New Zealand central bank becomes the first to raise rates...
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In This Issue.

* RBNZ becomes the first to raise rates...

* China's numbers fall short of expectations...

* Euro rises to a 2 year high...

* Gold pushes past $1,350 and Palladium gains momentum...

And, Now, Today's Pfennig For Your Thoughts!

New Zealand central bank becomes the first to raise rates...

Good day. The winter weather which hit us yesterday has receded, and the temps are supposed to slowly work their way back to a more spring-like range. I was able to walk into the office with just a light jacket on this morning, which was a welcome relief after being blasted with a wintry wind walking across the same bridge yesterday. The markets warmed up a bit yesterday also as they awaited data from China and the US. But leading off we have the Reserve Bank of New Zealand's rate announcement so let's get right to today's Pfennig.

Chuck shared his expectations for the results of today's RBNZ meeting back on Monday, but for those that missed it here is what Chuck had to say: The Reserve Bank of New Zealand (RBNZ) meets this Thursday, and it now appears that the rest of the world has caught up with Chuck on thinking that this week's meeting will be the one where the RBNZ hikes rates. I'm telling you this now, so you can hear me later. But this won't be a "one and done" for rate hikes from the RBNZ. I'm thinking that we'll see them make 3-25 Basis Points moves this year. Ending the year 75 Basis Points higher in their internal rate, or 3/4's of a percent higher. Their internal rate will end the year around 3 to 3.25%...

Well once again Chuck called it right. New Zealand's central bank raised interest rates 25 basis points to 2.75% and indicated there are more rate increases on the horizon. "Inflation pressures are increasing and are expected to continue doing so over the next two years," RBNZ Governor Graeme Wheeler said in a statement following the decision. "In this environment it is important that inflation expectations remain contained. To achieve this it is necessary to raise interest rates towards a level at which they are no longer adding to demand." The RBNZ went on to say that growth was becoming more broad-based and that the economic expansion was gaining momentum.

Growth in New Zealand is now projected to grow 3.5% in 2015, up from a previous estimate of 3%. And inflation is expected to rise along with GDP with the CPI projected at 2.1% by early 2016. Governor Wheeler said the central bank would raise rates as necessary in order to keep inflation near its target rate of 2%.

The kiwi had already priced in most of this first rate increase, and therefore did not jump too much in overnight trading. But with another 50 basis points of rate increases on the horizon the New Zealand dollar should remain well bid. But the currency's strength remains on the RBNZ's radar with the central bank stating that the kiwi's strength remained a headwind to the economy, was unsustainable in the long run, and was expected to gradually moderate in the coming years.

While the news from the RBNZ definitely dominated trading screens last night, there was also some big news from its neighbor 'down under' as Australia's jobs numbers surged last month. The February jobs numbers in Australia surged by 47,300, well above expectations of just a 18,000 increase and posting the largest gain in over a year. This was the first bit of positive news out of Australia in a while, and the currency traders took advantage to run the Aussie dollar higher. The AUD passed the .90 handle and is one of the top performing currencies over the past 24 hours.

The RBNZ announcement and data out of Australia set the markets up for a good open, but data released from China has restored investor worries about global growth. China's combined industrial output for January and February rose 8.6 percent from the year ago period, official data showed Thursday, worse than a Reuters forecast for a climb of 9.5 percent. Combined retail sales for the period were up 11.8 percent on year, missing Reuters expectations for an increase of 13.5 percent.

The data confirmed what most economists had already expected - China's economy slowed during the first two months of this year. And unlike the US slowdown, the Chinese slowdown can't be blamed on the weather! Traders were also waiting on additional information on plans from the Chinese leadership following the close of China's People's Congress. China's Premier Li Keqiang confirmed there is some 'flexibility' around the 7.5% growth goal for 2014, stating that a lower GDP number would be acceptable as long as full employment is maintained.

The recent bond default and worries about other possible corporate defaults have traders on edge. Many investors had figured the Chinese government would step in to 'rescue' the bond holders, but China's Premier seems just fine with allowing some defaults saying that 'sometimes certain individual cases of such defaults are hardly avoidable. What we should do is step up monitoring, properly handle relevant matters and ensure that there will be no regional and systemic financial risks."

But not all the data coming out of Asia was bad last night. Japan's latest measure of core machinery orders rose 13.4% in January from a month earlier - well above analysts' expectations of just a 7 percent rise.

