Waiting on the job numbers.

* Waiting on the jobs data.
* BOE cuts rates and increases stimulus…
* A mixed bag of US data.
* Gold inches higher on BOE rate cut…

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

Good morning and happy Friday to everyone. It is infusion confusion/recovery day for Chuck, so this will be another group effort and Frank will get things going for us this morning:

Courtomer, France. Shifting past pure Leninist thinking but retaining some of it’s essence, collectively we really are a bit decadent these days. Does this indicate a decline in the capitalist model – I don’t think so – but maybe the shift to crony capitalism is what he really meant. France certainly has followed his expected path to socialism. Hmmmmm. We were sitting in front of a small café sipping cappuccino’s in a hamlet in Normandy – Saint-Céneri-le-Gérei. It’s convincingly picturesque – amongst the best examples. We contrasted our own light load with that of the peasants / serfs / the future proletariat taking a few years off from subsistence farming to haul the stones up the abrupt hillside to construct the church and fortress. Times change. The design repelled both William the Conqueror, and his ancestor Henry V who was headed to annihilate the French at Agincourt. After all the locals were shooting downhill.

Henry V and Rollo (yes the one from BBC’s “Vikings”) demonstrated the old method of taxation. Lay siege to the town, capture it, do a little pillaging etc, then demand substantial ransom. Thus funded head home and enjoy the bounty. Maybe not exactly the modern model but there are threads of the old days that remain. Germany produced the most recent example of the type in World War II, and apparently Britain felt the EU was doing the same – in a much more subtle way perhaps. Not off with their heads but keep those cucumbers straight, eh? The news from the north here Thursday was a rate cut by the Bank of England – yet again following the failed Japan strategy along with the US and the EU in attempting to generate growth and inflation with State Money. We wish them well, but feel like it we’ll be revisiting this topic again – soon. For the most part the euro held its ground, and the pound sterling declined. Good news since we’ll be headed there next.

Looking back a short distance we see that despite all the shocks in the last few months the euro, the Australian dollar, and other currency values have held pretty firm against the US dollar. Most aren’t at their highs but the trend hasn’t been a rush to dollars. US rates remain low like everywhere else so while there is a pickup in yield it doesn’t count for much. Other indicators feel like they are softening to me. Not in a catastrophic way but drifting down a bit as global business steps back to recalculate. Discussing worldwide oil company orders indicate that US producers are continuing to cut way back, but some of the international gang are making big purchases in drilling and related equipment. Interesting.

Thanks Frank. As both Chuck and Frank mentioned, the Bank of England followed through on their promise to do what they could to help stabilize the UK economy following Brexit. Not only did the BOE cut interest rates by a quarter point (as expected) but they also added to their quantitative easing (QE) program. They increased the amount of bonds they will purchase from 375b pounds to 435b pounds and also added corporate bonds to the mix. The addition to QE wasn’t necessarily surprising, as most everyone agrees that the Brexit vote will eventually lead to a slowdown in UK growth. The addition of corporate bonds to the bond buying program was a bit more of a shock – and is an indication of just how dominant central banks are in the fixed income markets right now. Central Banks are by far the largest purchasers of their own sovereign debt in all of the major bond markets, and now they are being forced to expand their bond purchases into the corporate sector mainly due to the fact that they are already purchasing up almost all of the available sovereign debt!

I read a great line somewhere during my research last night, I can’t remember where I read it but apparently the chief economist of the BOE urged policy makers to ‘use a sledgehammer to crack a nut’. To me this is another sign that central banks are feeling they are losing the ability to stimulate their economies and need to turn to more ‘desperate’ measures to try and get something going.

The Pound sterling was the biggest mover of the day following the BOE decision; dropping over 1.5% vs. the US$. And I can actually agree with the pound selling as the BOE has ventured back down the path toward negative rates. Remember when everyone figured the BOE would be the ‘first’ central bank to start raising rates?? And now they are back to increasing their QE program and decreasing rates – sounds a lot like the BOJ & ECB. Unfortunately we haven’t seen any ‘positive’ growth from all of this stimulus and instead we see the lower rates beget lower rates, and stimulus leading to nothing but asset price bubbles.

While the Pound sterling was the biggest loser vs. the US$ yesterday, the Brazilian real and South African rand we big winners, booking gains of over 1.25%. The strong move in the price of the rand was due in part on smooth local elections which propelled South African’s currency to a nine month high. Risk sentiment also increased a bit which helped these two emerging market currencies. Most of the other major currencies traded in a fairly narrow range on Thursday with the dollar index inching higher largely due to a slight sell off in the euro.

Mike Meyer will bring us up on the data releases now, so take it away Mike:

Since it’s the beginning of the month, we have some heavy hitting data right out of the gates. Yesterday, we had the weekly jobs data, but there hasn’t been anything significant to talk about there, so I’ll just mention that it ticked up a bit to 269k. Shifting gears into data that packs a bit of a bigger punch, it was a mixed message with factory orders. The headline number was better than initial expectations after it posted a 1.5% loss in June, which was worse than the previous reading of -1.2%, but the less volatile ex-transportation number surprised on the upside with a 0.4% gain. With that said, total factory orders have lost 5.6% over the past year so the direction has been less than desirable.

