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A busy week ahead could give investors a sense of direction.

* Welcome to the second quarter.
* Chinese President to visit the US.
* Friday’s job numbers could give direction.
* Gold stays below $1,250…

And Now, Today’s A Pfennig For Your Thoughts.

Good morning. Chuck got the green light from the doctor and headed on down to the Florida sunshine and as usual when Chuck is away the big boss Frank Trotter will get things going for us this morning.

Saint Louis – As I write this we’re watching opening day baseball. It’s fun to see Red Schoendienst – age 94 – who started with the team in 1945; he’s still coming to the ballpark each day as a coach and has been in the Baseball Hall of Fame since 1989. The Cardinals, like many other teams, trot out a whole host of former greats, and current coaches. Chuck will be on vacation this week after a tough fortnight readjusting with some new medical challenges. He’d love to make some comments on his beloved Cardinals – and I suspect he may send some notes to the team – but it’s back to the regular season starting out against the arch rival Chicago Cubs. It pains me to say this but last year the Cubs were the best team in baseball and in a rare event the best team won. There I said it. Feels a little like Mark Twain wrote about taking castor oil. Yuck.

The markets are trying to decide if they want to say yuck to the “Life is Beautiful” trade that has been on for equities since election day. So far it’s still hanging in there but there appear to be cracks in the faith of the believers appearing. Long term rates have eased a bit, forecasts for GDP growth are positive in general, but moderate at best. There are some nice economic datum coming out, but each one it seems is followed by a statistic that makes one stop and think. I am rooting for a great result, but like a banker I tend to be skeptical.

Looking at the currency markets we wonder where and when things will turn. In order to finance the ongoing budget and trade deficits some commentators say that the US dollar needs to decline. We think that after the Fed rate rises appear to be in place that the US dollar will begin another down trend. But forecasting ranks up with astrology for accuracy – maybe someone else on the team will have an idea . . .

Thanks for that opening Frank. The dollar hasn’t given investors any indication of clear trend lately with the dollar index strengthening slightly throughout last week but staying within the downward trend which began at the start of the year. Today marks the first trading day of the 2nd quarter, hopefully the next three months will give us a better indication of where the markets are headed.

Investors continue to take a wait and see attitude with the new Trump administration ,, wondering exactly what trade and economic stimulus packages will be enacted after the failure of their healthcare ‘repeal and replace’.

Trump talked a tough game on trade during the campaign, and this week’s visit from Chinese President Xi Jinping will dominated this week’s trading. The US President has blamed the Chinese of manipulating their currency several times in the past, and the value of the Renminbi will certainly come up during this week’s visit down in Florida. Over the weekend Trump also took a hard line on North Korea which will undoubtedly come up in talks with China. While neither of these issues will be solved during a couple day trip, investors will be interested in seeing how well the two leaders seem to be hitting it off.

If the presidents of the two largest economies can appear to be on the same page on these very important issues investors could start moving in a big way back into the ‘risk’ assets. This would be good for the emerging market currencies and commodities which are both tied to global growth. But if President Trump and Xi Jinping take a more combative tone, the markets could see moves back away from these ‘growth’ assets.

Since this is the first week of the month, Friday will bring us the job numbers for March. With one of a possible 3 interest rate increases in the books, FOMC members (and investors) will be looking at this report to see if wages are starting to move higher. Wage inflation is one thing which could force Fed Chairman Yellen and her partners on the FOMC to consider picking up the pace on interest rates. However, if Friday’s report shows the US economic recovery has paused, then the markets could start reducing the odds of two more interest rate increases this year.

Chuck sent me the following note regarding Friday’s economic data prior to boarding his southbound plane:

The U.S. Data Cupboard on Friday, had the Personal Income & Spending, and the PCE that we talked about on Friday. First up the Personal Income and Spending. Remember when I used to carry on about how we were spending more than we made? Well, Income has caught up to spending, or better put, spending has dropped like a rock, so that’s no longer something to fret about. Instead, Personal Spending didn’t even meet the expectations which weren’t exactly anything to write home about! Spending grew in February at 0.1%! Well, so much for that increase in Spending we saw in the 4th QTR, eh? With consumption/ spending such a big part of the U.S. economy, this print has got to scare the bejeebers out of the rate hike campers, don’t you think?

