This is it, the last day before the sequester!Â If you listen to many of the â€˜talking headsâ€™ on the major stations this is the last day for our leaders in Washington to avoid forcing us into another recession. Driving into the office this morning I heard a congressmen urging the Republicans to compromise and agree to a more â€˜balancedâ€™ approach to cutting the deficit.Â He said the spending cuts have got to be balanced out with some revenue increases (higher taxes).Â I actually agree, but didnâ€™t we already agree to the tax hikes back at the beginning of the year?Â I think the President has definitely out-negotiated the Republicans by getting them all to agree to tax increases but then pushed the spending cuts out a couple of months.Â Now the administration is making the argument that you canâ€™t just have spending cuts without some additional revenue (it needs to be a â€˜balancedâ€™ approach).Â They have absolutely forgotten all about the revenue increases without spending cuts which occurred at the beginning of the year!Â But like I said before, any spending cuts (or even a decrease in the projected increase in government spending) is a good thing in my book.Â I donâ€™t think the sequester was the right way to go about cutting our spending, but apparently that is the only way it is going to happen.Â But enough of the politics, let me take a look at the currency markets.
The euro recovered from the Italian elections through most of the trading day, but started to give back some of these gains in early European trading.Â The euro slid after the Netherlands said its budget deficit will breach the EUâ€™s limit for this year and into 2014.Â I really donâ€™t think the markets should be overly concerned, as most of the EU members regularly breach the fiscal requirements originally held out to join the euro.Â In fact, we have a slide which we show during our presentations which shows the budget deficits of all of the countries which make up the common currency.Â The original budget limit agreed upon in the Maastricht treaty was a deficit of 3% of GDP.Â According to the EC, none of the current members of the euro-zone would meet this requirement, and the current average budget deficit of the euro-zone countries is 6.9% (over twice the original limit).
ECB President Mario Draghi was back in the headlines this morning after he signaled the bank has no intention of tightening monetary policy anytime soon.Â It seems Draghi and our own Ben Bernanke are singing from the same song sheet, all but guaranteeing interest rates will remain at abnormally low levels for the next couple of years.Â Both Draghi and Bernanke have been assuring markets that inflation will remain at bay, with Draghi stating â€œWe foresee for next year an inflation rate which is significantly lower than 2 percent.â€Â Neither of these two central bank leaders wants to be the first to raise rates, but both are dealing with board members who feel differently.Â Two ECB Executive Board members warned today about the risks of leaving the emergency measures in place for too long.Â Similar to the discussions which were revealed in the minutes of the last FOMC meeting.Â But for now it seems that both the European and US central bank policy members will continue to leave their quantitative easing in place.Â ECB President Draghi closed his speech with a warning that the problems in Europe are still far from being solved; â€œThere are clear limits to what monetary policy can and should aim to achieve.Â We cannot repair unsound budgets.Â We cannot clean up struggling banks.Â We cannot solve deep-rooted problems in the structure of Europeâ€™s economies.â€
Switzerlandâ€™s economy unexpectedly grew in the fourth quarter in spite of the relative strength of the Swiss franc.Â GDP rose .2 percent from the third quarter vs. economists expectations of no growth.Â Consumer spending increased 1.1%, driving much of the surprising GDP growth.Â The SNB set a cap of 1.20 CHF/Euro and will have to work to continue to hold the currency at these levels after this good news.Â The Swiss franc has actually weakened a bit vs. the Euro since the beginning of the year, with the European debt crisis taking a back seat to the US budget negotiations.Â But Italyâ€™s elections have brought the European crisis back into the minds of currency traders, and this good data from Switzerland will probably force the franc back up vs. both the euro and the US$.
Moving back over to our side of the pond, the new US Treasury secretary was confirmed by the Senate yesterday.Â Â Jacob J. Lew is set to take over from Timothy Geithner just as the $85 billion of spending cuts is set to take effect.Â Lew definitely has a full plate in front of him, as these spending cuts will be followed by the expiration of funding measures for US agencies on March 27.Â And donâ€™t forget about the debt ceiling which we will again hit at some point during the first half of the year. Â Neither Chuck nor I were big fans of the last Treasury secretary, and I just hope Mr. Lew can do a better job of convincing Congress and the Administration to work together to try and solve the massive fiscal problems facing our nation.
