China in a holding pattern.
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In This Issue.

* Housing keeps rolling along

* A quiet week for US data

* Ireland raised to investment grade

* Chinese growth in neutral

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

China in a holding pattern.

Good Day.and welcome to Tuesday morning. As Chuck mentioned on Friday, he's out for the next couple of weeks so Chris and I will be running split shifts to bring you the Pfennig each morning. MLK Day not only brought us a three day weekend, but also a muted Monday in the currency market. Speaking of market action, Friday was fairly quiet so let's take a look at the tape as well as what's in store for us this week.

Before we jump into the currencies, let's first review the US economic data from Friday and see where it all landed. The first set of reports were the December housing starts and building permits, both of which showed disappointment compared to the previous month. This decrease, however, was overshadowed by the fact November's figures were revised upward and proved to be the best since November 2007. In fact, construction began on 923,400 homes in 2013, which we would again have to go back to 2007 in order to surpass, so the markets remained fixated on the best figures in six years.

My own recon work driving around St. Louis would definitely support the fact that new construction has found a pulse, so I would say the results are legit. I saw a statistic a few weeks ago that I found interesting, which said refinances accounted for 85% of the mortgage business over the last ten years so that means only 15% was due to a home purchase. With the consolidation going on in the mortgage industry, it looks like the general consensus is that most homeowners who wanted to refi have already done so at the recent record low rates. As interest rates increase, it will be interesting to see if a threshold will emerge as to where borrowers would need to think twice about moving into a new home or considering a refi.

The next report, December industrial production, came in as expected but the final chapter of the 4th quarter is what had everyone talking. Production jumped at 6.8% in the last three months of the year and marked the largest quarterly increase since the second quarter of 2010. Similarly, manufacturing production increased as well and turned in its best quarterly performance since the first three months of 2012. Both reports are giving economists a warm and fuzzy feeling about 4th quarter GDP, which is already getting juiced by the new components added to calculations.

We also had capacity utilization, which measures the amount of factory currently in use, rise a little bit to 79.2 from 79.1. Some of the recent regional manufacturing reports have shown that continued growth has made its way into the New Year so far, but capacity use is still running 1% under its long term average. The not so bright spot came in the way of a disappointing preliminary reading of the U. of Michigan consumer confidence report. The index fell to 80.4 from 82.5 and continues to indicate that consumers still have reservations about the economic future.

Moving into this week, we're set up for a very quiet week in the data department. We have nothing out today and then only last week's mortgage apps tomorrow. Thursday will be the only day giving direction as we get the usual weekly jobs numbers and then existing home sales with leading indicators from December along with the first print of January's Markit PMI report. Friday will be empty as well so the markets will have to take their cue from other sources.

As I mentioned earlier, the dollar was up against most currencies as traders see the data prints justifying the Fed's continuance of the $10 billion a month taper plan. With the soft December jobs number just being chalked up to bad weather and swept under the rug at this point, the dollar also finished the week higher, especially against the Aussie, Mexican peso, and rand. As Chuck talked about on Friday, the New Zealand dollar was on the hot seat and actually finished the day in last place with over a 1% loss. And to further his thought on the AUD/NZD cross, it appears some hedge funds have taken some profits off the table by selling NZD, so there you go.

Again, we didn't have any negative data so it was just some profit taking. Lastly, I saw where HSBC is calling for the NZD to hit .87 this year as well as four rate hikes amounting to a total of 1%. At the opposite end of the spectrum, the Brazilian real had the best performance by appreciating just over .75%, but the contraction in economic activity doesn't support this move. At the end of the day, central bank intervention was enough to tip the scales. The pound sterling finished in second place, but we already know that retail sales was the wind in the sails for that currency.

The rand was barely clinging to positive territory as technical indicators suggest its fall to five year lows might be overdone. In fact, last week the currency fell to its lowest point since October 2008. There was also word that mineworkers might be close to ending a 2 ½ month strike, so that news gave the currency some life. With that said, the rand remains fragile as more labor strikes loom on the horizon and the economy continues to struggle. Not only that, but gold prices have worked against the rand as well so it's really been a double whammy.