We also had the final reading of the June durable goods reports, but nothing much to speak of there since the revisions were fairly small. The headline number improved a bit to -3.9% and the core number, which is often viewed as a proxy for capital spending, improved to -0.2%. This morning, we see the heavy weight walking toward the ring as we have the July jobs report first thing. I think this reports holds a bit more clout than usual for various reasons. First, I think the markets want confirmation that the dismal May report was a one off and can be largely overlooked.

The experts are calling for the July nonfarm payroll to come in at 180k, which would be lower than June’s reading of 287k. I think the safe zone would be somewhere between 172k and 204k since those figures represent the six month and twelve month average respectively. Anything that would meet or exceed expectations should at least maintain a simmer on a rate hike by year end, which is another reason why I think this report carries a bit more weight than normal. Next week is shaping up to be a quiet one in the way of US economic data as July retail sales pretty much sums it all up.

Thanks Mike, and as he suggested investors are holding their collective breaths waiting on this morning’s employment data. The dollar is pretty much right where we left it last night, as investors wait to see whether or not the US economy will bounce back from a pretty lackluster 2nd quarter. Expectations of an interest rate increase in 2016 have fallen again, and today’s data certainly could shift these expectations.

One surprise move overnight has been a positive move by the Australian dollar which rose to a three week high vs. the US$. The AUD has gained in spite of an interest rate cut by the RBA on Tuesday. Traders have moved the currency higher on the back of higher ore prices and the positive relative interest rates vs. most of the other major currencies. The kiwi has hung on for the ride and is also up this morning. And the Canadian dollar seems to have shrugged off the dip in oil prices to rally a bit vs. the US$ overnight. These commodity based currencies have been hit hard over the past few years with the massive drop in commodity prices, so it looks like investors are starting to see value in them even if commodity prices don’t continue the big moves booked over the first half of the year.

Speaking of commodities, gold inched higher yesterday and continued is slow climb higher overnight in spite of a slightly higher US dollar. Spot gold rose to $1,364.80 overnight as investors cautiously wait on today’s monthly job report. Gold is very sensitive to interest rates so yesterday’s announcement by the BOE was a positive for the shiny metal. Additional stimulus and ‘lower rates for longer’ certainly lead investors toward the non-interest bearing assets such as Gold as the opportunity costs of holding precious metals continue to fall. But if this morning’s employment data is positive, or more specifically if we see a jump in wages then I think gold and the rest of the precious metals will face some selling pressures. On the other hand, if the report disappoints we could see precious metal prices shoot higher. So today’s trading will be all about this morning’s data.

And Chuck sent the following over to me last night and asked me to share it with all of you in the TTWT section:

Dave Gonigam over at the 5 Minute Forecast (www.agorafinancial.com) had another piece from James Rickards that you should be aware of. In it, Rickards talks about how at the upcoming G-20 meeting September 4th, the dollar could come crashing down in value. He believes that IMF support for SDR’s, Russian and Chinese support for Gold, and Saudi Arabia’s search for a new benchmark for Oil will come to a head on Sept. 4th. Let’s listen in.

“Saudi Arabia could easily price oil in yuan and then swap the yuan for Swiss francs or SDRs and use the proceeds to add to its reserves or buy gold. Saudi Arabia could also price oil in SDRs or gold and hold those assets or swap them for other hard currencies to diversify away from dollars. The possibilities are numerous. The conversion of oil prices away from dollars to some alternative is just a matter of time.”

Now, longtime readers, and people who have come to my presentations at investment conferences over the years, may and should recall me talking about the U.S. losing its reserve currency status, and when it did, the dollar would no longer be the benchmark for the price of Oil. I began talking about this a shows I do believe in 2005. I know, I know, I sounded like the boy who cried wolf back then, but I to my defense, I did say over and over again that this scenario wouldn’t happen for a while, and gave a drop dead year of 2020. I also would say, that the time to diversify was now, and not to wait until the walls come crashing in on the dollar. Well, according to James Rickards, those walls will be crashing in, in less than a month!

Thanks to Chuck for sending that over, and to Mike and Frank for their contributions today – it was truly a ‘group effort’!

Currencies today 8/5/16. American Style: A$ .7658, kiwi .7209, C$ .7681, euro 1.1154, sterling 1.3154, Swiss $1.027 European Style: rand 13.675, krone 8.4231, SEK 8.5199, forint 278.31, zloty 3.8393, koruna 24.216, RUB 65.165, yen 101.04, sing 1.3402, HKD 7.7551, INR 66.758, China 6.6406, pesos 18.83, BRL 3.1746, Dollar Index 95.58, Oil $41.82, 10-year 1.50%, Silver $20.253, Platinum $1,161.95, Palladium $701.00, and Gold $1,360.89.

That’s it for today. I’m looking forward to watching the opening ceremonies of the summer games tonight. We are having our own version of the Olympics here in the office, with 5 different teams competing on several different competitions including archery (with rubber bands), equestrian (pushing a rider on an office chair), and desk volleyball. Thanks to Danielle for arranging the competition, I am certainly looking forward to the competition. Thanks for reading the Pfennig and make sure you have a Fantastic Friday and a great weekend!

Chris Gaffney, CFA
EverBank World Markets