Anticipation is building
Good day.and welcome to Wednesday morning as well as the last day of July. It’s still tough for me to comprehend that July will now be in the record books, but let’s take a quick look back. It turned out to be a good month both for me personally, with the birth of my little girl, as well as the currency and metals market. As we first entered into July, the dollar was gaining ground on a daily basis as the markets were taking the Fed’s stimulus removal to the extreme. They were looking past everything that needs to first take place before the Fed can even entertain the idea of raising rates, so a matter of putting the cart before the horse.
Bernanke saw all of this as moving way too fast and had to bring reality back into the picture by saying rates aren’t going higher at any point in the near term. Traders then started to back away from the table and question as to whether or not we’ll see tapering of stimulus as soon as September or if that decision gets pushed. With that said, most of the currencies posted decent gains against the dollar except for a few, which included the Brazilian real, Indian rupee, and Australian dollar. Metals also reversed course as gold increased about 7% in the month of July while silver was able to squeeze out a small gain.
And that brings us to today, where the markets have been held hostage for the most part by today’s Fed meeting and then the results of July’s job numbers. I’ll dive into the currency market in a bit, but let’s first take a look at the data from yesterday. We had the final chapter in May housing numbers with the S&P/Case Shiller home price index as well as the July Conference Board consumer confidence index. Home prices continued to show what we already knew, which is they have continued to progress in the right direction.
According to this index, home prices in May year over year increased 12.2% and was the biggest margin of gain over the past seven years. Keep in mind this report only takes into account 20 cities, so this result may not necessarily be consistent with your area. Some of the cities hit the hardest by the market are some of those leading the way for this report. For example, annual gains in San Francisco and Las Vegas were 24.5% and 23.3% respectively. The report also mentioned that home values in Dallas and Denver rose to records in May and marked the first time any city has surpassed its pre-crisis peak. Again, it’s all relative. The St. Louis housing market, for example, is nowhere near any of those levels and gains in New York only came in at 3.3%.
With all of that said, the month to month gain actually came in a little less than expected as higher interest rates began to enter the picture. Surprisingly enough, the July consumer confidence index took a hit as the reading of 80.3 came in worse than the estimate as well as June’s number. The report indicated that higher gas prices and mortgage rates were enough to trump the all powerful influence of the stock market. The individual indicators were a mixed bag as expectations for the next six months as well as those expecting incomes to increase fell while buying plans for homes, autos, and appliances were on the rise.
Well, it’s finally here. The day that kicks it all off. We don’t waste any time either as the ADP employment numbers will be out before our phones even kick on and will be quickly followed by everything except for the FOMC rate decision, which will be early afternoon. While I’m interested to see the ADP number, the national number on Friday will carry all of the weight. Personally, I’m most interested to see the first peek of second quarter GDP. Remember when Chuck was talking about the changes made to GDP calculations, well, that starts now.
This marks the biggest change to this report since 1999 and will now include, among other things, spending on research and development, certain aspects of the entertainment industry, some costs associated with home sales, and accounting for pensions when they have accrued instead of when they are paid out. The Bureau of Economic Analysis will also render annual revisions of GDP numbers, so it’s going to be interesting what kind of impact this will actually have at the end of the day. Anyway, most are waiting for the conclusion of the Fed meeting to see if we get any bones thrown our way as to the taper talk. Bernanke won’t speak after this meeting, so instead, we’ll just get a prepared statement.
Taking a look at currencies, the dollar index did rise a bit but stayed fairly flat for most of the day. While most of the currencies were in a tighter range, we did see a few currencies take a good shot to the chops. The Indian rupee lost about 1.75% yesterday as the central bank kept rates on hold and didn’t indicate a desire to defend the currency in the near term. They also said liquidity steps will be rolled back in a calibrated manner as stability is restored to the foreign exchange market, enabling monetary policy to revert to supporting growth with a continuing vigil on inflation.
It’s not exactly the most clear of statements, but I think the main take away is that a pro-growth stance will be ramping up and possibly undoing some recent policy tightening. Either way, policy makers have a lot to deal with in terms of a very high currency account deficit, lower growth forecasts, and higher inflation. Moving on to the second place finisher in the loser’s bracket, the Aussie ended up with close to a 1.5% loss on the day. It was another case of central bank comments acting as the dagger.
