Bullard now sees only one hike.

* Bullard says only one hike needed.
* Yen jumps higher after BOJ meeting.
* Brexit continues to move markets…
* Gold heading toward 3rd weekly gain…

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

Good morning and happy Friday. You all know the drill by now, today’s Pfennig will be another group effort starting with some comments from the big boss Frank Trotter:

On the way in Thursday I was thinking about the decomposing composers. As Monty Python said “there’s less of them every year.” We learn in history classes again and again that what we consider the giants amongst authors, artists, inventors, and yes – composers may not have even been noticed in their era, or died destitute and unappreciated. Those who were the talk of the town have faded into obscurity. Some of this is good public relations management. To the victors go the ability to rewrite the commentary. For others it just took longer for people to figure out how great they were. Maybe even a random article or book by an enthusiast; there will be plenty of those in the post Internet era I suspect.

Looking for candidates in the financial world is an interesting exercise. Who will be highlighted in the downloaded courses of the 2300’s? History seems to report mostly on those who failed miserably. John Law at the turn of 17th century France. Tulip Mania. South Sea Company bubble. The first, second, and final Barings crisis’. A wide array of panics and depressions. Like the nightly news (now there’s a dying entity) only the ugly makes the script. Occasionally the good folks are added in. Adam Smith. Friedrich Hayek. Milton Friedman. In the long run where will Keynes end up (as he said in that perspective we are all dead)? My bet is along side John Law (or perhaps that will be Ben Bernanke?).

Right here right now in 2016 we are in the midst of a central bank obsessive cycle. We are at the end of a week of large market fluctuations as a result of – no change. The economy of the world forges ahead on it’s slack line wobbling violently between stability and disaster. The likelihood of the remaining years through 2020 emerging as a growth spurt corollary of the post-World War II era economy are slight. We can only hope that this decade isn’t the highlighted case study for centuries of students to come. It’s my guess QE won’t even be on the syllabus.

St. Louis Fed Head James Bullard grabbed the attention of investors this morning with the release of a prepared text this morning. Bullard has long been seen as an inflation hawk, and is one of the most outspoken Fed heads – a favorite guest on many of the early morning cable channels. So it was a bit of a surprise when Bullard said the US economy may not need more than a single additional rate hike in the next 2.5 years. I’ll repeat that – Bullard thinks the fed funds interest rate will only be at .63% at the end of 2019. Lower for longer is exactly what he believes. The rate path ” is essentially flat over the forecast horizon,” Bullard wrote, with growth at around 2%, unemployment around 4.7%, and inflation remaining below the Feds 2% goal. “On balance, real output growth, the unemployment rate, and inflation may be at or near mean values that could be sustained over the forecast horizon provided there are no major shocks to the economy.” Bullard wrote.

Wow. I wrote yesterday that the Fed had finally started to come to agreement that the markets were right but to see a hawk admit that we are stuck in a low growth/low inflation/low interest rate environment for the foreseeable future was still a bit of a shock. But as we have been pointing out for a while now, the markets have been saying this for a long time. A quick look at the 10 year yield is all that is needed – investors just don’t see any future growth or accompanying inflation. So we all should be prepared for lower rates and lower GDP growth here in the US (and in the rest of the developed world).

Mike Meyer took a look at all of the economic data released yesterday and sent me the following to share with this morning’s Pfennig readers:

It turned out to be another wild ride in the markets yesterday, but the volatility didn’t necessarily stem from economic data. We did have several reports that came out, but we didn’t see much in the way of impactful or meaningful results. The May Consumer Price Index stayed in line with the common theme as of late, which has been prices remaining within a moderate range. Headline inflation actually dipped a bit both on a monthly and annual basis, but we did see core inflation tick slightly upward to 2.2% annually. The primary driver of core inflation continues to be higher rent and lodging costs. In fact, the Labor Department indicated that 60% of the increase in core consumer prices over the past year could be traced back to higher shelter costs, which includes rents, lodging, and rental equivalent of owner occupied housing.

With headline inflation tracking around 1% and the Fed’s preferred inflation measure (that being the Personal Consumption Expenditures index) hovering around 1.6%, both remain well below the 2% target. The weekly jobless claims moved a little higher last week to 277k, but nothing of concern at this point. The bottom line is these weekly jobs reports have been and continue to be in a healthy range, so unless we see these numbers rise and stay above 300k for a sustained period, we’ll just be going through the motions. Speaking of going through the motions, the first quarter current account deficit came in at $124.7 billion, not that anyone really cares anymore.

