A Failure To Communicate!

Good day… And a Tub Thumpin’ Thursday to you! I have a different outlook on things today… I don’t want to work, I want to bang on the drum all day! Yes, I’m in one of those moods this morning. Kathy is already at the PBI airport, and will be here when I get home from my infusion today… That is if she doesn’t decide to go shopping when she gets home! HA! Who knows what tomorrow brings, and as the great Johnny Rivers sang: just let tomorrow be… The Gin Blossoms greet me this morning with their song: Hey Jealousy… Back in the 90’s, when I was much younger, I saw the Gin Blossoms, along with Cracker, and Thin Lizzy… You couldn’t get me at that concert venue now, if you gave me tickets!

Well, the triple-witching day is here, but, it appears that a lot of the problems that could arise from the brew that included some bat wings and eye of newt, the witches were preparing, has been watered down… 1. Former FBI Director, Comey’s testimony will have already had his prepared words released to the public yesterday, and it appears that he will NOT say that the President put pressure on him to drop the investigation regarding Russia and Flynn…. 2. As I said yesterday, all the drama of the U.K. election that’s going on right now, had been removed, and it appeared that PM May’s party will retain a majority of the seats… and 3. The European Central Bank (ECB) meeting is going on right now, and nothing is expected that would shake up the markets, so… everyone was fretting, sweating, and leaving lots of sawdust on the floor, about today, and it most likely will turn out to be a dud!

So, the buying of Gold, yen, and U.S. Treasuries has subsided, for now… The bias to sell dollars has also subsided, but a new bias to buy dollars isn’t in place just yet… For instance, the euro was 1.1250 yesterday morning, and it’s sitting bang on that figure again this morning… And there was good trade data from China last night, so the Global Growth currencies of Australia and New Zealand (A$ and kiwi respectively), added to their values. Not huge moves, mind you, but they added to their values, which is a good thing!

So, speaking of the Chinese trade data that printed last night… The Chinese Trade Surplus for May was $40.81 Billion, which was better than the forecasts, and April’s print of $38.05 Billion… In addition, I talked yesterday about the Chinese currency reserves, and that report also printed showing that the reserves had increased to $3.054 Trillion, VS the previous print of $3.030 Trillion.. But looking under the hood here, tells me that most of the gains in the reserves have come about from currency appreciation… I’m told that the outflows of capital from China have started again, and that’s not a good thing, for it will require China to tap these reserves again to defend their currency.

So, the Trade data was good, and the Reserves data not so good… The Global Growth currencies decided to focus on the good, and like I said above, the A$ and kiwi added to their values..

In Brazil yesterday, the interim President, Temer’s trial was adjourned without a vote… Which means there’s more back room deals being done! HA! Seriously, this moves a possible vote to Saturday. I think Temer will be exonerated from these charges that have been brought on him, but… he could still face obstruction of justice and corruption charges… When will the political problems for Brazil go away? It seems like I’ve been talking about Brazilian politics for 5 years now, and quite frankly it’s getting old… The real keeps getting sold, on these political problems and the drop in the price of Oil yesterday didn’t help!

Yes, yesterday morning, I was talking about how the price of Oil had jumped to above the $48 handle… But that only lasted as long as it took for the weekly EIA report to print, that showed that oil and gas supplies had jumped much higher last week, and the trap floor sprung open and the price of Oil fell through it, falling all the way down to a $46 handle, and it’s barely holding that!

The ECB will end their meeting about the time I hit send on the Pfennig this morning, and then ECB President Mario Draghi, will hold a press conference… I truly don’t expect much this morning except the same-o, same-o, from him about how inflation hasn’t met the ECB’s target, and therefore the accommodation will continue, which means the negative deposit rates and bond buying… UGH!

Gold lost $6.80 yesterday to close at $1,286.80, and the early morning trading has been going back and forth between a tiny loss and a tiny gain, so I’ll just call it flat this morning! The rumors going around center on a report that will show just how strong China’s demand for physical Gold from Hong Kong was so far this year… I’m reading that there are some analysts and observers that think China’s demand could increase by 50%!

