The Fed cries UNCLE and sends Gold rocketing.

* The Fed cries UNCLE.
* Two other Central Bank meetings end with no change.
* Oil lower on BREXIT fears…
* Gold is back off to the races…

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

Good morning and happy Thursday. As Chuck mentioned in closing yesterday, his infusion was scheduled a bit earlier than normal today so today’s Pfennig will be brought to you by the team of Frank, Mike and Chris. So take it away Frank:

Greetings from muggy Jacksonville begins an email from an EverBank colleague. Here in Saint Louis a friend coming to dinner last night emailed to beg for an indoor seating due to 90+ temperatures and a good start on humidity. I thought about walking the five miles in to work Wednesday morning and realized that no one would come near me all day if I did. Summer is setting in as the June Solstice approaches.

Escaping the hot weather for perfect weather last week I was in Vail Colorado for the GoPro Mountain Games. EverBank has teamed up with the Vail Valley Foundation and was the title sponsor for the EverBank Half Marathon described here two weeks ago, and the EverBank Mountain Bike Race. Quite a number of EverBank clients and business partners were in attendance and I can say with confidence they were all amazed and delighted by what the games had to offer. It’s a little like watching a ten-ring circus; no matter where you looked there was something new and interesting going on. One of our guests was even interviewed on the local television show (

Virtually every event did not exist when I was growing up. Dock Dogs leapt for distance and height fresh from the pro circuit. Freestyle kayakers did flips and spins in a specially created wave on the swollen and raging river running through town. SUP Cross consisted of Stand Up Paddle boarders headed down the same stream four at a time jamming into tight gates creating carnage along the way. Eight-Ball sounded like something we would have created (but like many tech companies we didn’t) where kayaks, rafts, or SUP Board raced down river while dodging attackers. At least the EverBank Half Marathon stems from Greek times. One event new to my eyes was slack lining. A strip of flexible material a couple inches cross is stretched across a gap and competitors achieve Olympic balance beam style moves on a surface that is in constant motion. Amazing (and yes when my shoulder heals I’ll be trying).

Watching some people trying this out for the first time reminded me of the US Fed and their attempts to look in control as the economy appears to be many things at once. The Slack Line newbys feet gyrate wildly back and forth as they fight to stay upright, usually without success. At least they have thick padding to catch them. The Fed has been caught in a situation where rhetoric through May sounded confident in an economic recovery fully underway, only to be surprised as their ear canals failed to pick up the subtile changes in employment finding themselves yet again in the foam rubber wondering what to do next time.

Thanks to Frank for getting us started this Thursday morning, and per the title of today’s Pfennig I absolutely agree that the Fed is struggling to figure out what they can do to stimulate the US economy. I sent a note out to the desk shortly after Fed Chair Janet Yellen finished her press conference and figured I might as well share them with you Pfennig readers, so here they are:


The speech was as dovish as I can remember and definitely points toward rates remaining unchanged through the end of 2016. I was surprised by just how many time Janet Yellen used the term ‘uncertain’ when referring to the Fed member’s projections of where the economy and interest rates are headed. In fact, she even added ‘highly’ when speaking of their longer term projections during the question answer period. This really drives home our thoughts that the FOMC is flailing in their attempts to get the US economy growing again.

The FOMC’s retreat on both interest rate and economic growth expectations really calls Central Bank credibility into question. Chuck has repeatedly questioned the ability of central banks to ‘control’ their economies and yesterday’s press conference pretty much confirmed what he has been saying. The Bank of Japan, who will be announcing the results of their own meeting in less than 11 hours has set the standard for Central Bank ineffectiveness. The FOMC has had to adjust their expectations toward the markets, but even after these adjustments they are still higher than what the market believes.

During the Q&A the Chair stated that a move back toward 0% was possible if we face a future shock. This reiterates the thought Chuck has shared in the Pfennig that the next move by the FOMC could be a DECREASE if/when we have a Brexit or the labor market continues to head south. Yellen stated that the ‘neutral (or natural) rate’ or the level of interest rates at which GDP is growing at its trend rate and inflation is stable is currently very close to zero in many economist’s analysis.

Another comment during the Q&A seemed to reiterate the DOVISH tone: Yellen said that caution was appropriate with the timing of the next interest rate move as it was much easier for the FOMC to react to higher inflation / growth / labor than to lower growth / inflation / labor markets. This is in my opinion a confirmation of the dovish leanings of the Fed Chair – she would much rather error on the side of a spike in inflation than being blamed for killing the recovery. There is obviously much more room to move rates higher rather than lower, so she will want to be ‘forced’ to raise rates in the future.

A few of the key points the FOMC will be watching (and therefore investors should be watching also): Productivity Growth, Average Earnings, Global Developments. The Fed currently does not see inflation as a problem and therefore I will repeat what I have been saying – rates will remain lower for longer.

Mike Meyer sent me some excellent information regarding the economic data we got yesterday prior to the big FOMC announcement (yes there was something other than the FOMC impacting markets yesterday). Here is Mike’s take on yesterday’s data points:

We had a fair amount of data to sift through yesterday so let’s take a deeper dive and check it out. Kicking things off, we had the May producer price index yield mixed and subdued results. This report, which measures wholesale inflation, is the second in a line of three inflation reports from the Labor Department and the headline report came in a little higher than expected resulting from higher fuel costs. While this number gave us a 0.4% increase in May, the version which strips out food, energy, and trade services actually fell for the first time since October by declining 0.1%. Its important to keep in mind that we should start seeing the effects of higher oil prices feeding into these reports, so the coming months could bring us some higher numbers. Further, it’s tough to quantify the effects of the strong dollar on these inflation reports, so it will be interesting to see what becomes if the dollar does embark on a journey downward.

