EU reaches an agreement (again)...
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* Jobs data is massaged...

* EU reaches an agreement (again)...

* Ben warns Congress we are in a 'dark place'...

* Report shows strong growth in New Zealand...

And Now... Today's Pfennig!

EU reaches an agreement (again)...

Good day, and happy Friday to everyone. The end of another week minus Chuck who will be back in the saddle in a few more days. Chuck is working down in Florida today, giving a presentation at an investment conference. The dollar went on another amusement ride over the past 24 hours, appreciating during the US trading day and then falling back down overnight. It has settled in right about where it was this time yesterday morning with a few exceptions.

Even though Chuck is in Florida, he is keeping current on all the data and left me a phone message just after the weekly jobless numbers came out yesterday morning. He encouraged me to dig into the numbers, as there were more 'adjustments' made by the BLS. The official numbers showed the first time jobless applications declined 14,000 in the week ended March 20 to 442,000 which was about 8,000 lower than expected. But at Chuck's suggestion, I dug into the numbers a bit and found the Labor department 'adjusted' these numbers, effectively reducing the average number of new claims by 10,000. Without these revisions, the number would still have declined by 4,000; but the number would have been worse than expectations.

Unemployment continues to track near double digits, and continue to keep the FOMC from raising rates. Janet Yellen, who is slated to become the Vice Chairman of the Fed, is an expert on unemployment and will probably use her new position to try and steer Fed focus away from price stability and more toward sustainable employment. This means the unemployment numbers will have more of an impact on fed policy than the inflation data. If she is successful in convincing the other members of the FOMC to keep rates low for an extended period, it would be negative for the dollar as investors move into other higher yielding currencies.

The euro climbed back out of the hole it had fallen in and actually traded back above $1.34. Confidence was returned in the euro after European leaders s seemed to reach a consensus on a plan to assist Greece (again!). Hopefully this time the plan will stick, as it has the backing of both France and Germany. Even the European Central Bank President, Claude Trichet, who was vehemently opposed to IMF involvement has given the rescue plan his stamp of approval.

The plan uses the IMF as the first line of aid for Greece, with the EU members serving as a back up if needed. Trichet and other European leaders continue to believe Greece will be able to pull out of the debt crisis on its own. The agreement seems to have restored the credibility of the euro and calmed those in the markets who felt divisions on how to handle the Greek crisis would lead to a breakup of the single currency.

While Greece was certainly the hot topic at the EU summit in Brussels, leaders also discussed the global economy and leaked a draft of their conclusions early this morning. "The economic situation is improving, but the recovery is still fragile," according to the draft. "The exit from the exceptional support measures adopted to combat the crisis, once recovery is fully secured, will be important." It is all about the timing of the exit now. The central banks who threw the money machines in overdrive in response to the credit crisis must now figure out how to turn them off without forcing their economies back into recession. But the EU has a bit of an advantage over the US and UK; the EU's efforts focused on traditional monetary tools while the UK and US used new 'quantitative easing' efforts which are somewhat untested. This should allow the EU to pull back the liquidity a bit easier than either the UK or US.

Federal Reserve Chairman Ben Bernanke was on capitol hill yesterday and told lawmakers that the US government's budget outlook is 'somewhat dark' and that congress needs to agree on a plan to reduce the deficit. Talk about stating the obvious!! He was speaking in response to a question about the impact of the health care overhaul on the budget. He successfully avoided talking specifically about the impact of the new bill on the budget deficits (he wants to keep his boss happy!) but he did warn the congressmen that something must be done about the deficits. "Clearly everyone agrees that the overall fiscal outlook for the government is somewhat dark over the medium term, and it would be very useful if there could be bipartisan, concerted effort to explain, demonstrate and decide how the government is going to achieve a more sustainable fiscal trajectory," he said during his testimony.

It is very obvious that we have a deficit problem, but none of our elected officials want to do anything about it. There are three ways we can deal with these deficits. 1. Increase revenue. Yes, taxes are heading up, but not enough to really make a dent on the deficits. And without substantially higher tax rates, the government has to rely on a robust economy to generate more taxes. The data shows that our economy will likely be dormant for some time, so don't look for increased revenues to help with the deficits. 2. Decrease spending. The healthcare overhaul is not revenue neutral (not sure what planet the CBO is on), and congress is looking at other ways to try and 'borrow and spend' our way out of this economic slowdown. I just don't see our elected officials willing to cut spending.

This leaves us with number 3. Pay down the debt with cheaper dollars. Keep the printing presses in overdrive, generating enough US$ to pay down the debt. This is the 'easy' choice. Just keep printing more money, pushing the problem down the road for future generations. As long as global investors continue to buy our debt, there is no short term harm in keeping the presses running. Just keep producing more debt and selling it to global investors. This looks like the easy solution (if you can call it that) but it will eventually lead us to a lower US dollar.

Yesterday the Treasury Department held an auction for $32 billion of seven year notes, and the turnout was disappointing. Earlier in the week the Treasury auctioned 5yr and 2yr notes, and the demand was equally tepid. The government has been auctioning a steady stream of bonds for months to fund its economic stimulus efforts, and the buyers seem to be starting to push away from the table. The bid to cover ratio, which is a measure of demand, came in at the lowest level this year and has been steadily dropping. The lower demand has started to push yields higher and prices lower. Chuck has warned readers that the Treasury market was the next bubble to pop, and the lack of demand certainly looks bad for future issues of US debt.

The South African central bank surprised the markets yesterday with a rate cut, causing a slide in the value of the rand. South Africa lowered its benchmark rate by a half point in an attempt to slow the rise of their currency. The rand is the best performer vs. the US$ over the past month, as interest rate differentials made it a favorite with investors. A report yesterday showed inflation eased to a three year low in February, giving the central bank some room to lower rates. South Africa still enjoys a substantial yield advantage over most other countries, so the sell off in the rand will probably not last.

The New Zealand dollar rose for a second day as reports showed the nation's trade surplus widened in February and GDP grew at the fastest pace in two years. GDP expanded .8% in the 4th quarter of 2009 compared to a .3% gain in the previous quarter. Higher commodity prices should keep exports strong in New Zealand, which will help keep the kiwi higher.

Currencies today 3/26/10: American Style: A$ .9073, kiwi .7063, C$ .9765, euro 1.3398, sterling 1.4879, Swiss .9365, European Style: rand 7.4395, krone 6.0546, SEK 7.2544, forint 198.08, zloty 2.9078, koruna 18.9963, RUB 29.56, yen 92.42, sing 1.4034, HKD 7.7624, INR 45.325, China 6.8270, pesos 12.5216, BRL 1.8191, dollar index 81.746, Oil $81.31, 10-year 3.85%, Silver $16.9075, and Gold... $1,098.60

That's it for today... Chuck will be happy to see Butler beat Syracuse last night. Readers know Chuck is a lifelong MIZZOU supporter, but he drew Butler in our office bracket pool (appropriate right?!), so he will be happy they picked off a #1 team. A great friend of mine, Scott Moore, is coming into town for the NCAA tourney, and will be stopping by the desk later today. The girls heard he was coming by and told him to bring treats, so we will see if he comes through. Hope everyone has a Fantastic Friday and a wonderful weekend.

Chris Gaffney, CFA

Vice President

EverBank World Markets



Posted 03-26-2010 9:15 AM by Chuck Butler