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FOMC minutes turn the markets around.

In This Issue.

* FOMC minutes reverse the markets.
* Infrastructure spending.
* Pound sterling moves higher on data.
* Precious metals stuck in a range…

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

Good morning. I’m back in St. Louis this morning, and want to get today’s Pfennig started off with a quick mea culpa – as many of you noticed I forgot to update the currency price section of yesterday’s Pfennig. Getting the Pfennig out in Chuck’s absence is a team effort with many moving parts which all have to be coordinated, and the updating of currency prices was missed yesterday. Sorry for our error but I can assure you today’s prices are correct. With that apology out of the way we will get things moving with some quick thoughts from Frank:

LGA – A number of years ago, maybe a decade, we started to notice that trees growing over the power lines were still there year after year. A few more years down the road brought a year of high winds in the summer, and Ice storms in the winter. Our power was out fairly frequently. Since we are at the very end of a line, on a pole serving only two homes, we are typically last in line to be repaired. There were a few times when power was out for 3 to 5 days in the summer and finally a very cold snap in January when we were out for 10 days. At that point we purchased an external generator.

Pretty much as soon as we had it installed, trucks magically appeared in all of our nearby neighborhoods cutting down branches or trees near power lines. Apparently the local utility had decided that emergency repair costs were now larger than ongoing maintenance. The generator has clicked on a few times in the last 10 years, but the maintenance did its job for the most part.

Looking at the national statistics of infrastructure maintenance and repair shows a pretty significant decline since the Great Recession that continues through today. The lines in pretty much all sectors Point almost straight down showing that cities, states, and federal projects are not being done. Like the bridge collapse in Minneapolis several years ago, the Atlanta fire and bridge problem reminds us that infrastructure of all types provides us with the roads sewers water lines and power to conduct their daily lives. Business activity follows.

What to do at a time when our fiscal balance is already in tough shape?

Thanks Frank. I’m sure the cab ride from Wall Street out to LaGuardia got Frank thinking along the lines of infrastructure. It seems that every road in NYC is under construction, and LGA is a complete mess with a sea of construction cones, barriers, and cranes snarling the already heavy traffic. The new administration spoke about a trillion dollar infrastructure spending program with two goals in mind – repair our aging bridges, roads, and power grids and to give the US economy another boost. But as Frank points out, debt levels here in the US are already high so where will we find the money to spend on all of these projects? Privatization or some form of Public/Private partnership is one way, enabling private capital to be put to use.

Infrastructure spending is number three on the list of top priorities for the Trump administration, but with the healthcare reform being delayed (again) and the difficult job of tax reform still looming chances of making it to the #3 priority anytime soon are remote. This is beginning to weigh on the dollar, but as Dane wrote in his contribution for today’s Pfennig the real spark for market movements yesterday was the FOMC meeting minutes. Take it away Dane Moody:

Statements from the Federal Reserve and from Congress turned Wednesday’s trading day on a dime.

The markets got started Wednesday morning with a fresh, better than expected ADP jobs report. The report indicated that 263k jobs were added in March, crushing the expectation of 185k and well above the freshly revised figure of 245k from February (revised down from 298K). The dollar took this news and ran with it, but the move didn’t last long as the Federal Reserve March minutes stopped the dollar strength in its tracks.

The highly anticipated March Federal Reserve minutes showed discussion of the pace and method of upcoming balance sheet tightening and rate moves. The minutes indicated that the Fed might be ready to shrink the balance sheet, is seemingly content with the current pace of rate hikes and sees tax reform, infrastructure spending and external pressures as potential headwinds, and the dollar started to lose some ground. The Fed, however, reiterated the expectation for 3 hikes in 2017 – one down, two to go!

The US dollar lost additional ground on the back of comments from House Speaker Paul Ryan that healthcare reform is not likely to be done this week, despite rumors over the weekend that a new plan was coming together. Remember, the markets are looking at healthcare reform as the first of the 3 big projects promised by President Trump’s administration (healthcare, tax reform and infrastructure), and a delay in the healthcare reform delays the other two. Many are expecting tax reform to create some dollar strength, but it seems to be moving farther down the road.

The Fed and Speaker Ryan’s comments definitely changed the direction of the trading day. Instead of a down day for the currencies and metals, most ended the day right about where they started. Let’s touch on a few of the movers.

The pound sterling was once again on the move on Wednesday. GBP nearly jumped over 1.25, but settled in at 1.2480 on the back of positive data for the services sector. Traders remain very aware of the data releases in the United Kingdom, and a positive print was a nice excuse to push GBP higher. I suspect that we will see this continued data dependence in the UK for the medium term as markets grapple with the real impact of Brexit. While good data like Wednesday’s is a good reason for traders to buy, I suspect that the real moves will come if and when the data disappoints. How long will this last? We’re still many months from the actual Brexit, so the true impact might not be known for months beyond that.

And we’re back to South Africa again. The rand is certainly feeling the weight of the political instability there, as rumors of President Zuma’s ousting (rand up!) did not materialize, and the rand fell to its lowest level since January. The rand went from up 1.2% to down 0.9% during Wednesday’s session, which is quite a trip. It’s hard to see this situation resolving itself quickly, and I suspect additional volatility might be in store for the rand for a while.

Oil fell again on Wednesday, as US stockpiles in the US came in higher than expected. This news dragged on the Canadian dollar, which is down almost 0.9% in April. The Russian ruble also closed weaker, having broken into the 55 handle early in the trading day.

Thanks to Dane for updating us on yesterday’s market movements. Today the markets are mainly focused on the Trump-Xi meeting. Investors will be looking for direction on where trade negotiations will land – will we see new tariffs and barriers or will Trump’s stance soften? The value of the renminbi will also be a topic of discussion, but China has prepared for this meeting by letting the value appreciate which should serve to cool off the discussion of currency manipulation. I don’t expect Trump’s administration to declare China a currency manipulator next week, but the possibility will be held over Xi during the meetings.

Precious metal prices edged lower yesterday, and continued down in the overnight session. Metals investors are probably more focused on Fridays job data and less on the Chinese President’s visit. The precious metals have been kept in a fairly tight trading range lately, with downside protection provided by safe haven buyers and the prospect of higher interest rates keeping a lid on the upside in the short term. Looking at the YTD numbers, Palladium continues to be the best performer with an price increase of just over 18%, Silver is in 2nd with an increase of over 14% YTD. Even the worst performing precious metal, Platinum, had over a 5.5% increase during the first 3 months of the year.

Currencies today 4/6/17. American Style: A$ .7557, kiwi .6974, C$ .7449, euro 1.0665, sterling 1.2457, Swiss $.9970 European Style: rand 13.7975, krone 8.5959, SEK 8.9961, forint 290.09, zloty 3.9619, koruna 25.012, RUB 56.3405 yen 110.89, sing 1.4007, HKD 7.7690, INR 64.51, China 6.8930, pesos 18.785, BRL 3.1189, Dollar Index 100.54, Oil $51.42, 10-year 2.3516%, Silver $18.22, Platinum $955.30 Palladium $802.00, and Gold $1,251.56.

That is it for today. I flew from one rainy city right into another, but the temps are a little better here in St. Louis. On the bright side, the rain cancelled last night’s Cards/Cubs game so today we may get to watch a rare day/night double header. I’m running a bit later than usual so I’ll end this with a big thanks to everyone for reading the Pfennig. Have a great day!

Chris Gaffney, CFA
EverBank World Markets

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