Rate talk takes over.

* GDP rises 2.3%
* Consumer spending on the rise
* Dollar jumps higher
* Russia cuts rates

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

Good day. And welcome not only to Friday morning but also the last day of July. The past couple of days have brought us plenty of news and data to kick around, so it will be nice to have the weekend to let things digest. In keeping with the morning routine, we’ll start off with Frank Trotter’s thoughts of the day.

July 31st, 2015, 39.4963541,-106.8709022 (put that in Google Maps). A couple years ago I wrote up an adventure in a remote Colorado valley – see http://goo.gl/cD6ua6 . In part I asked the question – why did whoever it was dig here, and what happened later? I am, as you can see from the location listed in the intro back in that same valley. We’re in a 100+ year old school house, powered by solar since it’s off the grid, and drinking water (between glasses of wine) that comes from a spring about a mile up the mountain dropping 1,000 feet vertical through an 8 inch pipe laid long ago, and using high speed internet via satellite. I think I mentioned perfection or close to it last time. Tomorrow morning we’ll rise at a respectable hour, drive over to Ruedi Reservoir on forest service “roads”, and hike back to the ranch over a 3,500 rise called Red Table Mountain. On top I hear is an unbeatable view up valley to Aspen, and across to Sopris. It’s a warm up for doing the Four
Pass Loop around Maroon Bells on Sunday.

Thinking about those miners from long ago, and also listening to Doug Casey in Vancouver note that mining is a tough, ugly, outdated, difficult business, I conclude that things haven’t changed all that much. Of course the test shaft drilled just up the creek from where I sit was somewhat of a random shot in the dark, and modern prospectors use vastly more effective technology to locate and extract minerals. But there are many more holes drilled than there are developed, and putting up the capital depends in large part on the expectations for prices for the rocks pulled out of the ground. Right now it isn’t rosy in that neighborhood with values down around 95%. In terms of value it sure seems like a better idea to buy things that are exceptionally cheap rather than dear – can anyone say look at resources? I thought you could.

Thanks Frank. Well, the long awaited GDP number came out and it largely supported the optimism floating around heading into the report. Second quarter growth came in at a 2.3% annual pace, which was a little lower than expected, but the first quarter reading was adjusted up to 0.6% from the prior reported -0.2%. Focus then quickly shifted to consumer spending. The consumer spending component came in much better as it increased 2.9%, so calls that the US consumer was back in business were all the rage yesterday and is being supported by the various jobs reports. What didn’t get much air time was the fact that after tax income adjusted for inflation only increased 1.5%, which was the slowest since 2013, and prompted consumers to dip into savings in order to finance the increased spending. The savings rate dropped to 4.8% from 5.2%.

On the flip side of the coin, overall business spending continued to disappoint with spending on the energy and mining sector continuing to fall even further. There was progress made in exports and inflation as both components moved higher. When the dust settled yesterday, I think the GDP report produced results that the markets were hoping to see, which was continued growth that would provide support for the Fed to move ahead with a rate hike this year. In related news, the Commerce Department went back and made revisions to GDP over the past several years, but old revisions don’t get much air time. From the end of 2011 to the end of 2014, growth figures were revised down to 2.1% from 2.4% and we also had consumption figures get marked lower as well.

The other notable data yesterday were the usual weekly jobless/continuing claims which remained on solid footing. Jobless claims increased a bit to 270k from last week’s 40 year low of 255k, but they have remained below the 300k level for 21 consecutive weeks. The general rule of thumb is that anything under 300k points to an improving labor market. Its shaping up to be a quiet day of data here in the US since we only have a couple regional manufacturing reports and then the final version of the U. of Michigan consumer confidence report for July. Skipping ahead to next week, it looks like all eyes will be focused on the July jobs report that will be coming out on Friday.

The dollar strength picked up momentum once the data was in circulation as all of the currencies were trading in the red when I was leaving the office last night, but the Mexican peso, Swedish krona, and pound sterling were at least flirting with gains. The Mexican central bank did meet and kept rates on hold while saying the economic outlook had worsened and expressed concern that higher rates in the US could further hurt the currency. The peso has been getting hammered lately with the lower oil prices and an emerging market selloff, so the central bank intervened in the market yesterday in an attempt to stop the bleeding and is the reason why it didn’t get sold off like the Brazilian real or the rand.

The pound received continued support on thoughts the BOE will be a close follower to the Fed on raising interest rates, and I would expect that to continue unless we see a series of upcoming data which would derail that narrative. The Australian dollar was able to avoid a majority of the selling pressures yesterday since Chinese stocks have stabilized and the Chinese government pledges continued support. With rate hike chatter on the increase and a stronger dollar across the board, gold was lower on the day as it was trading around $1,087, about a $9 loss, last night and has remained in a fairly tight range between $1,100 and $1,080 over the past ten days.

As I came in this morning, the dollar has again remained on the high road. The Swiss franc and euro, however, have been able to break away and trade with modest gains so far this morning but for different reasons. The franc jumped higher after the Swiss National Bank announced a record loss of 50.1 billion CHF in the first half of this year resulting from its intervention efforts in an attempt to keep a lid on the currency movements. With these losses staring policy makers in the face, the trending thought is that future intervention could be pared back. The euro saw some love after we had some upbeat data, such as euro zone inflation remaining steady and German retail sales rising the most in 20 years over the first half of this year.

In other news, the Russian central bank cut interest rates by 0.50% and was largely expected. They did, however, project a dovish tone by saying the balance of risks will shift towards the considerable economic cooling despite a slight increase in inflation risks. In other words, rates could go down even further to support growth even though inflation is still running hot. Consequently, the ruble is trading around 61 with a 2% loss. The New Zealand dollar is down about 1% this morning after a business confidence report came in a at a 6 year low and strengthens the case for continued rate cuts. As a result, the Aussie has gotten pulled lower this morning. Most of the other currencies are holding onto a tight range.

Currencies today 7/31/15. American Style: A$ .7242, kiwi .6542, C$ .7665, euro 1.0966, sterling 1.5572, Swiss $1.0384, . European Style: rand 12.6825, krone 8.2079, SEK 8.6265, forint 280.87, zloty 3.7780, koruna 24.624, RUB 60.92, yen 124.33, sing 1.3746, HKD 7.7530, INR 64.1996, China 6.1172, pesos 16.1780, BRL 3.37, Dollar Index 97.356, Oil $47.69, 10-year 2.25%, Silver $14.60, Platinum $972.25, Palladium $608.22, and Gold $1,082.75

Mike Meyer
Vice President
EverBank World Markets