Chinese economy grows 6.7% in first half of 2016.

* Upbeat Chinese growth data spurs risk.
* US stocks reach another record…
* Fed policy makers signal more of the same.
* Gold to end worst week in seven…

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

Good morning. As has become our tradition on ‘Infusion Confusion’ Fridays, we will start today’s Pfennig with a few words from the big boss, Frank Trotter. He had sent me his ‘introduction’ yesterday afternoon prior to the events in Nice, France. The introduction spoke about Bastille day celebrations and compared the French revolution to today’s Brexit and a general push against the ‘establishment’. After last night’s terrorist attacks on those celebrating Bastille day we decided to leave the opening paragraphs out of this morning’s Pfennig. So with that set up here is the rest of Frank’s introduction to today’s Pfennig:

In an intellectual revolution in process right now we note that pretty much the entire foundation of the theory of modern finance is built upon the concept of a Risk-Free rate-of-return. All other assets and liabilities are to be compared to this risk-free rate and discounted in a manner proportionate their characteristics that vary from the risk-free asset. Traditionally this has been the US Treasury rate for the term or duration one wishes to consider. With global interest rates at or near zero and even below, and with long term bond values in doubt what’s an investor to do? Think a little about the almost reflexive response of most financial advisors – keep 30% – 40% in bonds – and consider how those portfolios will perform over the next ten years.

One casualty of the messages contained in these extremely low yields, according to Research Associates ( have been inflation-hedging assets. The broad market believes that rates, inflation, and economic activity will all remain extremely low for the next ten years or so. Thus with no market belief in the likelihood of inflation one can feel good about selling inflation hedging assets, thereby driving the prices down. Many of us think that assets that have been sold or ignored might be a good place to look for value. And if the commodity portion of these asset classes improves where do currencies from countries heavy on the export side of such product perform? Seems like we should take a look.

Thanks to Frank for getting things going this morning. The equity markets look to hold onto the gains booked this week after an upbeat report on Chinese growth boosted investor confidence. The Chinese economy grew at a slightly better than expected rate of 6.7% during the second quarter. The economy has been supported by Chinese consumption – exactly what the Chinese leaders have been wanting to see as they shift the globe’s second largest economy from one driven by manufacturing to a more mature consumption oriented one. This upbeat data had investors continuing to sell ‘risk’ assets which was not good news for holders of Japanese yen and the precious metals.

This week has definitely seen a shift in investor sentiment following the establishment of a new government in the UK and confirmations of additional stimulus from the Bank of Japan. The popular safe haven investment of the Japanese yen is set to have the largest weekly drop in value since ’99 and is now sitting at a three week low against the US$. As Chuck mentioned, former Federal Reserve Chairman Ben Bernanke visited BOJ officials earlier this week spurring a lot of talk about the possibility of ‘helicopter money’. Leaders at the BOJ have become desperate – as their economy continues to be stuck in a slow growth / low inflation pattern in spite of all of their monetary efforts. So now many think they will resort to trying ‘Helicopter Ben’s’ magic solution of just giving stimulus directly to the consumers. I guess after negative interest rates nothing sounds too crazy – and you might as well cut out the ‘middle man’ and just get the stimulus directly into the hands of those that want to spend it. Problem is that the Japanese consumers just haven’t shown that they want to spend so giving them more yen may just boost the savings rate.

Fed policy makers here in the US are signaling they are in no rush to raise US interest rates. St. Louis Fed President James Bullard repeated his position that the US economy will only be able to withstand one more interest rate over the next couple of years. “In the aftermath of Brexit people want to wait and see and I’m happy to go with that for now,” Bullard said yesterday. “There’s really no rush”. This is a shift for Bullard who was sounding a much more hawkish tone last year. And Dallas Fed President Robert Kaplan called for a ‘patient and gradual’ approach to raising rates while Atlanta Fed President Dennis Lockhart said the FOMC needs to be ‘cautious and patient’. So patient was the word of the day for the members of the FOMC who are definitely suggesting US interest rates will remain ‘lower for longer’.

Data released yesterday here in the US showed producer prices booked their biggest gain in a year in June. The Labor Department reported that its producer price index for final demand rose .5% last month after a .4% increase in May. The ‘rolling 12 month’ reading of PPI rose .3%, not a huge move but it was the first time this figure had risen since December of 2014. A rebound in oil prices is one reason for the increase. The weekly jobs numbers were also released by the Labor Department yesterday and showed initial claims for unemployment benefits of 254,000. This was fairly close to the 43 year low of 248k reported in mid April and had many economists believing May’s horrible employment report was just an aberration. While the weekly jobs numbers have never really been something which move the markets, they have been below 300k (the threshold for a healthy labor market) for 71 straight weeks now. But wage growth is still MIA and I still don’t believe Chairman Yellen will want to move rates higher without first seeing wage pressure.

With ‘risk on’ the Brazilian real continued its run higher on Thursday and is by far the best performing currency in 2016 with over a 21% appreciation vs. the US$. Interim President Michel Temer is expected to push for additional austerity measures following the election of an ally to lead the lower house of Congress. The currency has been appreciating in spite of an economy which is not expected to grow in 2016 or 2017. The other commodity currencies of CAD and AUD also booked gains yesterday as some industrial commodity prices rebounded. Oil prices recovered yesterday which helped the Canadian dollar push to a one week high. The Australian dollar inched higher after data showed 34,800 full time jobs were created in June, slightly better than economists had expected. The better employment data doesn’t necessarily mean the RBA won’t be looking to cut interest rates – a decision which probably hinges on 2nd quarter inflation data which is due out later this month.

The better data out of China had many commodities rallying yesterday, but gold continued to slide as investor sentiment shifted against the safe haven investments. After six straight weeks of gains, the price of Gold is taking a bit of a break. But I don’t think the rally is over just yet as we still have a lot of uncertainty in the markets. And global interest rates don’t look like they are going anywhere which should continue to boost investor interest in the precious metals as the opportunity costs of holding them remain at record lows. Silver was down a bit also but palladium moved a bit higher to reach its highest since November.

Currencies today 7/15/16. American Style: A$ .7636, kiwi .7144, C$ .7771, euro 1.1118, sterling 1.3330, Swiss $1.019 European Style: rand 14.32, krone 8.3837, SEK 8.5083, forint 283.30, zloty 3.9646, koruna 24.309, RUB 63.1783, yen 105.89, sing 1.3444, HKD 7.7540, INR 66.976, China 6.6805, pesos 18.3633, BRL 3.2464, Dollar Index 96.030, Oil $45.82, 10-year 1.56%, Silver $20.225, Platinum $1,095.60, Palladium $643.97, and Gold $1,331.00.

That’s it for today, and for the week. Some of the folks on the desk are still without power – mine was restored yesterday afternoon but I haven’t heard if Chuck got his back on yet. We had another round of storms roll through yesterday but this weekend is supposed to be hot and dry. Summer in St. Louis. Hope you all have a fantastic Friday and a wonderful weekend.

Chris Gaffney, CFA
EverBank World Markets