In This Issue.
* RBA cuts as expected with no hint of a further reduction...
* ISM numbers are positive but dollar slides???
* India is back intervening in the markets...
* Debt levels still a worry in Europe...
And, Now, Today's Pfennig For Your Thoughts!
RBA cuts as expected with no hint of a further reduction...
Good day. I had a good first day back, and actually put a dent into my inbox. The markets were fairly calm, with the stock markets stuck in a range and the dollar drifting lower. There is really a shortage of data releases this week, in contrast to the plethora of data releases last week, so the markets seem to be welcoming the chance to catch their breaths. The big news in the currency markets occurred overnight 'down under' so lets get right to today's Pfennig.
The RBA cut rates as expected, shaving another .25% off of the overnight cash-rate target which is now 2.5%. This cut was expected by over 94% of economists who follow these things, so absolutely no surprise. Since the cut had already been 'baked into' the currency price, traders looked to the statement by RBA Governor Glenn Stevens following the rate cut for direction. "The Board has previously noted that the inflation outlook could provide some scope to ease policy further, should that be required to support demand," Stevens said in his statement. "At today's meeting, and taking account of recent information on prices and activity, the Board judged that a further decline in the cash rate was appropriate." Previous statements had stated that inflation levels "may provide some scope for futher easing." Today's statement was therefore seen as a 'neutral' bias instead of the previous 'easing' bias.
The 2.5% cash rate is a record low for Australian interest rates, and most believe the rate will continue lower to 2.25% by year end. Recent inflation data certainly gives the RBA plenty of room for further cuts, with inflation running at a comfortable 2.4% last quarter, well within the RBA's target of 2 to 3 percent. But since Stevens didn't give any indication that there will be another cut in 2013, the aussie dollar rallied. The currency rose from yesterday's low of .8848 to trade above .90 cents immediately after the comments by Governor Stevens.
But the bounce in the Aussie dollar still doesn't convince me that it is time to get back into the aussie dollar. The mining sector remains under pressure from the slowing of the Chinese economy, and RBA policy makers seem to be welcoming a further drop in the value of the Australian dollar. "It is possible that the exchange rate will depreciate further overtime, which would help foster a rebalancing of growth in the economy," RBA Governor Stevens said today.
The lower currency rates have certainly helped with exports, as shown by figures which came out this morning showing Australia's trade surplus widened to A$602 million in June, the fifth straight month of trade surpluses. The Australian economy is becoming healthier, and recent indications that the Chinese economy is stabilizing should also be good news for the folks 'down under'. There will be an opportunity to move back into the Aussie dollar in the future, but for now I would wait.
Here in the US we will get a reading of the Trade Balance for June, but unlike our friends 'down under' the US is expected to have a $43.5 billion trade deficit. This is slightly smaller than last month's $45 billion deficit with the gains probably due to the recent tick up in oil exports and the decline in the value of the dollar during late May and early June.
The one piece of data we got yesterday here in the US was the ISM nonmanufacturing index which showed the service sector expanded in July at the fastest pace in five months. The index printed at a level of 56 which easily exceeded all of the economists' projections compiled by Bloomberg. A very nice rebound from June's level of 52.2 which was a three year low. The report adds to the excitement created by last week's ISM manufacturing index which also surprised on the upside with a reading of 55.4.
The data seem to support the Fed's view that economic activity and growth will continue to pick up during the second half of this year. As Mike reported last week, the Fed policy makers expect "economic growth will pick up from its recent pace and the unemployment rate will gradually decline." The report also showed that prices paid in the Services sector climbed to 60.1 from 52.5, indicating that inflation is starting to take hold. The dollar had rallied during early trading on Monday morning, but quickly gave up these gains after the ISM number printed which is not what I would have expected.
Lately, we have been in a pattern where good news for the US economy was bad news for the equity and bond markets, but good news for the currency markets. After the famous taper speech by Bernanke, the markets have been looking at any good US economic news as a sign the taper will begin sooner rather than later. A reduction in bond buying equates to less stimulus pumping into the markets, which has been seen as a negative for the equity and bond markets and a positive for the US$. And yesterday the positive ISM data was met with a spike higher in the value of the dollar, but this spike was quickly reversed and the dollar drifted lower throughout the remainder of the trading day.
