Retail Sales could support calls for a September taper...
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In This Issue.

* Retail Sales expected to support an earlier taper...

* Yen falls after Japan's economy slows more than forecast...

* Euro area emerges from recession...

* Gold pushes higher...

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

Retail Sales could support calls for a September taper...

Good day. Chuck is headed out to San Francisco today, and Frank and I will be joining him on Thursday. We are all there for the Money Show which will be held at the San Francisco Marriott. If you are in the area, please come on by and say hi to us! Chuck let everyone know that his one day on the desk led to a dollar rally and the greenback has held on to the gains in overnight trading.

The buzz in the markets this morning is concerning the US retail sales numbers which are scheduled to be released shortly. Sales in the US are expected to have risen .3% in July with the important ex-Auto figure increasing a bit more at a .4% pace. The sales numbers will be closely monitored as traders search for signs of when the FOMC will begin to taper their bond purchases from the current $85 billion per month.

Atlanta Fed President Dennis Lockhart will give a speech today following the Retail Sales announcement, and a good number could encourage him to give further indications that the FOMC will look to taper in September. Most economists have moved their predictions for the beginning of the taper out to December, but good economic data in the next few weeks could convince the Fed to start reducing the bond buying as early as September. The dollar has drifted lower as investors have migrated their bets on a bond purchase reduction further out on the calendar, so if the retail sales numbers come in better than expected I would think the dollar could see a bit bounce as these predictions are adjusted back to the closer date.

One of the biggest currency movers overnight was the Japanese yen which dropped over 1% vs. the US$. A report released yesterday showed Japan's economy slowed more than analysts forecast, with GDP growing 2.6% in the second quarter compared to a revised 3.8% increase in the previous 3 months. Another report released overnight showed machine orders in Japan dropped in June contributing to the yen's slide. The disappointing data out of Japan has currency traders betting that Prime Minister Abe and his government will push for even more stimulus.

Abe has pledged to do everything he can to make sure Japan does not fall back into the deflationary funk his country has been mired in for the past two decades, so the markets believe that any sign of weakness in the Japanese economy will probably be met with additional aggressive stimulus spending. As I mentioned last week, Japan's total debt has now surpassed 1 quadrillion yen, and so what is another billion or so yen??

Moving over to Europe, Sweden's krona strengthened after consumer prices showed an unexpected increase in July. The krona rose against the dollar for the first time in three days as the rise in prices reduced pressure on Sweden's central bank to reduce interest rates. Consumer prices rose .1% after declining .1% in June, and economists had predicted inflation to remain unchanged. Officials of Sweden's Riksbank had said last month that they would keep interest rates at the current level for at least another year. But there was growing pressure on the Riksbank for another rate cut as Europe's recovery was questioned. But this latest data, along with data showing the Eurozone is probably emerging from their recession should be enough to ease the pressure for lower rates.

Speaking of the Eurozone recovery, a report released this morning showed German investors are more confident. The ZEW Center for European Economic Research said its index of investor and analyst expectations increased to 42 from 36.3 in July. But while that is the highest level since March, any reading below 50 is still not in positive territory. The Eurozone is definitely on the recovery path, but the debt crisis is still out there waiting in the weeds. I read last night that Greece is expected to have to ask for additional bailout funds at year end, and the accumulation of debt in Italy and Spain is an ongoing concern. But as Chuck suggested yesterday, the euro is still hanging in there, which tells you what investors really think about the long term value of the US$.

We will get a clearer indication of the status of the Eurozone recovery tomorrow with the release of GDP figures for the 2nd quarter. The data is expected to show the euro area economy moved back into positive growth last quarter for the first time since 2011, ending what has been the longest recession since the introduction of the euro. The euro region is expected to have grown .2% in the 2nd quarter after contracting .3% in the previous 3 months.

Most of the emerging market currencies got sold again yesterday, with the South African rand, Mexican peso, and Brazilian real all dropping over .5% vs. the US$. The rand mad the largest move against the dollar after the death of a worker at a mine spooked investors. The mining sector is the largest employer in South Africa, and investors still remember the violence at this same platinum mine 12 months ago when police killed 34 workers. The focus of South African currency investors will shift today to the retail sales numbers which are expected to show sales growth of 3 percent in June. While this seems like a strong sales number, it follows an increase of 6.2% in the previous month, so if the data comes in below the expected value we could see further selling of the rand.

Gold rallied through most of yesterday's trading and tried to cling to these gains in overnight Asian trading. The shiny metal is off a bit this morning, but is still solidly trading above $1,300 per ounce. Good news out of China seems to have helped boost the price of commodities, including the precious metals. A report released yesterday showed consumption of Gold in China, the second largest consumer after India, increased 54 percent in the first half of 2013. Our thoughts on the emergence of the Chinese 'middle class' would be one reason for this large increase in the consumption of gold. Chinese citizens are much more akin to putting savings into precious metals instead of investing them into the equity markets or parking them at bank branches. The continued growth of a consumer economy in China should be long term bullish for the price of precious metals.

Then there was this. The recent slide of the US dollar is coming to an end according to a report released by Citigroup, Inc. A report released by a currency strategist at Citigroup said proprietary data on currency flows showed the intensity of the dollar-selling decreased over the past week. Citigroup strategist Richard Cochinos went on to say "We're not in a massive US risk environment or having massive real money go to emerging markets. If hedge funds and real money investors are heavily sold, and they don't have a huge incentive to sell much more from here on out, then it has to be that the dollar will start strengthening in a week or two going forward."

We always try to present opinions on both sides of the market, so I definitely wanted to share this report with Pfennig readers. So Citigroup thinks the reversal we have seen over the past two days is going to hold. But we will have to wait and see, as the chart still looks like the dollar is in a downward track which began during the first week of July. Chuck suggested we were in for a bit of a rollercoaster ride with regard to the dollar in 2013, and those predictions are certainly holding true.

To recap. Retail sales will be released this morning and could push for a September taper of bond purchases. The Japanese yen fell overnight as data may indicate the need for additional stimulus by the BOJ. Sweden's krona rallied after an inflation report, and German confidence moved to the highest level since March. Emerging markets continue to come under selling pressure with the South African rand sliding the most after the death of a mine worker spooked traders. And gold rallied as Chinese data gave the shiny metal some support.

Currencies today 8/13/13. American Style: A$ .9136, kiwi .7997, C$ .9688, euro 1.33, sterling 1.5450, Swiss $1.077. European Style: rand 9.9354, krone 5.8647, SEK 6.5146, forint 224.73, zloty 3.1520, koruna 19.4435, RUB 33.0517, yen 98.08, sing 1.2648, HKD 7.7558, INR 61.14, China 6.17050, pesos 12.6827, BRL 2.2878, Dollar Index 81.554, Oil $106.99, 10-year 2.65%, Silver $21.4025, Platinum $1,505.30, Palladium $736.90, and Gold. $1,326.95.

That's it for today. It was nice to get to work out yesterday morning while Chuck wrote the Pfennig. I miss my morning workouts, and find that I really need them now that I am getting a bit older! I ended up taking my daughter to the Inter Milan / Real Madrid soccer match over the weekend and really had a great time. We had some pretty good seats, and my teenage daughter and her friends were swooning over Cristiano Ronaldo! Hope all of you have a terrific Tuesday, and thanks for reading the Pfennig!

Chris Gaffney, CFA
Vice President
EverBank World Markets

Posted 08-13-2013 12:22 PM by Chuck Butler