will graduate and then head off to Georgetown University. I am extremely proud of both of them, as they have worked hard in high school and have set themselves up to be a success in life. Time really flies, it seems like I was holding the twins in my arms just a few years ago! I'll get this out the door now, and call home to check and see if the power is back on. Thanks for reading the Pfennig, and I hope everyone has a Marvelous Monday!

Chris Gaffney, CFA

Vice President

EverBank World Markets



Posted 05-21-2013 12:47 AM by Chuck Butler