A lot to think about...
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In This Issue.

* Confidence to a six year high

* Lots of data

* China removes excess

* It's already been a year

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

A lot to think about...

Good day.and welcome to not only a Monday morning but also the last week in July. As Chris mentioned on Friday, I'll be back behind the wheel this week but it's still tough to believe the dog days of summer are upon us. It's shaping up to be a busy week in all respects as we're shorthanded on the desk so the phones will be busy but we also have a lot of digest data wise which could translate into some choppy times ahead. With that said, let's jump right in and take a look.

Friday turned out to be a quiet day as economic data was hard to come by and most investors had already thrown in the towel for the weekend. Not only that, but this week is going to be a big one as we have quite a few heavy hitting reports that should steal the spot light and give the talking heads plenty to debate. Friday started off with the dollar slightly down and held firmly in the 81 handle. It was a mixed bag of nuts for currency returns on Friday, but most traded within a fairly tight range.

If we take a look at the only bit of data, the final revision to the July U. of Michigan confidence report did get adjusted to the upside by posting a reading of 85.1. This was higher than the initial estimate of 84 and climbed to the highest level in six years, which comes of no surprise given the strength of the stock market and a housing market showing some life. As we've said many times in the past, these confidence reports are heavily influenced by the stock market, so the headline number can get skewed from time to time.

Since that's often the case, I usually like to pull the layers back and see the reports within the report. While the index of current conditions rose to a six year high, the index of expectations six months out were a bit lower on prospects of higher borrowing costs. Other than that, most of the component reports were positive since consumers feel more wealthy as a result of higher home and stock prices. As a point of reference, the index is inching closer to the average of 89, which was last seen in the five years leading up to the recession. On the flip side, the gauge averaged 64.2 during the recession.

The sheer volume of data this week compared to last week is night and day. Just to give you an idea, it only took one page to list all of the economic data last week, but it takes three pages to view everything for this week. I guess you can say triple the action should triple the fun. Anyway, we kick it all off this morning nice and slow with June's pending home sales and the Dallas area manufacturing report. Again, the housing market has been burning brighter lately so I don't expect much, but the experts are calling for somewhat of a moderation on pending sales. As for the Dallas Fed report, it's supposed to fall in line with most of the other regions and show some expansion.

Jumping ahead and highlighting some reports to look for, we'll see the July employment numbers (both ADP and the all important national change in nonfarm payrolls), the first reading of second quarter GDP, the FOMC meeting, the July national manufacturing number, as well as June's factory orders. There are a bunch more so I just wanted to give you a taste, but we'll take a look at all of them as they arrive. As always, we have the unforeseen wildcards if any of the Fed heads decide to offer their opinions but it's going to be a data dominant week.

I found some comments from the IMF last week that said the Fed will need to effectively communicate its strategy to exit from the massive monetary stimulus while avoiding excessive volatility in interest rates. I think they were referring to the last FOMC meeting when Bernanke initially sounded hawkish as far as the stimulus policy is concerned but had to later back off a bit since treasury yields shot through the roof. In other words, think first about what's going to come out of your mouth and say what you mean.

I also saw some words from an analyst at BNY Mellon that has summed up the past several weeks fairly nice. Samarjit Shankar said that we find ourselves in an environment where subpar numbers in US activity and inflation are being viewed as a positive for risk appetite as they further postpone an eventual withdrawal of liquidity by the way of the Fed's tapering of its asset purchase program. Hence, a co-existence once again of a general drift lower in US Treasury yields and the slight rebound in risk assets for now.

As I mentioned earlier, the dollar finished both the day and the week lower on anticipation the Fed will emphasize its intent on keeping interest rates low for quite some time. In fact, the dollar index fell to the lowest level in over a month and was really pushed lower after the minutes of the Fed's June meeting were released on July 10. The big winner on Friday was the Japanese yen as it finished the day up over 1% and was really the only currency that showed any life.

Chris already talked about this, but the higher inflation number in Japan is what had investors jumping for joy. Once the dust began to settle, some analysts are hesitant about getting too excited as a big part of the increase was due to a 9.8% gain in utility costs, namely electricity, and a 6.4% rise in gas prices. Higher wages have yet to become a factor and will be needed to fuel a consumption led recovery. In the end, I think the market is barking up the wrong tree as it pertains to a moderation of stimulus at any point in the foreseeable future. At the end of the day, the yen did rise into the 97 handle but settled into mid 98.

