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Fed Decision Is Imminent…

* Currencies on hold
* PPI increases
* Oil volatility
* Waiting for the Fed

And now. Today’s A Pfennig For Your Thoughts

Good Day and welcome to Wednesday morning. Well, the digital countdown showing the hours, minutes, and seconds until the Fed rate decision will be prominently displayed on all of the cable news networks as we move into the afternoon. As you know, a quarter point move has already been baked and placed on the cooling rack at this point, so any whisper or innuendo of an increased rate path would appear to be the only newsworthy development at this point. Without further ado, Frank will get us pointed in the right direction this morning.

Hacienda Molinos – It’s funny. When we are exploring around in the US, I sometimes wonder – why exactly did a person many years ago locate here? Why did they pick that rock to drill a test hole? Things seem so far away and yet here they were (are). We spent a good bit of the day driving from Salta to Estancia Colome (-25.5129988,-66.3947448). This location and the several that we have been to in the past which are even further into the mountains, makes any statement about being remote in the US somewhat irrelevant. A visit years ago to what was the Angus Station in Australia further illustrates the point. These people were either entrepreneurs of their day, or outcasts who were lucky enough to find their way.

Today, it doesn’t seem farfetched to take a voyage to the far east or the deepest jungles of Africa to generate opportunity. Creating apps and tools that make some portion of our first world lives have a little less friction has created an extensive amount of wealth. Some old fashion manufacturers too, although there are a few notable that I won’t mention, appear to be creating a small fortune for their owners – out of a large one.

A discussion in the car about monetary policy (you would love to party with this crew) led to my recitation that while what is termed government money in the form of the US Federal Reserve Bank’s balance sheet (which has risen considerably since 2008), bank money that is created primarily through the multiplier effect of lending had shrunk through year end 2015. It would be a surprise to see if it is on the plus side of the ledger yet. Looking back a paragraph at the potential new enterprises to lend to, I suspect that like the mortgage side of the lending industry, the business plans that generated a loan in the early 2000’s are still being received with suspicion due to low growth outlooks and perhaps more caution. Less lending may be prudent, but it also produces less business expansion etc. The circle of business feeds itself at both ends of the continuous equation which results in a continuous bumpy outlook.

Thanks Frank. I think there are many, me included, that would find your party conversation topics to be extremely thought provoking, so sounds like a good time to me. With that said, let’s shift gears into some market commentary from Dane Moody:

Well, most expected that we’d see range-bound trading on Tuesday, and that’s exactly what happened, with the markets spending the day flat to down a smidge. The FOMC started their 2 day meeting, which concludes tomorrow with the Fed’s rate decision. Again, the 25 basis point rate hike is all but priced in at this point, but all eyes will be on the statement, on the dot-plot and on Fed Chair Janet Yellen for insight on the future course of action for the Fed. The US dollar index ticked up slightly with the expected rate hike. Though the precious metals started the day up a little bit, the afternoon pulled them back to Earth, as gold ended the day down 5 dollars and silver off by 10 cents. Most currencies spent much of the day trading flat across the screen.

Oil prices fell again on Tuesday, as both Saudi Arabia and the United States reported an increase in production. Saudi Arabia, in fact, reversed one third of the cuts made as part of the OPEC output-cut agreement from November of last year. Saudi Arabia was expected to keep their production well below its agreed amount, so this increase in production has put additional pressure on oil prices.

Tuesday morning at least provided a little bit of data to talk about, though it was nothing that moved the markets. The Producer Price Index (PPI) was up 0.3% last month and rising 2.2% for last 12 months. The year-over-year move is the biggest increase since March of 2012. These figures indicate inflation starting (or continuing) to creep into production costs and lends credence to the this afternoon’s expected rate hike. This morning, we get to see the other side of the inflation coin with the Consumer Price Index (CPI) data.

Rate hikes were a topic of conversation outside of the US, as the German Finance Minister Wolfgang Schaeuble mentioned that he believes rates are too low in the Eurozone, and he would like to see them “not to be so low.” Well put, Mr. Schaeuble. I don’t think there are many that would disagree with him that rates are too low, but the question becomes how can they make rate increases work. I suspect that we have a ways to go before we see rising rates in the Eurozone.

Thanks again, Dane. It has been a tough week for oil, but it’s gained back a good chunk of ground overnight and its trading up 2% at $48.80 right now. As Dane mentioned, increased production is a significant concern in the market. And from what I could gather, rising inventories in the US was the primary catalyst for the broad move lower over the past week. I did want to point out that while Saudi Arabia increased their production, it still remains below the cap that OPEC agreed upon back at the end of November so its not like they have disregarded the agreement. I did see where Goldman has retained their forecast of $57.50 in the second quarter, so that’s a fairly large jump from where it currently sits.

As I came in this morning, the dollar is marginally lower with most currencies and the metals sitting on slight gains as traders attempt to shed some long positions for a more neutral stance. Since the commentary from Janet Yellen is a wild card at this point, traders want to be positioned more toward the middle just in case we do see some disappointment from a dollar bull perspective. The rand is holding the top spot among currencies after a rise in business confidence while all of the others are in a holding pattern until this afternoon. And let the countdown, begin.

That does it for today. So, with that said, have a great day.

Currencies today 3/15/17.. American Style: A$ .7593, kiwi .6945, C$ .7434, euro 1.0628, sterling 1.2201, Swiss $.9916, .European Style: rand 13.0600, krone 8.5845, SEK 8.9907, forint 292.12, zloty 4.0645, koruna 25.416, RUB 58.9906, yen 114.58, sing 1.4123, HKD 7.7692, INR 65.64, China 6.9115, peso 19.5950, BRL 3.1727, Dollar Index 101.51, Oil $48.80, 10-year 2.57%, Silver $16.87, Platinum $935.10, Palladium $746.00, Gold $1,200.50

Mike Meyer
Vice President
EverBank World Markets

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