FOMC scales back their rate projections.

* FOMC releases the doves…
* US dollar drops across the board.
* Gold is up after the FOMC meeting…
* Frank shares his travel adventures…

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

Good morning or more appropriately ‘Top o’ the mornin’ and Happy St. Patrick’s Day to all of you! I have to admit that today is one of my favorite holidays as I’m ½ Irish (along with just about everyone else today!!). The office is celebrating with a pot luck lunch today featuring corned beef and cabbage and a cooking contest between all of the different departments – should do wonders for my diet! Chuck will miss out on our Irish celebrations but is undoubtedly celebrating in his own way as his spring break buddies are arriving in Jupiter.

Clients of the EverBank World Markets desk certainly had cause to celebrate yesterday as the currencies and precious metals staged an impressive rally following the FOMC decision. The members of the Federal Open Market Committee decided to hold steady on rates. But the real excitement came in the form of their new ‘dot’ projections of where interest rates are headed. Back in December the members projected four interest rate increases in 2016 and further rate increases in the next couple of years. But the members pulled back these projections in their latest release resetting expectations to two quarter point interest rate hikes by the end of the year. The members not only pulled in their predictions of where interest rates will be at the end of 2016, they also lowered their long run targets for interest rates to 3.3% from 3.5%.

Economists had predicted the non-move for US interest rates but the real excitement came when Fed Chair Yellen began her press conference. Everyone expected her to continue her fairly hawkish tone – but instead she ‘released her inner dove’. The Chairwoman warned that ‘global economic and financial developments continue to pose risks’ and that inflation will remain low for the remainder of 2016. Fed members lowered their inflation forecasts to 1.2% from their earlier prediction of a 1.6% increase in core prices. The members don’t see inflation hitting their target of 2% until sometime next year – increasing risks that they will have to ‘readjust’ their interest rate projections even further.

As I mentioned at the start of today’s Pfennig, the dovish tone of the FOMC statement sent the dollar down and gold higher. Mike Meyer and I were watching the chart of the dollar index as the FOMC decision was being announced, and the dollar was gently drifting lower as the details were being released. But then the dollar chart ‘fell off the table’ and we both knew something was up. It ended up being the release of the ‘dot’ chart of FOMC member’s interest rate projections. The euro, yen, and swiss franc all moved dramatically higher vs. the US$ as the dollar index hit a one month low. The commodity linked currencies of New Zealand, Australia, and Canada also shot higher, gaining as much as 1.5% immediately following the FOMC announcement.

The Australian dollar continued to climb in overnight trading as data showed Australia’s jobless rate fell in February reducing expectations of a rate cut in the near term. The AUD$ climbed above .7650 for the first time in nearly 9 months. But the currency’s climb hasn’t gone unnoticed by RBA officials who would like to see a weaker currency in order to support exports. RBA Assistant Governor Guy Debelle made this clear in an overnight interview: “We would like a lower Australian dollar. But we can’t all have depreciating currencies,” admitting that it will be difficult for all central banks to achieve their goals of weaker currencies simultaneously.

Perhaps central banks have lost the ability to weaken their currencies with rate cuts. The Norwegian krone rose in spite of cuts by the Norges Bank sending interest rates in Norway to record lows. The Norwegian currency gained over 1 percent vs. the Euro and US$ following the rate announcement. Investors had expected the cuts and the recent rise in the price of oil helped push the krone higher. And with the ECB cutting even more aggressively and the US postponing (at least for the short term) any additional rate increases investors have moved back into the krone. Another commodity based currency which benefitted from both the increase in oil prices and the FOMC decision is the Russian ruble which hit a new 2016 high overnight. There was a general ‘risk on’ feeling in the markets which benefitted most of the emerging market currencies as investors were encouraged by the stimulus efforts by the ECB, BOJ, and the delay in an increase in interest rates by the FOMC.

Investors in precious metals also liked the projections of a pause in the FOMC’s rate hike plan with gold shooting up over 2% to just over $1,260 per ounce. Gold had already benefitted from lowered expectations of rate hikes, and continued its 2016 rally as investors moved back into this ‘non-interest bearing’ asset. Gold is sensitive to moves in interest rates and lower interest rates reduce the ‘opportunity cost’ of holding precious metals – so lower rate expectations can lead to higher precious metals prices. Silver rallied alongside gold moving up about 1.9% and both Platinum and Palladium also participated in the precious metals rally. Just a really good day for investors in the precious metals accounts!