Moving on to other news, we had a Swiss National Bank (SNB) policy maker say the currency is still high and the cap will be necessary for the foreseeable future. There was no mention of tightening the cap, but most economists expect it to remain in place for at least another year. Staying in Europe, I saw where RBC is calling for a rate cut in March by the ECB. They seem to think the recent rise in money market rates is an attempt to get Draghi to live up to his do whatever it takes pledge. Separately, we had Moody's raise Ireland to investment grade citing an acceleration of economic growth and employment creation as the basis for its positive outlook.

While Monday proved to be quiet, we did have a variety of economic reports out of China that will simmer until the week back into gear. The results show that Chinese growth hit a wall in the fourth quarter as industrial production and investment spending slowed a bit. GDP for 2013 came in at 7.7%, which was the same pace as 2012, but it did exceed the government's target of 7.5%. Economists were hoping to see positive traction so most are viewing this as a disappointment and preliminary surveys are forecasting 7.4% growth this year.

I think most of the concern stemmed from the fact industrial production fell to 9.7% in December from 10% the month prior. If economic expansion at 7.7% and factory output close to double digits is alarming, I wonder what these folks say about the US economy. Even if we cut these figures in half, the Chinese are still cooking with gas. The head of China's statistics bureau said the contribution to GDP from tertiary industries, which includes services, exceeded secondary ones, mostly manufacturing, for the first time in 2013. This, to me, suggests overall stability and continued progress to a diversified economic base.

As I came in this morning, the dollar is up across the board with the Brazilian real taking most of the shrapnel. It looks like the markets are looking for inflation to continue rising which could prompt the central bank to keep raising rates. If the economy was actually growing and on solid ground, prospects of higher rates would be welcomed news but it's feared higher rates would stifle the economy. The pound held its ground for the most part as UK manufacturers' expectations for future investment increased to the highest point in nearly three years. Gold is down about $10 this morning so not a great way to start the week.

To recap.December housing starts and building permits came in lower than November's multi-year high but last year turned out to be the best year for home construction since 2007. We also had industrial production jump 6.8% in the 4th quarter while manufacturing followed up with a decent performance of its own. Capacity utilization increased a bit but consumer confidence has taken a hit so far in January. Data is sparse this week so the markets will have to take direction from elsewhere. We saw year end data out of China and it wasn't exactly well received as GDP held steady compared to 2012 at 7.7% while factory output showed some moderation.

Currencies today 1/21/14. American Style: A$ .8789, kiwi .8313, C$ .9094, euro 1.3530, sterling 1.6432, Swiss $1.0949, . European Style: rand 10.8395, krone 6.1901, SEK 6.5052, forint 223.63, zloty 3.0776, koruna 20.3540, RUB 33.9778, yen 104.68, sing 1.2795, HKD 7.7569, INR 61.88, China 6.1066, pesos 13.3147, BRL 2.3660, Dollar Index 81.29, Oil $94.64, 10-year 2.85%, Silver $19.88, Platinum $1,450.50, Palladium $743.47, and Gold. $1, 244.50

That's it for today.Well, hopefully you were one of the fortunate ones to have enjoyed a three day weekend. It was nice to have the extra day off, but both my daughter and I battled through a cold so not much fun at my household. The Super Bowl is officially set with Denver and Seattle battling it out for the title, so it's time to start thinking about what will be on the menu. As you know, we have a little weight loss competition going on here so I'm thinking of giving myself a special dispensation so I can properly enjoy the Super Bowl, since food is a big part of the festivities. Alright, I need to wrap it up, so that's it for me until Monday morning as Chris will take you through the rest of the week. Until next time, Have a Great Day!

Mike Meyer
Assistant Vice President
EverBank World Markets

Posted 01-21-2014 1:10 PM by Chuck Butler
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