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Dollar bounces back toward 14 year highs.

* Dollar bounces back.
* Bank of Japan holds steady.
* Attacks in Germany and Turkey shake up the markets.
* Safe haven bid not enough to boost gold…

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

Good morning. Sorry about the late delivery of the Pfennig yesterday, we had some server problems but our IT department got it squared away so all should be good now. Frank is headed back home for a holiday party which he hosts each year, but he still remembered to share some thoughts as he travels across the Midwest:

Somewhere over the Oklahoma Panhandle – Back a couple years ago my longtime friend, David Galland, wrote about what he called the “New Stoicism.” David was a co-founder of with us and at the time of this article was running and writing for the Casey Research Group. Neither of us are long on patience in our own very different ways and both of us could take some lessons from this approach to life and behavior. David’s article is here but don’t click out yet Having spent a good portion of Monday watching my American Airlines flight first be delayed a little, then more, then a lot, then more than necessary to catch the connection I thought about that article a lot and felt pretty good about being patient and focusing on those things that I could actually change. And change I have, both the first and second legs, so that I’ll still touch down in Saint Louis tonight.

Back to Oklahoma (probably Texas now – the WiFi isn’t working so I am not all that sure) I certainly start to think a little about oil. It does appear clear amongst a host of other questions that the US will be going back into the oil and coal business full speed under the new administration. Prices a bit over $50 seem to signal that the combination of OPEC (public) restraint and global economic activity are inching up ever so slowly. As a nation now marginally able to export oil at some magical price point a little higher than here we may finally be able to quell our obsessions with the Middle East a bit. It’s a little hard to add it all up but the potential reduction in the financial and human costs could be remarkable. Of course, we should always watch what we wish for. As China becomes the largest player in oil imports from the Middle East attention is sure to shift from catering to one customer to another. And there’s always that potential dust up in the eastern S
audi Arabian oil fields.

In a discussion with our CFO about 2017 Steve asked “So how do you see the year playing out in the currency markets?” I said that we were in the middle of crafting forecasts for our various publications and I was terrified to consider how we’d feel about what we said now, when New Year’s rolls around next year. As we’ll see in a future article economic forecasts and baseball have a lot in common; they both bat about .300. So at least the bar isn’t very high. But relative to many other years we are faced with a stock market at or near record highs in the face of modest economic activity and a rapidly rising yield curve. Let’s face it ten-year yields under 3% still don’t suggest that he market thinks we’re in a high-growth break-out. That probably means inflation around or below 2% as observed by the Fed. Where does that take us for growth. We’ll all stay tuned.

Thanks Frank, and I agree that trying to figure out where the markets are headed is a real head scratcher as we turn the calendar over. According to dictionary publisher Merriam-Webster, ‘Surreal’ was the word of 2016. The unexpected results of the BREXIT and US elections certainly seem to justify the selection. And the markets have certainly been somewhat surreal, with equity prices hitting daily records in spite of heightened levels of uncertainty, and bond yields staying fairly close to historic lows for longer than anyone expected. Negative interest rates – very surreal.

Your probably wondering where I’m going with all of this, well Chuck sent me a note this weekend which got me thinking along the lines of just how surreal this all has become. Here is Chuck’s note:

I’m sitting here on this cold and icy Saturday Night, thinking about something that had occurred to me today.. Last week the Fed announced that they would be looking to hike rates 3 times in 2017. And it hit me right between the eyes! WHAP! By doing that, the Fed is announcing that they are more dovish for 2017 than they have been for the last two years. Hmmm. Make you wonder doesn’t it? I’ll leave it at that, and for your own thoughts as to what’s going on here..

Thanks Chuck, and you have again hit the nail on the head. The markets feel the FOMC has taken a ‘hawkish’ tone as they are now predicting 3 more interest rates in 2017, but as Chuck just reminded us, last year at this time they had thought we would be seeing 4 interest rates increases in 2016. So the FOMC is actually a bit more dovish than they were last year at this time. But I guess that really doesn’t matter to Mr. Market as this equity rally continues on newly found consumers’ confidence. What are they all confident about? I guess it is just change – as we really don’t have any solid details of what the new administration will try to do, but it seems investors are fine with this unknown.

Janet Yellen helped the dollar claw back into positive territory yesterday after she said the US labor market has improved enough to start to generate wage growth. “After years of a slow economic recovery, you are entering the strongest job market in nearly a decade,” Yellen told students graduating from the University of Baltimore yesterday. “There are also indications that wage growth is picking up, and weekly earnings for younger workers have made strong gains over the past couple of years.”

This last line about wage growth is what had the market a bit lathered up as Yellen has repeatedly said she would wait for wage growth prior to taking a more aggressive approach on rates. And if that wage growth actually becomes a reality we could see the pace of rate hikes pick up steam which could lead to more dollar strength.

