FOMC cements the case for a June rate increase.

* Fed statement sends June odds above 75%.
* Dollar up across the board.
* ADP report shows smallest gain since October.
* Precious metals sink after FOMC…

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

Good morning. I received a note from the Big Boss Frank Trotter yesterday, telling me to not worry about the markets and instead focus on the water. I had sent him a picture of the water in my backyard, I think he got a little worried. So, Chris and Frank will team up to get you the Pfennig today and tomorrow, and hopefully by Monday, things will be back to, or at least on their way to, normal.

All the work is finished, we’ve prepared, and now we sit and wait it out, the river crested yesterday, but as of last night, the water level had not gone down.. So with all the work finished , I was on plug patrol all day. making certain our drain plugs held tight, which they did so far, but it rained most of yesterday, last night and is supposed to again today, so my job is not complete yet!

While on plug patrol, I received an note from a dear reader who know I love to read and so the note was about, which piqued my interest even more! Remember the other day, when I told you about how the elected officials in this country never listen to the warnings that the CBO, GAO, or Comptroller of the currency issue? And that our debt here in the U.S. is greater than what is reported? So, this is from the actual U.S. Treasury.

In fiscal year 2016 the U.S. Debt increased $1,422,827,047,452.46. And what did the Gov’t tell us the deficit was for 2016? Something like $454 Billion? (maybe they forgot the 1 in from of that number?) And here’s how the number foot to what we see on the Debt Clock. We ended fiscal year 2015 with a debt of $18,159,617,666,484.33 and ended the fiscal year 2016 with a debt of $19,573,444,713,936.79.. The difference? The $1.422 Trillion number above.

Now doesn’t that just get your dander up? It does mine because under the cover of darkness, while no one is looking they try to slip this past us. So, see like I always say, I don’t make this stuff up folks, and when I told you that our annual deficit that gets added to the national debt each year is larger than the Gov’t tells us it is, well, at some point, the real numbers have to come out.

In my presentations I used to point each year’s deficit announcement by the Gov’t and then show the real numbers. So, I’ve been doing this for some time now, it’s not my first rodeo and I’m not fooled easily!

With Chuck battling mother nature and ‘off the grid’ we will let Frank get things rolling this morning, so take it away Frank:

Here in the USA – a first and second world country – we spend most of our time planning and thinking about things that generally don’t impact our physical safety. Yes, for sure, there are many for whom the next meal or shelter is of paramount concern. But as a frequent traveler to the fully second and third world these concerns pale in comparison. It comes as a shock then when ice storms, hurricanes, tornados, and floods insert themselves into our lives. We don’t control these events in any major way so that makes us feel all the more helpless when they occur. We are standing in for Chuck today and tomorrow as the water creeps up on his house and his neighborhood. It’s a five alarm event in that part of town with two interstates closed for a total of about 20 miles – major cross country arteries. A portion of the old Route 66 of Depression fame is also under water.

I spoke with Chuck Wednesday morning. First off he noted that it’s great having lake front property. Maybe it’ll increase the property values in the neighborhood – HA! The water is over the location of the pool equipment that he moved, but about ten-feet below the basement. This is the second 100-year flood in the area in 3 years – those who missed statistics class have thought this was impossible. With all the new levies upstream we wonder if the flood maps will need to be revised. On the good side Chuck reports that it is eerily quiet at the house. Electricity is still on but cable and internet are down. There is no traffic since most arteries in and out of the area are closed. The sound of generators fills the air in the distance. Pumps running down the block add their hum to the ambient noise. But mostly it’s all quiet.

Back on the Pfennig beat we’ll shift our attention from natural disasters to the potential of financial ones. It seems we are walking along a ridge. On one side the ground drops into a chasm; on the other lie blue skies and warm weather. In these missives we have all noted that there are two distinct opinions resident in the markets. Bond holders clearly believe that there will be little or no inflation and little growth over the next ten years and have bid the ten-year US Treasury Note to 2.28% as exhibit “A”. The equity markets on the other hand see nothing but clear sailing ahead even as corporate earnings fall and GDP falters. I was discussing the fact that so many Americans have exposure to the stock markets through their retirement or 401K plans now. What happens if there is a tumble – a sustained decline unlike 2008-2009 – that leaves an already difficult dream of retirement completely in the world of fantasy? Something to always keep in mind – the estimated “investible net worth” of the median household in the US is about $6,000; that means that the most wealthy of the bottom 62-million households has about $6k to tide them over or to retire. Over the past few years I have added “civil unrest” to the possible outcomes to consider; let’s hope it doesn’t end up there but be sure to add it to your list of things to have on your mind. With that cheerful thought onward and upward to Chris.

Thanks to Frank for another great Pfennig intro, and good luck to Chuck and his neighbors who are desperately trying to keep their homes above the water.

And keeping with the theme this morning, the currency and metals markets were underwater yesterday as the FOMC left rates unchanged but downplayed weak first quarter economic growth. The Fed statement said consumer spending has continued to be solid, business investment has firmed, and inflation is running close to its target. The members also emphasized the strength of the labor market which seems a little at odds with the ADP report which had been released earlier in the day. The ADP private jobs report showed employers expanded their payrolls by 177,000 jobs last month which was the smallest monthly gain in seven months. But the ADP numbers have not been a very good predictor of the more important monthly non-farm payroll report which will be released by the Labor department on Friday.

The other data released yesterday morning was a bit more positive as the Markit US Services PMI and Composite PMI both showed the pace of growth in the US economy’s service sector increased in April. The ISM Non-Manufacturing Composite index increased to 57.5 from a previous reading of 55.2.

FOMC members seem set in their earlier commitment to raise US interest rates two more times in 2017 with the next move coming in June. Expectations for the June rate hike increased to just over 75% following the release of the Fed statement. This sent the dollar higher across the board, with the Australian and New Zealand dollars taking the biggest hits. The Aussie dollar was down about 1.5% vs. the US$, and the kiwi fell just under 1%. Looking at the currency roundup, there was only one currency which was up vs. the US dollar yesterday, and that was the Czech Krona which was up just slightly.

Gold hit a one month low after the FOMC meeting ended. The stronger dollar along with a slight increase in bets that rates will move higher in June combined to send the precious metals lower throughout most of the day. And the metals continued to slide in the overnight markets with the largest moves seen in Platinum which dropped over 3%. Gold broke through both 50 and 200 day moving averages yesterday which does not bode well for the shiny metal in the short term.

Currencies today 5/4/17. American Style: A$ .7392, kiwi .6856, C$ .7278, euro 1.0924, sterling 1.2882, Swiss $1.0078 European Style: rand 13.55, krone 8.678, SEK 8.8302, forint 285.55, zloty 3.8603, koruna 24.532, RUB 58.026 yen 112.83, sing 1.4003, HKD 7.7819, INR 64.20, China 6.8957, pesos 19.006, BRL 3.1824, Dollar Index 99.149, Oil $46.86, 10-year 2.3396%, Silver $16.43, Platinum $893.00 Palladium $794.00, and Gold $1,230.58.

That is it for today. More rain is falling this morning, and the temps have dropped well below normal. But the experts say the rain will stop sometime this weekend and temps will be warming up – but next we will have to deal with all of the mosquitos. I just heard they reopened one of the two major interstates which were closed due to flooding, so hopefully that will improve the commute for everybody. I’ll get this out the door and thanks to all of you for reading the Pfennig! Have a great Thursday.

Chris Gaffney, CFA
EverBank World Markets