Moving over to the industrial sector, we saw the New York Fed’s Empire Manufacturing index for June reverse course from May’s awful print and gave us a decent rebound. These regional reports can be pretty volatile, but this report offers one of the first peeks at June factory conditions, so we’ll see if this a trend or an anomaly. Two of Chuck’s favorite bits of data has always been Industrial Production (IP) and Capacity Utilization, but unfortunately, neither one of these reports gave us good news. It looks as though a sharp reduction in automobile production was the main driver in the negative IP print but this report along with the previous months downward revisions are putting dampers on positive contributions to the economic growth story.

Capacity Utilization basically took one step forward and one step back over the past few months. If you remember, the reading from March was 74.8 and then April’s number was revised down to 75.3, so yesterday’s disappointing reading for May of 74.9 essentially takes us back to where we were in the beginning of spring. All of these reports were merely appetizers to hold us over until the main entrée, which of course of the conclusion of the FOMC and accompanying statements/commentary.

The dollar got sold after the FOMC announcement as currency investors decreased their bets the Fed would be moving interest rates higher this year. And no action by the BOJ at the end of their meeting overnight continued the selling. The Bank of Japan kept interest rates on the negative side and more importantly did not increase monetary stimulus in spite of anemic inflation and weak global growth. The non-moves sent the yen higher since most investors thought the BOJ would be shifting the printing presses into a higher gear. The yen has hit a two year high overnight after falling through the 104 handle.

The Swiss National Bank followed up both the BOJ and FOMC with their announcement that they would be keeping rates unchanged and left open the possibility that they could cut their record low negative rates even further if needed. A new BREXIT poll released overnight helped stall some of the dollar selling and added to the ‘safe haven’ buying of the yen. The new poll showed a wider lead for the ‘leave’ camp which caused selling of most risk assets.

The Canadian dollar was one currency which weakened overnight as oil prices fell and global worries continued to create questions around the future demand for energy.

Gold was one of the largest benefactors of the new worries created by the inaction of the BOJ, FOMC and SNB. The price of gold has climbed to a 2 year high overnight on the combination of ‘lower interest rates for longer’ and a weaker US$. I was asked by a reporter yesterday what the FOMC decision would mean to Gold and commented with the following:

The Fed decision and Yellen’s comments during her news conference should be very positive for gold, and here is why:

1. Interest rates will remain ‘lower for longer’. Since gold is a non-interest bearing asset there is an opportunity cost associated with holding it (the absence of earning interest in some other instrument). This opportunity cost increases as interest rates increase, so the price of gold and most precious metals are negatively correlated with interest rates. As rates move higher the price of gold will typically move down. The Fed’s decision to keep rates at their extremely low levels should give a bump to gold and put it back on the trend we saw emerging during the first part of 2016.

2. Economic Uncertainty. Yellen all but admitted that the central bank does not have a great handle on the US economy. She described the Fed member’s long term projections as ‘highly uncertain’ and referenced several global factors including BREXIT. All of this uncertainty should move investors toward the stability of Gold which is typically seen as a safe haven asset.

3. US Dollar. The statement has sent the dollar lower, and the precious metals are inversely related to the US$ so a lower dollar typically leads to higher gold prices. The precious metals are priced and traded in US$ terms so a fall in the dollar makes them more attractive (cheaper) to foreign investors who are typically more inclined to include them in their portfolios. The Fed’s actions (or rather inaction) on interest rates and more importantly the dovish tone of Yellen’s statement and press conference has sent the US dollar lower.

The combination of these factors could put gold back on an upward trajectory ‘back on the rally tracks’. If we get a BREXIT or a disappointing May labor report we could see another dramatic leg up in the price of gold.

As US traders are beginning to turn on their trading screens they will see the dollar is actually starting to rebound a bit. I think this is mainly a reaction to the BREXIT polls and the shift in confidence regarding the global economy. With all of the central banks urging caution, investors are pushing back into the safe havens which means the JPY and USD are moving higher along with Gold. And take a look at the 10 year yield – 1.56% !! Sure looks like the FOMC has a little further to go in order to catch up to the market’s expectations.

Currencies today 6/16/16. American Style: A$ .7346, kiwi .7027, C$ .7688, euro 1.1175, sterling 1.4136, Swiss $1.034. European Style: rand 15.4042, krone 8.3909, SEK 8.4004, forint 281.78, zloty 3.98, koruna 24.213, RUB 65.832, yen 104.35, sing 1.3527, HKD 7.7601, INR 67.2938, China 6.5739, pesos 18.9537, BRL 3.4827, Dollar Index 95.028, Oil $47.30, 10-year 1.5669%, Silver $17.70, Platinum $984.38, Palladium $536.92, and Gold $1,305.47

That’s it for today, a very busy day in the markets yesterday. Now we wait for the BREXIT vote which could really throw another ‘cat among the pigeons’. The heavy heat continues here in the Midwest and what I mean by heavy is that the humidity is so thick it feels like the heat is weighing on you like a heavy blanket. Definitely NOT comfortable – it would be great to head back to Vail this weekend but that is not going to happen. Thanks for reading the Pfenning, I hope you all have a Terrific Thursday and be good to yourself!

Chris Gaffney
World Markets
T. 314.951.1619
F. 888.882.0073
[email protected]