Good day. TGIF! As Chuck indicated yesterday morning, he has to report to a classroom today for some continuing education and has therefore left the reins of the Pfennig in my hands. I gladly take them and will try to steer us through the economic factors which are driving the markets. As I turn the screens on this morning, the dollar has spiked up with the dollar index jumping back up to levels we haven’t seen in over a month.
The euro is the main driver of the dollar index, so it is no surprise that the euro is down this morning. The euro is dropping after a report was released showing Spain’s jobless rate rose to 25.02% from 24.6% in the previous quarter. This was the highest jobless rate in Spain in over 35 years and increased investors’ concerns. Other reports showed French household sentiment dropped for a fourth month and euro-area services and manufacturing output contracted. The data certainly illustrate just how tough times are in the European economy, and investors have started pushing the euro back below $1.30.
It actually amazes me that the euro has been as resilient as it has. Spain is all but certain to have to ask for a bailout, and both Greece and Italy continue to struggle. Even the French economy is in bad shape. French President Francois Hollande had pledged to overhaul the French economy when he took office 6 months ago. But recently the French president has been downplaying these promises. Hollande pledged to get deficits below 3 percent of gross domestic product in 2013, but that looks unlikely as the IMF expects the French economy will only grow at a .4% rate next year and the deficits remain.
But investors seem to be comfortable with the fact that the European countries are going to take longer to recover. Even recent news that Greece is going to need another 2 years to meet their budget targets doesn’t seem to have bothered investors in the euro. I guess when you compare Europe with the US it really doesn’t look all that bad.
We will get a better view of the US economy with the release of 3rd quarter GDP. Gross Domestic Product is predicted to have increased 1.8% during the past quarter after rising 1.3% in the previous quarter. While it is moving in the right direction, this would be the first time GDP was below 2% in consecutive quarters since the US economy emerged from recession in 2009. Another report is predicted to show confidence declined slightly as the U of Mich. Confidence is projected to fall slightly.
Yesterday’s weekly jobs report showed a decrease in initial jobless claims to 369K from an adjusted 392K last week. Continuing claims remain at worryingly high levels at over 3,254,000 out of work. Another report had better news as Durable Goods orders increased 9.9% in September after a dramatic 13.1% drop in the previous month. And finally, a report showed pending home sales dropped to just .3% during September compared to a drop of 2.6% during August. The YOY number was better, showing an increase of 8.5% which indicates the US housing market is still improving, albeit slower than many expected.
As all of you know, Mike Meyer has been off the desk the past couple of weeks enjoying his honeymoon with his new bride. With Mike gone I’ve had the pleasure of taking a few more calls than typical, and I have to say I enjoy getting back on the phones to speak with the great World Markets clients. One of the most common questions we have been fielding lately is ‘who do you think is going to win the election’ and the automatic follow up of ‘and what will the election mean for the dollar”?
I’m smart enough not to try to predict the election (it is hard enough trying to figure out where the currencies are going over the next few years!); but I do let our clients know that the elections probably won’t have too much of an impact on the direction of the dollar in the next few years. The dollar is headed lower, and there isn’t much either party can do about it. I know this may upset readers on either side of the political divide, as they believe their ‘man’ has the stuff to lead our country in the right direction. But the massive amounts of debt which we have accumulated are not going to magically disappear on November 7th, and this debt is what will continue to drive the value of the dollar lower.
A story which appeared in the Journal of Accountancy yesterday partially confirmed my thoughts on the election. (No, I don’t typically peruse the Journal of Accountancy, but I do get a summary of the day’s top financial stories sent to me by the CFA organization and spotted it there). The article quoted a survey which was conducted at the Association for Financial Professionals. In the survey, 63% of executives said that the outcome of the US Presidential election won’t have a significant effect on business conditions. Unfortunately our path is already set, and it won’t be immediately impacted by the election, whether we get a change at the top or not. That is not to say we shouldn’t vote, nor that a change in the direction of the economy is not possible. Just that we won’t see any immediate impacts, change will take time to work its way through the economy.
No, the results of the election won’t determine the short term course of the dollar, but just getting past November 6th probably will. You see markets don’t like uncertainty, and with the election basically a toss-up many investors are not wanting to commit funds to the markets. So the results of the election probably have less to do with the direction of the markets than just getting past them. I know I am certainly looking forward to an end of all of the political ads!