I searched for an answer, even quizzing Mike on what was causing the drop in the dollar following what certainly appeared to be good economic news for the US. But neither Mike nor I could find a good explanation for the selling in both the currency and equity markets. The only answer we could come up with is that traders were simply looking past the data and focusing instead on the poor jobs numbers which were reported last Friday. The monthly jobs data released at the end of last week suggest the Fed will keep the bond buying program at 85 billion per month through the end of the year. I saw a chart of economist's predictions on Bloomberg TV yesterday which showed many of them are shifting their expectations for the taper from September to December. Both Chuck and I have thought the Fed would have a tough time pulling away from the stimulus table before the end of the year, so the shift by other economists only confirms our thoughts.
India had another volatile day of trading, with the market moving the rupee down in value only to be moved back down by government intervention. The Indian government has helped push volatility in the rupee to the highest level in a few years. The rupee has fallen over 11 percent against the dollar in the past three months, almost matching the fall in the AUD and BRL which are the worst performers vs. the US$ over the past quarter.
The reserve bank of India cut interest rates in May to try and stimulate growth, but then raised them in July to try and reverse the rupee's slide. Just last week the government signaled another reversal in policy, indicating they would be looking to cut rates in order to try and stimulate the economy. Talk about a central bank which doesn't look like it has a clue! At times it really does seem they have no idea what the market impacts of their interest rate moves will be. At least they seem to be concerned about the drop in the Indian currency. Hopefully they will see that their knee jerk reactions to each currency move is not healthy for their economy and start to take a longer term outlook when considering policy moves.
Then there was this. As I mentioned yesterday, my travels of the past few weeks have me full of great articles for the TTWT section. Today I will share an article which appears in The Economist magazine. The article, dated August 5 and written by D.L. discusses the amount of debt which has accumulated in Italy, and the very tricky process of rolling that debt over which is being handled by Italy's Treasury department which is headed up by Maria Cannata:
"The summer break is less relaxing for some than others. When a country has a total public debt of more than 2 trillion ($2.6 trillion) and a debt-to-GDP ratio of 130.3%, its debt managers always have the next auction to prepare. Italy has a 2013 funding requirement of about 450 billion; investors bought ?34.6 billion of Italian government debt in July's nine auctions. For the debt directorate, which is part of Italy's Treasury department, every month and every auction is a test of their systems. Things have to go smoothly."
During the presentations I have been giving while on the road the past few weeks I have dedicated a couple of slides to the ongoing debt issues in Europe, and specifically point out my concerns with the level of debt which has accumulated in both Spain and Italy. While the problems in Portugal, Greece, and Cyprus have been grabbed the headlines, I try to point out that the small size of these economies make their debt problems fairly easy for the ECB to deal with. But any hiccups in the larger economies of Spain or Italy could have a much more dramatic impact on the region and the euro. The Economist article goes on to explain that while the drop in rates have helped Italy, there remains a risk that the debt problems in Europe could jump back onto the front pages:
"The European Central Bank's pledge to buy the debt of struggling governments has brought down funding costs. By the end of July Italy had covered 70% of its funding requirement for 2013. Foreigners now own less than 40% of Italian debt securities, compared with a figure of more than 50% four years ago, so the country is less exposed to flighty capital than before. But the sheer scale of Italy's debt remains daunting: ?328.2 billion of Italian debt falls due for redemption over the next twelve months and the country's public-sector deficit creates a need for more borrowing. With concerns over Italian banks mounting, and the country's political scene always capable of delivering shocks, Ms Cannata and her team have to stay watchful."
While things have been going relatively smoothly in Europe, the risk of a renewed debt crisis remains. Those looking to invest in the euro certainly need, like Ms. Cannata and her team, to stay watchful. You can read the entire Economist article at the following link.
