Fed steers the ship.

* Markets react as predicted…
* Data continue to show a tepid US recover.
* Commodity currencies take it on the chin…
* Gold slides on higher US rates…

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

Frank will kick things off today with some views on what .25% really means:

Plans for the big New Year’s Eve party at the Fed look epic and awesome. It will be a memorable event, one with revelry and congratulatory speeches all around. It’s a raging success!!! Fed Funds trading opened Thursday at 0.35% versus Wednesday’s 0.14% kick off level. Overnight LIBOR – yes that of the fixing scandals – jumped up 0.23%. It’s wonderful when a plan comes together. Twenty-four-hour news channels cheered and a long list of invited commentators breathed a sigh of relief – finally something to talk about around the clock.

But aside from generating advertising dollars for cable networks just what is the effect to this cause? How can it change our daily lives? Chris Gaffney and I will head out on the two day fact finding trip to the countryside today. What is the impact on a small farming community? Will it even come up in conversation? Will this allow the price of corn and soy beans and cattle to rise and farmers to make a profit beyond Federal Assistance payments? How will purveyors of ham or private equity managers react? How will it effect the numbers and flight of migratory birds? We’ll have to see.

We’re putting together our 2016 outlook today for the upcoming issue of EverBank Insights (http://www.everbank.com/Insights for previous issues). Chuck has already turned in his homework setting the bar for on time delivery that others will likely not approach. Wealth Management and our Capital Markets team didn’t study for the exam until today and are rushing to complete the assignment on time. I’ll come up to bat with the bases already loaded with information and will need to come through for the team. I’m looking forward to the reports and you should look for the report immediately in the New Year. But now, back to our regularly scheduled broadcast.

Thanks Frank, and now its time for Chris to do most of the heavy lifting for today. “Wednesday’s reaction to the Fed’s decision continued through the trading day on Thursday with most of the asset classes behaving just as you would think they should after an interest rate hike. Stocks were down (higher rates make alternatives to equities a bit more attractive and make it harder on companies dependent on low rate financing), Bonds were down in price and up in yield (as interest rates increase the value of bonds drops), the US$ was up (higher US rates make the US$ relatively more attractive), and the precious metals were down (higher rates make interest bearing alternatives more attractive).

The US$ pushed up to a two week high against most of the major currencies yesterday as investors digested the Fed’s monetary policy move. A stronger dollar is what most traders expected, as the slight rate increase widened the monetary policy divergence between the US FOMC and their counterparts across the Atlantic and Pacific oceans. Both the ECB and BOJ are expected to continue on their easy money paths which could encourage international investors to move into higher yielding US debt which drives up investment flows into the US$.

The impact of a stronger dollar was seen in the US current account data which was released yesterday. The US current account deficit in the third quarter widened sharply to its highest level in nearly 7 years. The second quarter deficit was also revised higher which indicates the stronger dollar continues to put pressure on US trade which will be especially negative for US multinational companies which depend on exports. On a slightly more positive note, data released yesterday showed the weekly jobless claims held below 300k for the 41st straight week

The Chinese used their ‘new’ currency float to guide the Renminbi lower vs. the US$ and ended up hitting a 4 ½ year low. We had a couple of long term highs hit by the US$ yesterday as the Canadian dollar fell to a 11 year low on the combination of lower oil and higher US interest rates. The biggest movers in the currency markets yesterday were the commodity based currencies of the South African rand (-1.88%), Australian Dollar (-1.49%), the New Zealand Dollar (-1.44%), and the aforementioned Canadian Dollar which was down 1.15%. These commodity currencies came under additional selling pressure after several of the ‘large’ currency trading banks renewed their calls for dollar strength in 2016. These calls go against history – following the start of the last few tightening cycles by the FOMC in 2004, 1999, and 1994 the US$ experienced a period of weakness. But these currency houses, led by Goldman say ‘this time is different’..

The one bright spot in the currency markets was the beleaguered Brazilian Real which eeked out a .1% gain vs. the US$. The Brazilian currency was the sole winner vs. the US$ yesterday, as their congress approved a smaller cut in their budget surplus target than the markets had expected. The rally was also due to the currency being dramatically oversold after the ratings cut yesterday.

As I mentioned up above, gold was down through most of the day, ending up down over one percent. Dollar strength, along with higher interest rates here in the US were blamed for the precious metals sell off. Precious metals are priced in US$, so a stronger dollar causes the precious metals to become more expensive (and perhaps less attractive) for non-US investors. A further drop in oil prices, and increased bearish sentiment for commodities in general weighed on gold yesterday. While many of the market watchers interpreted Yellen’s press conference as being ‘dovish’, the popular opinion with investors is that there are 4 more interest rates coming in 2016 which is probably not the best news for precious metals. But as we have seen in the recent past, when all of the investors start getting on one side of a trade, there is risk of a sharp reversal. In this case, if the US economic data continues to be less than stellar the calls for 4 interest rate increases could decrease to 3 rate increases, and then 2 rate increases. Remember that at this time last year almost everyone (with the exception of our Chuck Butler) felt the Fed would be moving rates higher in March of 2015.”

Thanks again Chris, and the best of luck to you and Frank on your fact finding mission. As I came in this morning, the currency and metals market appear to have found some traction as most of the currencies are trading in positive territory or very close to it. The South African rand and Japanese yen top the charts today with nearly 1% gains so far this morning. There wasn’t anything of substance to propel the rand upward other than being oversold, but the Bank of Japan didn’t implement additional easing and kept its main monetary stimulus target unchanged. Other than that, its going to be a quiet day in the data department so its shaping up for Fed leftovers to steer the ship today.

Before we officially kick off the weekend, I wanted to leave you with a special treat. Our good friend, Dennis Miller of Miller On The Money, recently interviewed Chuck, and I would like to share with you this morning. Here is a snippet: “Recently the International Monetary Fund (IMF) approved the Renminbi into their exclusive club of currencies that make up their Special Drawing Rights (SDR’s). I knew it was coming. The next email I opened reminded me why. Each morning I read The Daily Pfennig, written by good friend Chuck Butler. He is excellent at taking major world events and explaining them in terms I can understand. He got my attention: “I wonder how many people in that room at the Orlando Money Show in February 2010, remember me telling them this would all change for the renminbi by the end of the decade?” I raised my hand, I was there and Chuck pegged it!” The interview continues on from there, so please input the following link in your browser to see the whole thing,   http://eepurl.com/bJ66DX. Dennis has some great stuff, so if you haven’t already, check him out at www.milleronthemoney.com .

Currencies today 12/18/15. American Style: A$ .7131, kiwi .6707, C$ .7180, euro 1.0822, sterling 1.4904, Swiss $1.0052. European Style: rand 15.0197, krone 8.7685, SEK 8.5580, forint 289.60, zloty 3.9493, koruna 24.937, RUB 70.9270, yen 121.51, sing 1.4114, HKD 7.7525, INR 66.3257, China 6.4814, pesos 17.0000, BRL 3.9045, Dollar Index 98.927, Oil $34.78, 10-year 2.20%, Silver $13.80, Platinum $846.46, Palladium $552.99, and Gold $1,056.75

Mike Meyer
Vice President
EverBank World Markets