Equity investors also liked the news on US interest rates as the S&P 500 closed at its highest level of the year. The Dow Jones industrial average ticked higher as did the Nasdaq, but none of these markets were up as much as the precious metals and currencies.

Before I get to the closing by the big boss Frank Trotter I wanted to mention a major news story coming out of South America. There were major protests in Brazil last night after the current President Dilma Rousseff decided to give a cabinet position to former President Luiz da Silva. The offer came after Lula was charged with money laundering in the ongoing investigation in a bribery and corruption scandal involving Petrobras. The cabinet position gives Lula some protection against being prosecuted – and protestors see this as just a continuation of the corruption which has gripped Rousseff’s presidency. The BRL is up nearly 2% and continues to be one of the best performers this month as investors continue to gain confidence that Rousseff will be ousted and a more pro-business (and hopefully less corrupt) leader will replace her.

I’ll close out today’s Pfennig with a note I received from Frank Trotter who is off to another investment conference somewhere south (luckily not in Brazil but I’ll let you try and figure out exactly where he is):

We departed Salta at a leisurely hour, drove south to El Carrill then turned west. We were headed up the Cuesta del Obispo. It’s a gradual climb for some 20 kilometers followed by safe but still breathtaking switchbacks to the crest. The road climbs about 6,000 feet through our journey. Below the road near the top condors patrol like massive hawks scanning the valley below for a meal. It was the perfect day. Deep, deep blue skies. A few wisps of clouds that provided perspective. Clear air.

At the top near 11,000 feet of elevation sits a very small chapel near the Piedra Del Molino. This replaced an ancient site where travelers left offerings of food and treats as thanks for a safe journey to that point. The chapel today holds the formal installations from the Catholic Church that you might imagine. But we are told that traditional Quechua offerings fill the space until the caretakers carry them away, only to return once more.

Down the hill to Cachi, dominated by a 22,000 foot complex of mountains of the same name takes us to a quick lunch on the colonial plaza then on down the Calchqui Valley towards our hacienda in Molinos. While not as famous as the Mendoza area, we favor the Malbecs and Torrontes from this region. High altitude and extremely full bodied, like the Amorone is to Valpolicella. Dinner with some local product finishes a great day.

Reading the history of this area, like every high school graduate who paid even nominal attention, brings Ozymandias to mind. Shelley’s theme stands first for local tribes, then the Inca, then Spanish gangs, and finally an independent sort of local rule. Each sure that they were in charge and would remain so indefinitely. Only the mountains, and the valley, and the condors remain the same.

For those readers who like me are geographically challenged (and don’t want to Google the names of the towns Frank mentions) he is attending an investment seminar in Argentina.

Currencies today 3/17/16. American Style: A$ .7601, kiwi .6810, C$ .7682, euro 1.1303, sterling 1.4384, Swiss $1.031. European Style: rand 15.3760, krone 8.3910, SEK 8.1995, forint 274.23, zloty 3.7954, koruna 23.939, RUB 68.5215, yen 111.81, sing 1.3566, HKD 7.7566, INR 66.7403, China 6.4961, pesos 17.5132, BRL 3.68, Dollar Index 95.033, Oil $38.79, 10-year 1.88%, Silver $15.649, Platinum $982.50, Palladium $584.00, and Gold $1,262.26

That’s it for today. It’s been a couple of years since I wrote the Pfennig on St. Patrick’s day so I get to continue something I started several years ago. Long time readers can probably recite the story of my Grandfather’s journey to the US verbatim, but hopefully you won’t mind if I take this opportunity to share it with all of the new Pfennig readers. As I mentioned in the opening paragraph, I am ½ Irish thanks to my father who passed away just days before St. Patrick’s Day a few years back. 5 of my father’s brothers and his only sister raised their families here in St. Louis, so St. Patrick’s Day has always been a big party for the Gaffney family. My father is a first generation American; his father left his home in County Roscommon at the young age of 11 and rode his bike across Ireland to Dublin where he went to work at the Guinness factory in order to earn enough money to come to America. After a few years, he sailed away from England bound for New York on a ship which was a sister ship to the Titanic. As the luck of the Irish would have it, a young Irish lass who would eventually become my grandmother was also on her way to America. Both ended up coming to St. Louis where they settled down and raised 6 boys and a girl. So each St. Patrick’s day I raise a pint of Guinness, who financed my Grandpa’s trip to this great land of opportunity. I can just picture my dad and his father enjoying a few pints up above. Happy St. Patrick’s Day to all of you!

Chris Gaffney, CFA
EverBank World Markets