To recap. The RBA cut rates as expected, and did not indicate that a further cut was imminent, leading to a rally in the Aussie dollar. Here in the US we saw a positive move on the ISM services index, but the currency markets seemed to be ignoring this data and instead focusing on last weeks monthly jobs report. There is a growing consensus that the Fed will not start the taper until late in the year, instead of the previous thought that a September taper was a sure thing. India had another volatile day, with the government trying to intervene to help stem the slide of the rupee. Intervention never seems to work in the long or even medium term, so I expect rupee volatility to continue. And I finished today's Pfennig by sharing an article from The Economist magazine regarding the debt crisis in Europe.
Currencies today 8/06/13. American Style: A$ .8987, kiwi .7883, C$ .9644, euro 1.3284, sterling 1.5365, Swiss $1.0786. European Style: rand 9.8714, krone 5.9278, SEK 6.5561, forint 225.21, zloty 3.1727, koruna 19.5215, RUB 32.8763, yen 98.06, sing 1.2675, HKD 7.7559, INR 61.30, China 6.1753, pesos 12.6514, BRL 2.306, Dollar Index 81.733, Oil $107.03, 10-year 2.65%, Silver $19.7680, Platinum $1,441.90, Palladium $728.50, and Gold. $1,292.69.
That's it for today. We finally caught the raccoon which has been raiding my daughter's vegetable garden. We have been trying to trap the raccoon for a couple of weeks now, and he consistently out smarted us, eating all of the peanut butter sandwiches we used for bait in addition to devastating our corn and tomato crops. My son and daughter just called to let me know they were going to take him across the highway and let him lose in a large park a couple of miles away from our house. Hopefully he won't find his way back. I am running a bit later than usual today, as I took a bit of time this morning to get in my normal work out. So I will go ahead and hit the send button now. Thanks for reading the Pfennig, and I hope you have a Terrific Tuesday!!
Chris Gaffney, CFA
Vice President
EverBank World Markets
1-800-926-4922
1-314-647-3837 Reported by Proactive Investors 2 days ago.
* RBA cuts as expected with no hint of a further reduction...
* ISM numbers are positive but dollar slides???
* India is back intervening in the markets...
* Debt levels still a worry in Europe...
And, Now, Today's Pfennig For Your Thoughts!
RBA cuts as expected with no hint of a further reduction...
Good day. I had a good first day back, and actually put a dent into my inbox. The markets were fairly calm, with the stock markets stuck in a range and the dollar drifting lower. There is really a shortage of data releases this week, in contrast to the plethora of data releases last week, so the markets seem to be welcoming the chance to catch their breaths. The big news in the currency markets occurred overnight 'down under' so lets get right to today's Pfennig.
The RBA cut rates as expected, shaving another .25% off of the overnight cash-rate target which is now 2.5%. This cut was expected by over 94% of economists who follow these things, so absolutely no surprise. Since the cut had already been 'baked into' the currency price, traders looked to the statement by RBA Governor Glenn Stevens following the rate cut for direction. "The Board has previously noted that the inflation outlook could provide some scope to ease policy further, should that be required to support demand," Stevens said in his statement. "At today's meeting, and taking account of recent information on prices and activity, the Board judged that a further decline in the cash rate was appropriate." Previous statements had stated that inflation levels "may provide some scope for futher easing." Today's statement was therefore seen as a 'neutral' bias instead of the previous 'easing' bias.
The 2.5% cash rate is a record low for Australian interest rates, and most believe the rate will continue lower to 2.25% by year end. Recent inflation data certainly gives the RBA plenty of room for further cuts, with inflation running at a comfortable 2.4% last quarter, well within the RBA's target of 2 to 3 percent. But since Stevens didn't give any indication that there will be another cut in 2013, the aussie dollar rallied. The currency rose from yesterday's low of .8848 to trade above .90 cents immediately after the comments by Governor Stevens.