Rounding out the rest of the reports, the Philly Fed index came in higher and followed the same path as the Empire Index, however, the employment component of this report showed some softening. Lastly, the June homebuilder index was on the rise and real average weekly earnings remained flat. Switching gears into today, we only have May housing starts and building permits and then next week is going to be extremely sparse with home sales and durable goods the only data of note.

A big thanks to Mike for that nice recap. This morning will be a fairly light one for data with just the May housing starts and building permits. The housing market was one of the early positive signs for the US economy, but just as the rest of the US economy has cooled the housing starts are expected to have slowed 1.9% vs. last month. And the pace of building permits is also expected to have slowed last month.

As I reported yesterday, the Bank of Japan left rates unchanged, and chose not to add additional stimulus to their economy. This sparked a massive move by the Japanese yen which jumped to its highest level in more than three years. The yen was up vs. almost every currency as Brexit worries and general negative sentiment following the uninspiring FOMC statement sent investors looking for safe havens. I continue to question how anyone would consider the yen a safe haven – have they seen the economic data coming out of Japan for the past few decades?? But as Chuck pointed out to me the other day, the yen continues to be one of the most liquid of all global currencies and investors definitely don’t want to turn to the euro or US$ so the Japanese yen is the currency everyone is piling into. But this could be just a short term move as there continues to be no yield in the yen – investors will probably look to move back into higher yielding currencies and investments once the uncertainty of a BREXIT vote is lifted.

The Swiss franc is another currency which has traditionally been seen as a safe haven, but its location on continental Europe has been working against it. But the central bank of Switzerland (SNB) is still worried about massive inflows of currency if/when the UK exits the EU. SNB officials kept interest rates unchanged at the end of their meeting yesterday but left open the option of cutting rates deeper into negative territory should the BREXIT vote succeed.

Next week’s vote in the UK continued to dominate the markets now that we are past June’s FOMC meeting. With the polls shifting almost daily most investors have apparently decided to ‘wait this one out’ and have headed for the relative shelter of the most liquid securities – the US treasuries, Japanese yen and of course our favorite safe haven GOLD.

South Africa is one of the world’s largest gold producers so it wasn’t much of a surprise to see the rand recoup some of its recent losses yesterday. The other commodity currencies of Canada and Australia also moved higher during the last few hours of trading yesterday. The AUD peaked earlier this week at .7450 and a break of that level could send it up to test the one month high of .7505. Recent data suggests the RBA will probably refrain from any further rate moves this year, a shift of sentiment which should help keep the AUD well bid. The kiwi benefitted from better than expected GDP report – the New Zealand economy grew .7% in the first quarter and 2.8% on the year, beating forecasts.

As I mentioned earlier, Gold is set to end the week with a 3rd consecutive weekly gain but gave up some of its gains late Thursday. Gold moved above $1,300 and peaked at almost a 2 year high of $1,315.55 before retreating back down to $1,280 in late trading. Gold is the ‘original’ hard asset and the one currency which isn’t beholden to a central bank so it is a logical choice for investors looking for shelter from all of the uncertainty we currently face. ‘Buy on any dips’ is something Chuck loves to say.

Currencies today 6/16/16. American Style: A$ .7384, kiwi .7051, C$ .7758, euro 1.1252, sterling 1.4279, Swiss $1.04. European Style: rand 15.2026, krone 8.3704, SEK 8.3286, forint 279.04, zloty 3.95, koruna 24.045, RUB 65.082, yen 104.28, sing 1.3498, HKD 7.7602, INR 67.0717, China 6.5795, pesos 18.8518, BRL 3.4465, Dollar Index 94.378, Oil $47.23, 10-year 1.5941%, Silver $17.41, Platinum $973.00, Palladium $532.30, and Gold $1,288.75

That’s it for today, a very busy week in the markets and next week promises to be an exciting one with the BREXIT vote. It will be interesting to see what impact the horrible assassination of the British lawmaker Jo Cox will have on the vote. We are supposed to see a bit of a break in the heavy heat which has been sitting on the Midwest this weekend – I sure hope so as I have a ton of yard work which I have been putting off waiting on cooler weather. And HAPPY FATHER’S DAY to all of the dads out there. I lost my dad a few years ago but will certainly be thinking of him while my girl spoils me on Sunday. And now that I think of it, it is my daughter Lauren’s 18th birthday on Monday so I’ll give her an early Pfennig bday shout out. Thanks for reading the Pfenning, I hope you all have a Fantastic Friday and a wonderful weekend.

Chris Gaffney, CFA
EverBank World Markets