In addition, the Personal Consumption Expenditures (PCE) which is the Fed preferred method of tracking consumer inflation, which is a good thing, considering all the games people play with CPI, and it moved in the wrong direction in February, and is at 1.8% (In January it was 1.89%) You may recall here that the Fed has an inflation target of 2%, and they went ahead and started hiking rates with the belief that inflation would eventually grow faster. It was so slow to move that at one point Fed members even discussed allowing the economy to run hot for a short time after inflation got moving, in order to have inflation strong enough to withstand their rate hikes. But what’s a Fed member to do now? Their inflation tracker is going in the wrong direction, and where’s the faster inflation pace that they promised us we would see?

Well, folks. It’s actually there, rising inflation that is. I think there’s something amiss in the way the calculations that the Fed uses from data that the Bureau of Economic Analysis (BEA), sends them. I think somebody ought to look into those calcs. Otherwise, the markets have no idea what to think or believe! And the Fed could be losing credibility with their song and dance about faster inflation, when their own reports don’t reflect that. I’m just saying.

Thanks to Chuck for sharing his thoughts on last week’s data. As I mentioned earlier, this week will be fairly busy with Minutes from the March FOMC meeting released along with the minutes from the ECB’s last gathering. The Reserve Bank of Australia will probably keep their rates steady tomorrow, and India’s central bank is also expected to keep rates on hold. We will also get a plethora of second tier data releases during the week, leading up to Friday’s big job report.

The pound sterling fell for the first time in 3 days after data released in the UK showed a slowdown in the manufacturing sector. The pound had been recovering from last year’s dramatic sell off as investors shifted into it and away from the euro, but data showing that UK manufacturing growth cooled in March turned the pound around. HIS Markit’s factory purchasing managers index fell to 54.2 from a revised 54.5 in February. The number remained above the key 50 level which indicates expansion but economists had predicted an increase to 55 and were therefore disappointed. With the UK officially starting the negotiations to leave the EU, the pound will undoubtedly continue to be somewhat volatile as investors try and figure out just how contentious the Brexit will be for the UK economy.

Gold remained below $1,250 during a fairly light trading day. The possibility of a more aggressive US interest rate policy have kept a lid on prices, but this lid could be lifted off if the US economic growth targets and expectations disappoint. Safe haven buying could increase in April – sparked by French elections. Right now the markets have discounted the possibility of a win by the French hard-right leader Le Pen, so if she surprises with an upset we could see a quick boost in the price of gold.

Typically investors ‘buy the rumor and sell the fact’ so the safe haven asset of gold could see a move higher prior to the French elections. And if US data disappoints, or the Brexit rhetoric heats up within the EU we could see additional flows into precious metals.

Currencies today 4/3/17. American Style: A$ .7610, kiwi .7002, C$ .7493, euro 1.0661, sterling 1.2504, Swiss $.9983 European Style: rand 13.5300, krone 8.5771, SEK 9.9186, forint 289.44, zloty 3.9657, koruna 25.356, RUB 56.3332 yen 111.27, sing 1.3973, HKD 7.7720, INR 64.9750, China 6.8993, pesos 18.7230, BRL 3.1240, Dollar Index 100.54, Oil $50.73, 10-year 2.38%, Silver $18.16, Platinum $950.50 Palladium $799.70, and Gold $1,247.20.

That is it for today. I stayed up late watching the Cardinal’s beat last year’s World Series Champions – a nice way to get the season started! And the Blues continued to position themselves for what will hopefully be another deep run into the playoffs, with a good win over Nashville. I had a great weekend, spending Friday night with my son in Richmond before flying home to escort my daughter to our last ‘Father Daughter’ dance. We had a good time dancing the night away before grabbing our classic ‘late night’ snack at a local diner. Still can’t believe she will be graduating in about a month. Time to get this out the door. I hope everyone has a great start to their week, and thanks for reading the Pfennig.

Chris Gaffney, CFA
EverBank World Markets

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