Yield on US 10 year hits a record low.

* US 10 year at record lows.
* Uncertainty to rule during 2016.
* Mexico raises rates…
* Gold and Silver move higher…

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

Good morning and welcome to July! This year is flying by, but I seem to say that more and more as I grow older… You all know the drill by now, today’s Pfennig will be another group effort starting with some comments from the big boss Frank Trotter: Over last weekend we journeyed to our local science center to watch the D-Day IMAX since we are headed to Normandy this summer. We stayed for a nice piece of eye candy shot from the International Space Station. I won’t get into the fact that manned space flight is possibly the greatest waste of money for the next fifty years at least – unmanned craft are creating quantum levels more science knowledge than astronauts shooting home videos . . . . Jennifer Lawrence provided a mesmerizing voice over reciting facts about the known universe and describing how the astronauts make cappuccinos.

By coincidence I listened to the ‘Galaxy Song’ from Monty Python on my walk in earlier this week. Eric Idle pretty much runs through the same catalogue of facts as Ms. Lawrence but comes to a different conclusion. At the end he suggest to “pray that there’s intelligent life somewhere out in space, ’cause it’s bugger all down here on Earth.” After a week of chaos caused by the British vote to leave the European Union I couldn’t be more in agreement.

Today of course is the one-week anniversary of finding out about the results of the vote. Markets roiled and cable news actually had a substantive topic for a whole week. Yesterday the leader of the LEAVE campaign and presumptive new Prime Minister said he wouldn’t run for the job (but will he accept?). As Chuck said it’s like the dog who caught the car – what do I do now? We did put a bit of a short analysis up on EverBank Insights here: https://goo.gl/sh5z6z . While I am sure this will change shortly it’s a good start on understanding what the markets are saying after the vote.

And now I’ll turn the conn over to Mike Meyer who will give us an update on yesterday’s data; take it away Mike: It was a fairly tame day in both the currency market as well as the economic data department yesterday, so any meaningful headlines were at a premium. We had the weekly jobless numbers turn in another uneventful performance, which is a good thing, and then we had a larger than expected bump up in the Chicago Purchasing Manager Index. In looking at this week’s jobless claims figure of 268k, its identical to the year to date average, so this continues to be a non-event as long as we remain below the 300k threshold. With that said, it doesn’t look like we can get much better than our current range so I don’t expect to see much in these weekly numbers until/unless we see a shift downward in the employment paradigm.

The Chicago PMI, which is a measure of manufacturing conditions in the surrounding areas, gave us a conflicting read. The good news was the headline number jumped up quite a bit to 56.8 in June, but the employment component of the report dropped at the quickest pace since November 2009. While that may raise an eyebrow or two, the more critical components of new orders and production more than offset the drop in employment. Forging ahead with today’s data, its squarely focused on June manufacturing. We get the final Markit PMI number as well as the national factory index via the ISM manufacturing report. Keep in mind that summer can bring some anomalies to anything related to manufacturing since auto makers and other factories often shut down for re-tooling, so we might see some larger than normal deviations in July’s employment and output figures.

Moving into next week’s data, we’ll have some real market movers as we build toward Friday’s crescendo of the June Non-Farm Payroll, aka the jobs jamboree. While we have some other first tier data, I think the markets will be holding their breath until we see what the June jobs report will bring. If you recall, May came in at an atrocious 38k so everyone wants to know whether this is a one off or the beginning of a new trend. Stay tuned until Friday.

Thanks to both Frank and Mike for getting things started this morning which happens to be the first trading day of the 2nd half of 2016. Yep, we are now ½ through 2016 and there is still no interest rate increase in sight for the US. Pfennig readers should have expected that the FOMC would hold rates steady this year, as Chuck has been telling everyone this all year – but the markets were expecting at least one and probably two rate hikes would have been completed by now. Instead the yield on the US 10 year treasury hit a record low of 1.37% in overnight trading. And European sovereign debt yields are also at or near record lows as the ECB is rumored to be investigating ways to expand their QE program of buying bonds. Bank of England Governor Mark Carney signaled to markets yesterday that the BOE stood ready to enact more policy moves aimed at supporting growth over the rest of the summer. So we have central banks across the globe looking to continue to keep rates low in order to try and support their economies. ‘Lower for longer’ is absolutely the theme for interest rates going forward.