And don’t forget about that fiscal cliff which is still waiting for us at year end. The election won’t make that go away either. Another story I read stated that nearly 1 million jobs have already been lost due to the fiscal cliff. The story, which appeared in the Washington Post pointed to a study by the National Association of Manufacturers which says employers are laying off workers and leaving vacant positions empty as they worry about what will happen if / when tax hikes and spending cuts take effect January 1st. The study concluded that nearly 6 million jobs will disappear through 2014 and the jobless rate will rise close to 12% if the country is pushed off this cliff. Scary stuff, but that is exactly what was intended. The ‘fiscal cliff’ was instituted in order to force the hand of congress and our administration; making them make the very tough decisions which are necessary in order to push our economy toward a more sustainable path. Perhaps the cliff is exactly the ‘tough love’ our economy needs, but the markets certainly don’t think we will be forced over it.
The next two months will certainly be interesting.
As Chuck reported, the RBNZ left rates unchanged yesterday and the kiwi moved higher. But a report released overnight has the New Zealand dollar moving lower. New Zealand’s trade deficit expanded to the widest level since 2009 as exports fell and a stronger kiwi encouraged imports. The NZ$888 million deficit was actually a bit lower than expected. Dairy exports, which make up nearly one quarter of annual exports in NZ, dropped 12 percent. Central bank Governor Graeme Wheeler blamed the higher kiwi for ‘undermining export earnings’ and encouraging imports. This is not a good sign for clients holding kiwi, as the new head of the RBNZ continues to indicate he would like to see a weaker currency. The Australian dollar also fell overnight as investors worried about demand in Asia.
Then There Was This. A report by Schroder Investment Management, Ltd. dated October 23 suggests global economic growth may be reaching a saturation point. The concept implies global demographic and climate changes, combined with an expanding consumption in emerging markets will limit global growth. According to the story, ‘Forecasts show that by 2050, the world’s population will climb by 2 billion, or 30 percent, and 3 billion people with the ability to spend $10 to $100 a day will join the consumer market.’ World gross domestic product could jump threefold according to the report.
While this would seem to be positive news, the report points out that this growth will push the global environment to its limits. “Investors need to recognize that pressure will build for regulations more suited to resource scarcity, such as punitive taxes on companies that use environmental assets excessively.” The report calls into question the sustainability of global growth as demand for resources dramatically increases.
While the report has some scary conclusions, the news that global growth is going to increase is certainly positive and meshes with what we are expecting to see. Commodities are going to be at an even greater premium in the coming years, and the countries who export commodities should continue to see good demand for their currencies.
To recap. The euro fell overnight after Spanish unemployment increased to over 25%. US data released today is expected to show GDP increased to 1.8% from 1.3% last quarter. The US elections are looming, but the election won’t have any impact on the dollar as the debts and deficits will remain in near term. The NZD trade deficit widened and New Zeland’s central bank head blames the high price of the kiwi for the increase in imports.
Currencies today 10/26/12. American Style: A$ $1.0325, kiwi .8187, C$ $1.003, euro 1.2894, sterling 1.6105, Swiss $1.0662. European Style: rand 8.7574, krone 5.7970, SEK 6.7325, forint 219.85, zloty 3.2184, koruna 19.3435, RUB 31.504, yen 79.80, sing 1.2233, HKD 7.7503, INR 53.575, China 6.2494, pesos 13.0745, BRL 2.0265, Dollar Index 80.228, Oil $85.55, 10-year 1.77%, Silver $31.6975 and Gold. $1,703.45
That’s it for today. I spent a chilly night in the stands with my wife and daughter as we watched Brendan’s football team win their first playoff game. Now they get to move on to the second round and face a tough opponent on Halloween night. Mizzou’s homecoming is this weekend, and my Aunt Marilyn is flying in from Texas to attend the football game with my mom. I look forward to spending some time with my aunt, who is a real hoot and has a special attachment to MIZZOU; during her college days she was the school’s mascot, Truman the Tiger. Hopefully Mizzou will be able to win for their big homecoming crowd. Congratulations to the SF Giants who head over to Detroit with a 2 game lead in the World Series. I am running late as usual, so I will get this out the door. I hope everyone has a Fantastic Friday and a Wonderful Weekend. Thanks for reading the Pfennig.
Chris Gaffney, CFA
SVP & Director of Sales
EverBank World Markets
8300 Eager Road, Ste. 700, St. Louis, MO. 63144