The euro also moved higher, pushing to the highest level vs. the US$ in more than two years. ECB policy members were talking up the economic recovery in Europe which helped reverse the previous thoughts that the ECB would have to institute a fresh round of quantitative easing. The euro area enjoys a large current account surplus when compared to the US, and that seems to finally be hitting home with some investors. As we have stated several times here in the Pfennig, countries which can maintain a current account surplus 'create' demand for their currencies (for trade purposes) while countries which run a constant trade deficit will eventually see their currencies drop in value.

Gold surged to a six month high yesterday, finally vaulting through the $1,350 figure to close with a 1.3% gain on the day. The precious metals continued to see buyers searching for a safe haven to shelter them from the ongoing stalemate between Russia and Ukraine. Adding to the safe haven bid are all the worries about the Chinese slowdown and the first ever bond default. Copper has led industrial metals in a free fall over the past few days following the announcement earlier this week that exports in China fell over 18% YOY. China is the largest consumer of copper, and the industrial metal's price has become a closely watched indicator of the health of the Chinese economy. Copper is also used as collateral for many of the loans received by Chinese institutions, so the lower copper prices have led some to predict additional problems in the Chinese banking system (similar to how falling real estate prices here in the US led to banking problems).

For What It's Worth. Earlier I spoke about the big drop in copper and what the markets are reading into the sell-off. The drop has also been watched closely by our friends over at Agora Publishing and yesterday's 5 Min Forecast included Greg Guenthner's opinion that we may still not have found a bottom. Greg also talks about Palladium which has been getting a lot of press lately. Seems everyone is starting to notice this step sister of Platinum. So let's listen to what Greg had to say in yesterday's 5:

The bleeding in copper has stopped -- for now. After a dip to $2.90 a pound overnight, the bid is back to $2.945. "Sell copper," says Greg Guenthner in today's Rude Awakening. "It could easily move lower from here." And if you buy palladium -- a metals "pair trade" -- you'll make out like a bandit. "Palladium is useful (it's a key component in catalytic converters for the auto industry). And even more importantly, this forgotten precious metal has even managed to buck the downtrend that punished gold and silver in 2013. Palladium is up more than 7% so far in 2014. Compare that with the paltry 1% gains offered by the broad market so far this year and you'll understand why I like this trade so much."

Chris again. You can click here to read the entire 5 Min. Forecast and also take a look at the charts which accompany Greg's comments. While we don't offer a way to 'sell' copper, we do have a few different ways to invest into Palladium through our Metal Select accounts. We offer Palladium 1 oz bars and Maple leaf coins for safekeeping or delivery, and also offer one of the only 'Unallocated' Palladium accounts that I'm aware of. The unallocated accounts offer investors the opportunity to hold Gold, Silver, Platinum and even Palladium without any storage charges.

To recap. The RBNZ increased rates .25%, leading all other central banks on what will eventually turn into a rate rising environment. AUD rallied on some good labor news and the Japanese data was also positive. However, China data fell short of expectations (but was still pretty impressive!) and increased worries about the global recovery. The euro hit a 2 year high vs. the US$ and gold finally broke through the $1,350 level and is now moving higher. And I ended with a piece from the 5 talking about Palladium - a metal which we just recently added to our Metal Select offerings.

Currencies today 3/13/14. American Style: A$ .9056, kiwi .8566, C$ .9026, euro 1.3950, sterling 1.6704, Swiss $1.1481. European Style: rand 10.769, krone 5.9192, SEK 6.3426, forint 223.52, zloty 3.0290, koruna 19.601, RUB 36.45, yen 102.59, sing 1.2641, HKD 7.7642, INR 61.17, China 6.132, pesos 13.2205, BRL 2.3513, Dollar Index 79.328, Oil $98.26, 10-year 2.73%, Silver $21.29, Platinum $1.471.25, Palladium $770.90, and Gold. $1,367.81.

That's it for today. I am starting to get ready for my spring break trip with my son. I am one of several fathers 'chaperoning' a spring break trip down to Punta Cana - should be fun! But I have a couple more busy days here at work before I get to head down to the islands. I see where the Rams lost another couple of linemen, I just hope we find someone to protect Bradford! The Blues play again tonight, and hopefully will find a way to get back into the habit of winning. I hope everyone has a Tub Thumping Thursday and thanks for reading the Pfennig!

Chris Gaffney, CFA
Vice President
EverBank World Markets

Posted 03-13-2014 11:29 AM by Chuck Butler
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