China pledges more support for their economy.

* China pledges more support…
* Data continues to question FOMC decision.
* Fed’s Lockhart sees four more rate hikes in 2016…
* Gold sustains a rally…

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

Frank kicks things off again today:

I’ve written before about the multi-tier currency system that has been in place in Argentina for many years. Until recently the government would set the official conversion rate into and out of Argentine Pesos. There were restrictions on how much and individual could convert, and strict restrictions on the free movement of capital by companies. As a result another market, called the “Blue Peso” was where almost all Argentines and visitors in the know made their exchanges. For a visitor the difference in price ran from about 35% discount to 45%. This was an effort by the prior administration to stem the flow of Peso’s out of the country as estimated inflation approached 30% due to disastrous and extreme populous Peronist policies. The new President, President Mauricio Marci delivered on his policy changes as promised and to no one’s surprise the market rate has fallen significantly and converged with the Blue rate. Let the market dictate!

While some economists and many more politicians feel that they know better when it comes to setting currency rates, it’s certainly my opinion that price discovery in a free market does a better job. Sometimes of course it’s not the answer that one wants. Sometimes a price exposes weaknesses in an economy, or in the expected impact of policies on that economy. In contrast sometimes governments in particular think currency prices are too high. Right now we see many items in the press and in commentary stating that the stagnation in US manufacturing is a result of the strong dollar over the past couple years. A higher US dollar makes it harder to export goods and services at the same margin, or to export at all. At least for now we aren’t hearing serious calls to “fix” the situation as we often hear from the campaign trail. Good for now.

China on the other hand is faced with extracting themselves from a fixed currency price program in the middle of a global contraction. For years we have felt that they have set the price of the Renminbi lower than the market would discover to boost their exports. With the planned inclusion in the IMF’s reserve basket, and perhaps a free float by this time next year it appears that the last vestiges of manipulation will occur for a while yet as the government pushes the prices down a little longer to keep exports on life support. Of course the price of the Renminbi hasn’t really moved all that much year to date, less than 4% if I have it right. Perhaps there’s a major move to come?

Thanks again to Frank for supplying that excellent introduction to this Tuesday edition of the Pfennig. His mention of the Chinese Renminbi was right on target this morning as they led the headlines as I turned on my Reuters terminal this morning. Officials in Beijing have pledged more reforms and polices to support their economy in 2016. The Peoples Bank of China set the Renminbi mid-point rate at 6.4746 per dollar which was slightly stronger than yesterday’s fix. Officials confirmed they would be working to make their monetary policy more flexible and expand its budget deficit in 2016 in order to support slowing growth.

The dollar fell against most of the major currencies as we started the holiday week as traders questioned the ability of the US economy to withstand the recent rate increase. The dollar index continued the slide which it started after peaking out last Thursday. The Australian dollar and New Zealand dollar were two of the big movers vs. the US$ overnight as they were buoyed by the hopes of more support by Chinese officials and steadier oil prices. The Canadian dollar was also helped by more stable energy prices and actually booked a gain vs. the US$ for the first time in several days.

The euro and yen gained ground against the dollar but stayed in a fairly tight range as traders are hesitant to put on any major new positions this close to the end of the year.

We only had one piece of data released yesterday, and it wasn’t a market moving one. The November Chicago Fed National Activity Index showed a decrease of .3 vs an expected reading of a positive .10 with 48 of the 85 monthly individual indicators deteriorating during past month. October’s number was also revised lower by the Chicago Fed from an original reading of -.04 to a reading of -.17. Any readings below 0 indicated below-trend growth in the national economy so these numbers from the Chicago Fed certainly don’t support the FOMC’s opinion that the US economy is in the midst of a strong recovery.