The Bank of Japan kept monetary policy unchanged just as the markets had expected. This caused additional selling of the yen which slid as much as 1 percent in overnight trading and is back over 118 this morning. The yen and other ‘safe haven’ currencies including the Swiss Franc and US$ surged for a while yesterday after terrorist attacks in both Turkey and Germany, but these attacks were seen as ‘one off’ and unrelated so the markets seemed to shrug them off fairly quickly. I guess this type of trading is just another confirmation that ‘surreal’ was a great way to describe today’s global economy.

But back to the currency markets. The Bank of Japan Governor Kuroda gave an upbeat view of the Japanese economy but made sure to throw cold water on the thought that Japanese interest rates may be starting to increase sometime soon. Instead Kuroda vowed to keep policy ‘very accommodative’ in order to achieve their goal of 2 percent inflation. He also pointed out that the recent depreciation of the Japanese yen would be helpful in boosting inflation by increasing import costs and therefore raise inflation expectations. This has been the largest challenge faced by the BOJ – trying to convince consumers and investors that inflation is going to show up. Unfortunately for Kuroda all of the jawboning and convincing he has been trying to do just doesn’t line up with reality – Japanese inflation is MIA.

But there are some signs that global inflation may be returning. UK retail sales surged over Black Friday according to a report released this morning. And the report which was released by the Confederation of British Industry stated that “Pressures on retail activity are likely to increase in 2017. With higher inflation beginning to weigh on households’ purchasing power. ”

Minutes from the Reserve Bank of Australia’s December meeting showed that the board is trying to balance growth concerns with household debt levels. This is the same problem facing many of the global central banks – the need to stimulate more growth but having to try to do that without increasing debt levels which are already near record levels. There are some indications that Australian housing prices are starting to accelerate, which could lead to a boost in both consumer confidence and spending. The RBA board also saw positive signs on the international economy as fears of a hard landing in their main trading partner, China have abated. The positive tone of the RBA minutes lead to a bit of a rally in both the AUD and NZD overnight, but both currencies are giving back some of these overnight gains as trading gets underway here in the US.

Precious metals caught a bit of a safe haven bid yesterday as news of the attacks in Germany and Turkey rippled through the markets. But this safe haven bid didn’t last as investors shrugged off the attacks and started to focus instead on all of the positive talk coming from global central banks. Janet Yellen helped the dollar and hurt gold with her speech yesterday. Decreased physical demand in India is also weighing on the price of gold as the governments clampdown on high value currency notes. Apparently some traders feel the government clampdown on larger denomination bills will ultimately hurt consumer demand for precious metals. There was an initial surge in buying as Indian investors swapped cash for gold, but this flurry apparently died out and many analysts now predict that demand will drop as we enter what is traditionally a fairly strong season for gold.

For What It’s Worth.. Chuck sent me the following this weekend after reading an article on the web: . Here is Chuck’s take on this article and the additional funding which is going to be required.

What do you get for $10 Billion? I mean, we’re talking about some serious dough here, right? $10 Billion. that’s Billion with a capital B! Well, that’s the amount that U.S. taxpayers will have to fork out to cover double-digit premium hikes for subsidized health insurance under the Affordable Care Act, according to a study being released from the Center for Health and Economy. Hmmm, I don’t recall being told that taxpayers were going to have to foot the bill for ACA, do you? Oh, that’s right, the actual plan was never really read by lawmakers before passing it, so how would they have known that taxpayers would have to subsidize the plan? The article was in the Associated Press, and had this to say, “Currently more than 8 in 10 consumers buying private health insurance through and state markets receive tax credits from the government to help pay their premiums. Those subsidies are designed to rise along with premiums, shielding consumers from sudden
increases. But the bill ultimately gets passed on to taxpayers.”

Currencies today 12/20/16. American Style: A$ .7231, kiwi .6889, C$ .7465, euro 1.0364, sterling 1.2326, Swiss $.9695 European Style: rand 14.055, krone 8.7135, SEK 9.3834, forint 299.79, zloty 4.2546, koruna 26.064, RUB 61.467 yen 118.09, sing 1.447, HKD 7.7659, INR 68.055, China 6.9468, pesos 20.418 BRL 3.3648, Dollar Index 103.57, Oil $52.58, 10-year 2.58%, Silver $15.65, Platinum $907.50 Palladium $665.50, and Gold $1,127.50.

That’s it for today. I got a treat last night when I got home as my son asked me to go to the Blues game with him. The game ended up going into overtime and the Blues lost but it was still great to be able to spend the night with Brendan. I’m looking forward to seeing some of my old Mark Twain coworkers at the annual holiday party which is being cohosted by Frank tonight. I just noticed I’m running late again, so I’ll hit the send button now. I hope everyone has a Terrific Tuesday and thanks for reading the Pfennig.

Chris Gaffney, CFA
EverBank World Markets

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