It was a ‘risk off’ day in the markets which helped to push these bond yields to their record low levels. The BREXIT vote was the trigger for all of this uncertainty, and questions regarding elections across the globe have added to investor angst. As Frank hinted above, the presumptive new Prime Minister and leader of the LEAVE campaign, Boris Johnson (who happens have been born in NYC) had to pull out of the race after being blindsided by his political partner Michael Gove who withdrew his support at the last second. You can’t make this stuff up – UK politics are better than the last season of ‘House of Cards’ as the leadership of the major UK political parties are in an absolute state of chaos.

But election questions are not only focused on the UK – Australia has an election tomorrow and the latest polls have the results too close to call. Current PM Malcolm Turnbull took a gamble by dissolving both houses of parliament in May and the rebellious mood of voters in the UK and US looks to be contagious. PM Turnbull pleaded with voters to back the current government, “This is not the time for a protest vote”. It looks like independents and minor parties are set to play a major role in the formation of a new government which could extend the uncertainty.

There will be more uncertainty for the EU as courts ruled the Austrian presidential election must be re-run. I know I am confusing some readers this morning by talking about both the Australian and Austrian elections at the same time, but stick with me. The Presidential contest in Austria was decided on May 22nd and was extremely close. Well the Constitutional Court in Austria ruled that there were just too many irregularities in the voting and so there will need to be another run off. The far right candidate had lost the original election, but just barely and with the BREXIT vote bolstering the rebellious attitudes across the globe it could mean Norbert Hofer of the anti-immigration Freedom Party could become another thorn for the EU to deal with.

Japanese voters will head to the polls this month also, but in this case PM Shinzo Abe is expected to score an easy election win. I guess Japanese voters like the job Abe and his Liberal Democratic Party have done to begin to turn the Japanese economy around. Abe has promised even more stimulus if elected with the LDP pledging another 30 trillion yen in public-private investment over the next 5 years. The money will be spent on infrastructure projects including a new bullet train network. That along with the delay in the tax hike seem to have sealed the deal for Abe.

Global yields fell to record lows but at least one central bank has bucked the trend and decided to raise rates. Mexico’s central bank hiked rates by 50 basis points yesterday, surprising the markets. The move was seen as an attempt to shore up the Mexican peso on concerns that the low currency values would lead to inflation. The .50% move was unexpected and led the peso to be the one of the best performing currencies yesterday and the only ‘non safe haven’ currency to book a nice gain. The move by Mexico’s central bank is good news for the MXN going forward as it shows they willing to enact policy moves aimed to keep the value of the peso from dropping.

There are a few more central bank meetings next week, but none are expected to result in any moves like we saw out of Mexico. The Reserve Bank of Australia (RBA) will announce their decision on interest rates next Tuesday, and are expected to leave rates unchanged. But the markets will be listening for any signs of an easing bias which has permeated their policy statements following the last couple of meetings. The headwinds created by BREXIT could force the RBA to add additional dovish language which would hurt the aussie dollar which has been fairly resilient.

Gold is headed for another weekly gain and the price of Silver has hit a 21 month high in early morning trading. Yes, the psychological level of $20 is very close to being surpassed by Silver – we haven’t seen Silver trade above $20 since 2014. Investor uncertainty is at core of all of this buying in the precious metals. And the ‘lower for longer’ pattern for interest rates is helping also as interest bearing alternatives to both gold and silver are less attractive (especially for those in negative interest rate markets!). Silver soared 2.5% yesterday and may look to add to these gains today in what will be a fairly thin market.

Currencies today 7/1/16. American Style: A$ .7482, kiwi .7179, C$ .7757, euro 1.1138, sterling 1.3298, Swiss $1.028 European Style: rand 14.5788, krone 8.3378, SEK 8.4189, forint 284.05, zloty 3.9487, koruna 24.312, RUB 63.9875, yen 102.68, sing 1.3427, HKD 7.7581, INR 67.3092, China 6.6496, pesos 18.1675, BRL 3.22, Dollar Index 95.633, Oil $48.14, 10-year 1.43%, Silver $19.195, Platinum $1,042.40, Palladium $598.05, and Gold $1,334.01.

That’s it for today, I just heard our weekend weather is going to be IFFY, temps will be fine but sounds like we will get some rain. Tomorrow I’ll be walking with my daughter in the big St. Louis 4th of July parade. Most years I’m a ‘Skating Elvi’ along with the big boss Frank T. but we are all taking a year off from rollerblading so I’ll be walking alongside my daughter Lauren who is a puppeteer. My son surprised us by coming home for the weekend – a real treat for all of us as we haven’t seen him since the beginning of the year. Thanks for reading the Pfennig, I hope you all have a Fantastic Friday and a wonderfully long 4th of July weekend.

Chris Gaffney, CFA
EverBank World Markets