The Australian dollar was in second place but was only up a fraction of a percent. There wasn't anything new so it was merely trading counter to the US dollar. I saw where the markets are pricing in a 70% chance that we'll see a rate cut next month but what happens if they don't. There are so many that are on the same side of the trade, that a pause by the RBA could send the Aussie quite a bit higher. With that said, its a big if. By contrast, the New Zealand central bank is expected to keep rates on hold until mid 2014, at which point we could see a rate hike.

While we're in Asia, let's hit on China. The Ministry of Industry and Information Technology announced plans to cut excess production capacity to help ease into a more sustainable economic growth structure, which includes a reduction in the cement, steel, copper, and aluminum industries. While growth has been a concern, it's still moving along at a 7.5% clip, but the government has said it will act if it gets close to or dips below the line in the sand of 7%. We've seen many reports over the years all but calling for a collapse in the Chinese economy, but we've yet to see it and I don't think that we will. A moderation such as what we have seen, yes. But an all out collapse, I just don't see it.

Jumping over to Europe, we had July consumer confidence in France, the eurozone's second largest economy, increase from record lows as the near term outlook showed some improvement. With that said, unemployment running at record highs and austerity measures still in place will keep a lid on this for quite a while. We also had the one year anniversary of Draghi's pledge to do whatever it takes, which really turned the tide for not only the currency but also the debt market. Bond yields have come down so much over the past year and has gone a long way in preventing a boiling over effect.

Don't get me wrong here. There is still a lot to worry about in Europe, but Draghi did his job by keeping the wheels on the track. I saw where Axel Merk, of Merk investments, said the euro has the potential to rise to 1.40 this year and 1.50 next year on the basis where ECB monetary policy is tighter than the Fed. In any event, the cries for a breakup of the euro have been thrown to the back of the closet and the euro has risen about 10% since last year.

As I came in this morning, everything is trading right around where I left them on Friday afternoon. The dollar is pointing ever so slightly downward so far this morning with most of the currencies sitting right on the breakeven mark. Gold and silver have slight gains so far and the yen broke back into the 97 handle. Other than that, we'll see what today's data will bring us but as I mentioned, there is a lot for the markets to digest this week so we might need to tighten up the seat belts.

For What It's Worth. German Finance Minister Wolfgang Schaeuble told German newspaper Bild am Sonntag that a much-discussed second haircut for Greek debt isn't going to happen. "One thing is clear: There will be no second debt haircut for Athens," he said. The eurozone will provide help as long as Greece fulfills obligations to narrow its budget deficit, he said.

To recap.Economic data was few and far between last week, but we're packed to the brim this week. We did see the U. of Michigan confidence report rise to a six year high in July since the equity markets have been en fuego. All eyes will be focused on the FOMC meeting and the July jobs numbers to fix the odds for tapering in September. It was quiet last week, but we could see some rough waters this week with all of the data. The dollar fell to the lowest level in over a month and the yen broke into the 97 handle on thoughts additional stimulus might not be needed. China is trying to remove capacity and its already been a year since Draghi declared Whatever It Takes.

Currencies today 7/29/13. American Style: A$ .9245, kiwi .8077, C$ .9733, euro 1.3277, sterling 1.5377, Swiss $1.0780, . European Style: rand 9.8298, krone 5.9195, SEK 6.4594, forint 224.42, zloty 3.1857, koruna 19.5139, RUB 32.7854, yen 97.89, sing 1.2668, HKD 7.7570, INR 59.42, China 6.1705, pesos 12.6967, BRL 2.2562, Dollar Index 81.62, Oil $104.84, 10-year 2.55%, Silver $20.10, Platinum $1,435.15, Palladium $728.95, and Gold. $1,334.79

That's it for today.I hope you had a chance to enjoy your weekend. It was an unbelievable weekend weather wise here in St. Louis with sunny skies and highs in the low 80s. I guess if it was like this all year round, the cost of living would be twice as much. I spent most of my weekend working and taking care of my little girl, but I did manage to get outside and take the dog for a run. The Cards didn't have a very good weekend as they got swept by the Braves, but there's no time to sulk since we follow that up with a big series with the Pirates. Like I mentioned, Ty is out all week so we'll be functioning with a man down. With that said, I need to get this show on the road. Until tomorrow, Have a Great Day!

Mike Meyer
Assistant Vice President
EverBank World Markets

Posted 07-29-2013 1:45 PM by Chuck Butler
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