But the bounce in the Aussie dollar still doesn't convince me that it is time to get back into the aussie dollar. The mining sector remains under pressure from the slowing of the Chinese economy, and RBA policy makers seem to be welcoming a further drop in the value of the Australian dollar. "It is possible that the exchange rate will depreciate further overtime, which would help foster a rebalancing of growth in the economy," RBA Governor Stevens said today.
The lower currency rates have certainly helped with exports, as shown by figures which came out this morning showing Australia's trade surplus widened to A$602 million in June, the fifth straight month of trade surpluses. The Australian economy is becoming healthier, and recent indications that the Chinese economy is stabilizing should also be good news for the folks 'down under'. There will be an opportunity to move back into the Aussie dollar in the future, but for now I would wait.
Here in the US we will get a reading of the Trade Balance for June, but unlike our friends 'down under' the US is expected to have a $43.5 billion trade deficit. This is slightly smaller than last month's $45 billion deficit with the gains probably due to the recent tick up in oil exports and the decline in the value of the dollar during late May and early June.
The one piece of data we got yesterday here in the US was the ISM nonmanufacturing index which showed the service sector expanded in July at the fastest pace in five months. The index printed at a level of 56 which easily exceeded all of the economists' projections compiled by Bloomberg. A very nice rebound from June's level of 52.2 which was a three year low. The report adds to the excitement created by last week's ISM manufacturing index which also surprised on the upside with a reading of 55.4.
The data seem to support the Fed's view that economic activity and growth will continue to pick up during the second half of this year. As Mike reported last week, the Fed policy makers expect "economic growth will pick up from its recent pace and the unemployment rate will gradually decline." The report also showed that prices paid in the Services sector climbed to 60.1 from 52.5, indicating that inflation is starting to take hold. The dollar had rallied during early trading on Monday morning, but quickly gave up these gains after the ISM number printed which is not what I would have expected.
Lately, we have been in a pattern where good news for the US economy was bad news for the equity and bond markets, but good news for the currency markets. After the famous taper speech by Bernanke, the markets have been looking at any good US economic news as a sign the taper will begin sooner rather than later. A reduction in bond buying equates to less stimulus pumping into the markets, which has been seen as a negative for the equity and bond markets and a positive for the US$. And yesterday the positive ISM data was met with a spike higher in the value of the dollar, but this spike was quickly reversed and the dollar drifted lower throughout the remainder of the trading day.
I searched for an answer, even quizzing Mike on what was causing the drop in the dollar following what certainly appeared to be good economic news for the US. But neither Mike nor I could find a good explanation for the selling in both the currency and equity markets. The only answer we could come up with is that traders were simply looking past the data and focusing instead on the poor jobs numbers which were reported last Friday. The monthly jobs data released at the end of last week suggest the Fed will keep the bond buying program at 85 billion per month through the end of the year. I saw a chart of economist's predictions on Bloomberg TV yesterday which showed many of them are shifting their expectations for the taper from September to December. Both Chuck and I have thought the Fed would have a tough time pulling away from the stimulus table before the end of the year, so the shift by other economists only confirms our thoughts.
India had another volatile day of trading, with the market moving the rupee down in value only to be moved back down by government intervention. The Indian government has helped push volatility in the rupee to the highest level in a few years. The rupee has fallen over 11 percent against the dollar in the past three months, almost matching the fall in the AUD and BRL which are the worst performers vs. the US$ over the past quarter.
The reserve bank of India cut interest rates in May to try and stimulate growth, but then raised them in July to try and reverse the rupee's slide. Just last week the government signaled another reversal in policy, indicating they would be looking to cut rates in order to try and stimulate the economy. Talk about a central bank which doesn't look like it has a clue! At times it really does seem they have no idea what the market impacts of their interest rate moves will be. At least they seem to be concerned about the drop in the Indian currency. Hopefully they will see that their knee jerk reactions to each currency move is not healthy for their economy and start to take a longer term outlook when considering policy moves.
