Fed remains on hold

* Disappointing data
* Fed still hesitant
* Dollar heads lower
* Metals shine

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

Good Day. And welcome to Thursday morning. The Fed meeting has passed us by, which was largely a non-event, and left the markets pretty much in the same spot. I think most market participants didn’t have high expectations to begin with, but they at least wanted to be prepared for any rogue comments. I’ll dive a little deeper into the Fed meeting in a bit, but first, let’s see what Frank has in store for us today.

“After departing the Sprott Natural Resource Conference in Vancouver last night our flight took off to the west over the sound then turned south. Passing Mount Baker, the San Juan Islands looked like a great place to be on this blue sky day. Rainier was enveloped in clouds as we passed and we continued on over Seattle before turning southeast towards Phoenix. Getting to and from Vancouver from Saint Louis always looks so easy, but ends up with some wrinkles. Seattle is just a 4 hour non-stop flight for us but that last 200 miles or so usually involves a roundabout routing. This YVR to PHX route is a great one though for a window seat junky like me. Mountains, deserts, the Columbia River and with any luck the Grand Canyon all on one swing.

As I noted yesterday the mood around the conference and the city of Vancouver was distinctly more upbeat than the last few years. In my talk, I showed that a lot has changed since January. You may recall that three weeks into this year the mood in the market was rather bad. The New York Times ran an article on January 21st talking about the “plummeting” markets listing all sorts of major assets that had fallen drastically. Since then many of the markets have reversed drastically and the US dollar seems to have broken the strong dollar trend we have seen over the past few years.

One participant of the conference who apparently wasn’t feeling the enthusiasm asked me when I thought this awful economy would get better. First, I said let’s back up and understand that the economy as a whole isn’t terrible or in a recession right now. Issues galore, but it continues to grind along. We do see a number of things that could derail the progress – a shock event, economic or otherwise; a really bad earning quarter; employment issues etc. But for now things just move along.”

Thanks Frank. Moving forward, Dane has been doing a great job with his contributions so let’s take a look and see what we have in the way of economic data.

“The good (or as Chris recently described it, “less bad”) data we’ve gotten recently came to a screeching halt on Wednesday, as Durable Goods fell by 4% in June. May’s already negative print was revised further downward to -2.8%. In the June report, new orders for aircraft and military hardware (tanks, ships, etc.) were hardest hit, but none of the leading indicators in this report showed good news. The only bright spot in the reading came from the auto makers, which rose by 2.6% for the month, but traders looking for a positive picture of the US economy were left with little to go on in this report. However, with the FOMC announcement hogging the spotlight and the headlines for the trading day, this print isn’t likely to leave a lasting impression for investors.

This morning, we get our snapshot of the employment situation with the weekly job numbers, and Friday offers up the second quarter US GDP numbers, along with University of Michigan consumer sentiment and a couple Fed Presidents speaking. Goldman Sachs for one wasted no time in cutting their projection for the second quarter GDP figure by .1% on the durable goods report from yesterday. We only have to wait until Friday to see if they were right or if the GDP figure tells another story.”

Thanks again Dane, you’ve been a big help. Immediately following the Fed meeting, the initial knee jerk reaction was a fairly large pop upward of the dollar but it didn’t take long for that to evaporate and then some. The first headlines to hit the airwaves were suggestive of a more upbeat and optimistic tone. A few parcels of the Fed statement included “Near term risks to the economic outlook have diminished” and “job gains were strong in June and indicators point to some increase in labor utilization in recent months.” These mentions gave the markets an initial impression that the Fed was shifting gears into a hawkish stance, but once the dust settled and full context was brought into focus, a different conclusion began to take hold.

Bottom line is the Fed really didn’t say much of anything, at least from the perspective of change or additional insight. They went on to mention economic conditions should evolve in a manner that will warrant only gradual increases in the federal funds rate and reiterated expectations that inflation will hit its 2% target at some point over the medium term. The Fed is running out of time to take action this year as September, November, and December represent the final meetings of 2016. They will hold a press conference after the Sept meeting and publish new forecasts and projections, so let the speculating begin.

As I was getting ready to wrap things up in the office yesterday afternoon, I glanced at the currency screens and saw a fairly significant reversal of most currencies as compared to the early morning trading session. The rand, euro, pound, and Swiss franc all finished the day in a four way tie with nearly 0.60% gains and most other currencies ended somewhere between 0.00% and 0.50% while the yen remained in negative territory and in last place. I saw something about how dollar bull bets were on the rise over the past two weeks, so its looking like the bounce we saw yesterday was largely due to an unwinding of those dollar positions.

Comments from the South African central bank helped to push the rand to toward the top of the pack after they stated a contraction in the second quarter is not likely, which staves off recession worries. There were several economic reports from various European nations, but they pretty much cancelled each other out. We had British retail sales and French consumer confidence disappoint while Spanish retail sales and Italian confidence were on the rise. Ultimately, headlines out of Japan and the US were the dominating forces yesterday.

Oil had yet another tough day as it broke into the $41 handle but metals had quite the opposite experience. Gold finished with a 1.50% gain, palladium was up 2.0%, while platinum and silver were up 3.5%. As was the case with currencies, metals moved lower right at the conclusion of the Fed meeting but reversed course and picked up some serious steam in the following hours. Again, there aren’t any specific factors that I could find that attributes to the rise other than an unwinding of speculation that the Fed was going to be a little more suggestive of an imminent rate hike in September.

As I came in this morning, the dollar remains on its downward path that was set forth after the Fed meeting and all of the currencies, except for the pound, are trading in positive territory up to this point. We did see a rise in economic confidence among the euro area in July while unemployment in both Germany and Spain yielded improvement. Metals are still building on their gains from yesterday, so its pretty much a weak dollar story in early so far this morning. I guess we won’t have to wait long to see if the US trading session will push the weak dollar envelope or try and reverse course.

That’s it for today, so until tomorrow, have a great day!

Currencies today 7/28/16. American Style: A$ .7526, kiwi .7088, C$ .7603, euro 1.1088, sterling 1.3167, Swiss $1.0185 European Style: rand 14.2274, krone 8.5114, SEK 8.6087, forint 281.27, zloty 3.9312, koruna 24.381, RUB 66.4106, yen 104.75, sing 1.3502, HKD 7.7563, INR 67.0338, China 6.6597, pesos 18.8138, BRL 3.2720, Dollar Index 96.545, Oil $42.21, 10-year 1.52%, Silver $20.45, Platinum $1,150.50, Palladium $705.35, and Gold $1,344.10.

Mike Meyer
Vice President
EverBank World Markets