Data released yesterday here in the US yesterday indicates the US economy may help make Mr. Lewâ€™s job a bit easier.Â Durable Goods orders Ex transportation jumped in January by the most in a year, rising 1.9% following an adjusted 1% increase in the prior month.Â And the housing numbers had even better news as pending home sales rose 4.5% MOM and a whopping 10.4% compared to a year ago.Â The very important housing sector certainly looks like it is recovering, and we can only hope it drags the rest of the US economy along for the ride.Â Today we will get the 4thÂ quarter GDP numbers for the US along with the weekly jobs data and the Bloomberg Consumer Comfort measure.Â The GDP data is expected to show the US economy increased .5% during the last quarter of 2012, but indications are that this number may be lower than expected.Â The weekly jobs data is expected to come in right about where they were last week at 360k initial claims.
The Australian dollar rallied overnight, paring some of the biggest monthly drop for the currency since last May.Â Currency traders pared bets that the central bank will cut its key interest rate after data showed companies will continue to invest into next year.Â Australian companies forecast they will increase spending during the upcoming year after 4thÂ quarter capital spending fell 1.2%.Â The Reserve Bank of Australia (RBA) said in a briefing note that their modeling shows the Australian dollar could be 4% to 15% overvalued.Â It certainly sounds like the RBA is attempting to â€˜jawboneâ€™ the value of the Aussie dollar lower, but the currency traders continue to be attracted to this commodity rich countryâ€™s currency.
The New Zealand dollar was the best performing currency vs. the US$ after a report showed ANZ business confidence rose during last month.Â The kiwi strengthened over .25% vs. the US$ after an index of Business confidence rose to 39.4 from a reading of 22.7 the prior month.Â The overnight increase shifted the return of the kiwi into the positive column vs. the US$ for the year.Â A positive interest rate differential combined with a growing economy should continue to help propel the New Zealand dollar higher vs. the US$ and euro.
To recap. The forced budget cuts are set to take place tomorrow, but both the congress and the administration are scrambling to try and figure out how to avoid these cuts.Â The euro recovered some of the ground it had lost due to the Italian elections but then turned around again after the Netherlands said its budget deficits would be larger than the EUâ€™s target.Â Switzerlandâ€™s economy unexpectedly grew in the fourth quarter putting pressure on the SNBâ€™s cap of the franc.Â The new US Treasury secretary was confirmed, let us hope he can do a better job than the last one.Â And both the Aussie and New Zealand dollars rallied overnight.
Currencies today 2/28/13. American Style: A$ $1.0264, kiwi .8317, C$ $.9770, euro 1.3115, sterling 1.5193, Swiss $1.0745. European Style: rand 8.9404, krone 5.7104, SEK 6.4427, forint 225.93, zloty 3.1690, koruna 19.5515, RUB 30.5355, yen 92.20, sing 1.2366, HKD 7.7565, INR 54.36, China 6.2217, pesos 12.7618, BRL 1.9705, Dollar Index 81.608, Oil $92.64, 10-year 1.88%, Silver $29.00, Gold $1,591.00 (buying opportunity?), and Platinum $1,597.62.
Thatâ€™s it for today.Â We are hosting a big â€˜Art and Hockeyâ€™ party this evening here at our offices.Â Every year we invite a couple of local artists to display their works around our offices and then open up for an â€˜art galaâ€™.Â It is always a good time and we get the benefit of having some great art hanging on our walls for a few days.Â This year we have combined it with our sponsorship of a 3 on 3 outdoor hockey tournament.Â It should be an interesting evening, combining art lovers with a bunch of hockey players! Â If you are in St. Louis I encourage you to drop by our offices at the corner of Hanley and Hwy 40, the party starts at 5 pm. Â I get to keep the hockey theme going as I scored a ticket to the big Blues vs. Blackhawk hockey game tonight.Â I am hoping the Blues can give the Hawks their first loss of the season, but we are heading into the game with a lot of injuries, so the chances of that are pretty slim.
With that I will thank you all for reading the Pfennig and have a great Thursday!
Written by Chris Gaffney, CFAÂ -Â SVP & Director of Sales at EverBank
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