We had a number of Federal Reserve members hitting the airwaves recently in an attempt to put their own ‘spin’ on the recent FOMC increase. In a radio interview yesterday, Federal Reserve Bank of Atlanta President Dennis Lockhart suggested the FOMC is prepared to raise an additional 4 times in 2016 which is in line with their projection that the Fed Funds rate will stand at 1.375% one year from now. “Moving up gradually means not every meeting, in all likelihood,” Lockhart said during the interview. “The rate of rising interest rates will be more like every other meeting.” So one of the Fed heads has started to prime the market for a ‘regular’ rate increase – maybe not every meeting but at least every other meeting. While he said the rate increases will continue to be ‘data dependent’ he reiterated the FOMC majority opinion that the US economy is solid enough to withstand the rate increases. Lockhart said the rate hike reflects a ‘solid’ outlook for the economy, with in
flation likely to move toward the Fed’s 2 percent goal after the temporary drags from lower oil prices and a stronger dollar end. But the big question remains – when will those drags end?

I think all of you Pfennig readers know exactly where Chuck stands on the ‘strength of the US recovery’ and something he read over the weekend struck a nerve so he decided to share it with us:

OK.. so much for this “strong U.S. economy” that the Fed keeps pointing to. This past weekend I read where Global Corporate Defaults as reported by Standard & Poors, have exceeded 100 in 2015. These are the Big companies folks, not small businesses, who have seen more deaths this year than births. But of those 100, over 55 happened right here in the U.S. Nearly 20 were in the Emerging Markets, and barely over 10 happened in the Eurozone. The rest were scattered around the Globe. But 55 of the 100 here in the U.S? Forget all the data that has shown the economy isn’t hitting on but 4 of its 8 cylinders, this data has got to blow somebody’s mind that’s in charge at the Fed, doesn’t it? I am sick and tired of hearing people that should know better, spout off about the strong U.S. economy. They are crazier than loons to me folks.

Today is a much busier data day with the final data on 3rd quarter GDP along with the Existing Home sales data for November and the Richmond Fed Manufacturing index. As I mentioned yesterday, the 3rd quarter GDP data is expected to show a 1.9% increase – revised from the earlier reading of a 2.1% increase. The GDP Price index and Core PCE figures which are released along with the GDP number are thought to have held stable at a 1.3% increase for both. The Existing home sales are predicted to show a .2% drop for the month of November, following a pretty sharp 3.4% decrease in October. And finally the Richmond Fed index is also expected to report a negative number at -1 for December following a -3 reading last month. Again, none of this data is expected to indicate the US economy is rosy – heck, it doesn’t even show it is holding steady – but instead the indications are that we are slipping not recovering.

Gold was able to sustain a rally on Monday – with prices rising over 1 percent. The precious metal prices moved higher after the US data came in weaker than expected which had investors questioning the predictions of another 4 more interest rate increases in 2016. We are also probably seeing some short covering / profit taking as we enter the final two weeks of 2015. According to our trader Tim, market liquidity is already starting to dry up. Could make for an interesting few days – only 5 ‘full’ trading days left in 2015.

Currencies today 12/22/15. American Style: A$ .7244, kiwi .6825, C$ .7180, euro 1.0954, sterling 1.4863, Swiss $1.0116. European Style: rand 15.1338, krone 8.7061, SEK 8.4381, forint 286.50, zloty 3.8681, koruna 24.662, RUB 71.1170, yen 120.92, sing 1.4040, HKD 7.7527, INR 66.2632, China 6.4746, pesos 17.1724, BRL 3.9879, Dollar Index 98.232, Oil $35.96, 10-year 2.2075%, Silver $14.29, Platinum $872.64, Palladium $554.98, and Gold $1,075.86

That’s it for today. We still haven’t seen much of winter here in the Midwest – and with 50 degree temps during the day we don’t have much of a chance for a ‘White Christmas’! But no matter the weather I am still looking forward to getting together with all of the family this weekend. I have a busy couple of days heading into the holidays with a big charity ball this evening and then a neighborhood event the following night. Mike Harrell and his wife welcomed a handsome young man into the world yesterday – the first pictures show him wearing a Seminole hat!! Congrats! I’m running late this morning, so I’ll just hit the send button now after thanking all of you for reading the Pfennig. Hope you have a terrific Tuesday!

Chris Gaffney, CFA
EverBank World Markets