The RBA central bank governor said that second quarter inflation data suggests there is still room to lower interest rates if required and that he wouldn’t be surprised if the currency dropped further. Traders have now fully priced in a rate cut as the odds in the swap market now stand at a 94% change of a cut on August 6. I guess we’ll see if this is a classic case of buy the rumor and sell the fact, or as it would apply in this case, sell the rumor and buy the fact. Anyway, the poor Aussie has been getting kicked from all directions whether its domestically or from abroad.
The other currency that took a tumble was the Swedish krona, which had been one of the better performing currencies. This move was actually initiated by hard data instead of central bank jawboning as the economy unexpectedly shrank in the second quarter by 0.1%. This comes on the heels of the central bank keeping interest rates on hold at it last meeting and their indication for the possibility of rates rising in the second half of next year. This is a thinner traded currency so I’m not surprised by its larger move downward of close to 1.25%, but we’ll have to keep our eyes on this to see if any change to the policy outlook arises.
As I came in this morning, the markets are still in standby mode with the dollar holding a slight edge so far today. As I touched on before, most economists are going to pick the bones clean of the Fed’s statement following the rate decision to see if there are any changes to the wording and/or tone. As we’ve seen in the past, the initial reaction is usually of the kneejerk variety so don’t be surprised if the pendulum swings all the way to one side or the other right out of the gate.
For What It’s Worth.There was a good article I found in The Market Oracle written by Axel Merk, of which I wanted to share a snippet. There was also a humorous illustration accompanying the piece which depicted a man falling from a building with several firemen holding a large dollar bill instead of a blanket to catch the victim. The caption from one of the firemen reads “Is this Safe?” Chuck has painted a similar scene over the years with his description of a man falling from a tall building while exclaiming so far so good, but let’s take a look at what Mr. Merk had to say:
Sell the dollar? What a novel idea: sell the dollar if one is concerned about the dollar? The Chinese central bank does it by diversifying to a basket of currencies they manage. Quite simply, investors that think we have the better printing press than others, might diversify to other currencies accordingly. Investors have been a bit jittery on the concept in recent years, as the US was touted to be the cleanest of the dirty shirts in referring to other currencies.
When investment firm PIMCO came up with that slogan, they forgot to mention that the euro appreciated against the US dollar last year by 1.76%; and as of this writing, the euro is also ahead of the US dollar year to date even with all of the trouble they have had. Maybe having the biggest bragging rights (reserve currency status) isn’t a panacea after all, and when there’s blood on the street (Eurozone), there might be some value.
To recap.We wave goodbye to the month of July today, but it actually turned out to be a good month for many of the currencies and metals. Yesterday, we had another home price index give us a continued rise but a little less than expected on a monthly basis. Consumer confidence in July unexpectedly fell as higher gas prices and mortgage rates offset gains in the stock market. We get a bunch of data today that includes the ADP employment numbers and the first look at second quarter GDP. The rupee got blasted as the central bank kept rates on hold and indicates its moving toward a pro-growth stance. The Aussie got hit as policy makers hint around that a rate cut is likely and we saw second quarter GDP contract in Sweden.
Currencies today 7/31/13. American Style: A$ .9031, kiwi .7993, C$ .9715, euro 1.3258, sterling 1.5203, Swiss $1.0767, . European Style: rand 9.8592, krone 5.9395, SEK 6.5708, forint 225.92, zloty 3.1957, koruna 19.4880, RUB 32.9981, yen 97.71, sing 1.2726, HKD 7.7549, INR 60.3737, China 6.1788, pesos 12.7962, BRL 2.2825, Dollar Index 81.85, Oil $103.27, 10-year 2.61%, Silver $19.90, Platinum $1,437.75, Palladium $736.05, and Gold. $1,329.50
That’s it for today.I don’t know if you’ve seen this commercial or not, I think it’s for Geico, but it’s appropriate since its Wednesday. The commercial is set in an office and shows a camel walking through a bunch of cubicles and saying to everyone that he encounters “Hey, guess what day it is”. The camel asks his question to several people and then the hook at the end of the commercial is that you’ll be happier than a camel on Wednesday. It’s because of hump day, get it. Anyway, I thought it was funny so just wanted to share. Well, we survived another shorthanded day on the desk and we’re another day closer to the weekend. On that note, I’m done for today. Until tomorrow, Have a Great Day!
Assistant Vice President
EverBank World Markets
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