Then there was this. As I mentioned yesterday, my travels of the past few weeks have me full of great articles for the TTWT section. Today I will share an article which appears in The Economist magazine. The article, dated August 5 and written by D.L. discusses the amount of debt which has accumulated in Italy, and the very tricky process of rolling that debt over which is being handled by Italy's Treasury department which is headed up by Maria Cannata:
"The summer break is less relaxing for some than others. When a country has a total public debt of more than 2 trillion ($2.6 trillion) and a debt-to-GDP ratio of 130.3%, its debt managers always have the next auction to prepare. Italy has a 2013 funding requirement of about 450 billion; investors bought ?34.6 billion of Italian government debt in July's nine auctions. For the debt directorate, which is part of Italy's Treasury department, every month and every auction is a test of their systems. Things have to go smoothly."
During the presentations I have been giving while on the road the past few weeks I have dedicated a couple of slides to the ongoing debt issues in Europe, and specifically point out my concerns with the level of debt which has accumulated in both Spain and Italy. While the problems in Portugal, Greece, and Cyprus have been grabbed the headlines, I try to point out that the small size of these economies make their debt problems fairly easy for the ECB to deal with. But any hiccups in the larger economies of Spain or Italy could have a much more dramatic impact on the region and the euro. The Economist article goes on to explain that while the drop in rates have helped Italy, there remains a risk that the debt problems in Europe could jump back onto the front pages:
"The European Central Bank's pledge to buy the debt of struggling governments has brought down funding costs. By the end of July Italy had covered 70% of its funding requirement for 2013. Foreigners now own less than 40% of Italian debt securities, compared with a figure of more than 50% four years ago, so the country is less exposed to flighty capital than before. But the sheer scale of Italy's debt remains daunting: ?328.2 billion of Italian debt falls due for redemption over the next twelve months and the country's public-sector deficit creates a need for more borrowing. With concerns over Italian banks mounting, and the country's political scene always capable of delivering shocks, Ms Cannata and her team have to stay watchful."
While things have been going relatively smoothly in Europe, the risk of a renewed debt crisis remains. Those looking to invest in the euro certainly need, like Ms. Cannata and her team, to stay watchful. You can read the entire Economist article at the following link.
To recap. The RBA cut rates as expected, and did not indicate that a further cut was imminent, leading to a rally in the Aussie dollar. Here in the US we saw a positive move on the ISM services index, but the currency markets seemed to be ignoring this data and instead focusing on last weeks monthly jobs report. There is a growing consensus that the Fed will not start the taper until late in the year, instead of the previous thought that a September taper was a sure thing. India had another volatile day, with the government trying to intervene to help stem the slide of the rupee. Intervention never seems to work in the long or even medium term, so I expect rupee volatility to continue. And I finished today's Pfennig by sharing an article from The Economist magazine regarding the debt crisis in Europe.
Currencies today 8/06/13. American Style: A$ .8987, kiwi .7883, C$ .9644, euro 1.3284, sterling 1.5365, Swiss $1.0786. European Style: rand 9.8714, krone 5.9278, SEK 6.5561, forint 225.21, zloty 3.1727, koruna 19.5215, RUB 32.8763, yen 98.06, sing 1.2675, HKD 7.7559, INR 61.30, China 6.1753, pesos 12.6514, BRL 2.306, Dollar Index 81.733, Oil $107.03, 10-year 2.65%, Silver $19.7680, Platinum $1,441.90, Palladium $728.50, and Gold. $1,292.69.
That's it for today. We finally caught the raccoon which has been raiding my daughter's vegetable garden. We have been trying to trap the raccoon for a couple of weeks now, and he consistently out smarted us, eating all of the peanut butter sandwiches we used for bait in addition to devastating our corn and tomato crops. My son and daughter just called to let me know they were going to take him across the highway and let him lose in a large park a couple of miles away from our house. Hopefully he won't find his way back. I am running a bit later than usual today, as I took a bit of time this morning to get in my normal work out. So I will go ahead and hit the send button now. Thanks for reading the Pfennig, and I hope you have a Terrific Tuesday!!
Chris Gaffney, CFA
Vice President
EverBank World Markets
1-800-926-4922
1-314-647-3837 Reported by Proactive Investors 2 days ago.