The U.S. Data Cupboard had the Consumer Credit (read debt) for April yesterday, and boy was I shocked to see the number! Consumers only racked up debt of $8.2 Billion! Wait! What? How can that be? March’s previous figure of $16.4 Billion was revised upward to $19.5 Billion!!!!! So, U.S. consumers went from adding debt of $19.5 Billion to $8.2 Billion in one month? OK, either this data will see a HUGE upward revision next month, OR… We return to the theme of last month, and that is that the U.S. Consumer has “tapped out”…

Which one do you think will end up being true? I think both of them! The number is ripe for an upward revision next month, but it won’t get it anywhere near the average so far this year, which was $15 Billion per month.. But if this isn’t proof that the U.S. consumer has “tapped out” then I’m a monkey’s uncle! HA! Remember that saying? I hadn’t heard that one in years, until it popped into my head while I was typing!

Well, did you happen to see or hear or read what former Fed Minneapolis President, Narayana Kocherlakota, had to say yesterday? Well, if you didn’t, then get a load of this! Kocherlakota said in an interview with MarketWatch that the Fed should NOT hike rates in June, and should grow, NOT cut the balance sheet, until inflation hits their 2% target. I bet those words won’t play well in the Eccles Building (The Fed’s HQ)… There goes his invitation to the Christmas Party too! HA! But in essence, isn’t what he’s saying correct? It’s like this as far as I’m concerned: The Fed set the guidelines for cutting rates and unwinding their balance sheet… It was a strong employment rate, and 2% inflation… The Fed has now hiked rates 3 times and inflation, as calculated by the PCE (Personal Consumption Expenditures) had never reached 2%, much less stayed there! And as far as the employment thing is concerned, I don’t know how the Fed members can sleep at night, when more than 90 Million Americans still don’t have jobs and have given up looking for one!

So, what we have here is a failure to communicate… They didn’t say, “well, if we only reach one of the two targets, we’re going to start hiking rates and unwinding the balance sheet” NO! They said, that when the two targets are reached they will begin to hike rates and unwind the balance sheet! And their forecasts for stronger inflation doesn’t count! Just because they see inflation higher in the future, doesn’t count for now! And besides since when does the Fed nail their forecasts bang on? Remember green shoots? Remember, Bernanke telling us that there was no widespread problem with Subprime Loans? Or how long now have they been saying that “by the end of the year, we will see stronger growth”? Only to not see it, at least for any sustaining period to time… So… in the end, I’m with Kocherlakota on this one!

Oh, and if you want to read the whole article / interview with Kocherlakota on MarketWatch, click here: http://www.marketwatch.com/story/kocherlakota-says-fed-shouldnt-hike-rates-in-june-and-it-should-grow-not-cut-the-balance-sheet-2017-06-07?siteid=nwtam

To recap… The triple-witching day is here, and it appears it has already been watered down, for the U.K. election, according to the bookies, is all but over but for the shouting, and PM May’s party will retain a majority of the seats. All the election drama is over here… In addition, former FBI Director, Comey, released his prepared statements yesterday ahead of time, and there’s no smoking gun here, and finally, the ECB is meeting and there’s nothing that’s going to come of that except the same-o, same-o… “Oh woe is us, we have no inflation”… Of course the folks over at the Bundesbank in Germany are singing a different song! So, the safe haven assets of Gold, yen and Treasuries all have backed off their lofty figures of yesterday. China’s Trade Surplus grew in May, and the Global Growth campers were dancing in the streets!

For What It’s Worth… I have a Pfennig Reader, who also writes his own markets letter each day, and has it out by 7 am… He calls it the Sevens Report… He’s a former stock guy, but has a great handle on everything that goes on in the markets, and yesterday, he did a little “Bonds 101” and I liked it so much, I asked him if I could use it… And well, he said yes, since that’s what this is all about today!… Anyway, the Sevens Report can be found here: www.sevensreport.com here you can sign up for a free two week trial, but after that, it’ll cost to continue…

And here’s the Bonds 101 piece… enjoy! “In the bond market, everything trades off a spread to Treasuries, and Treasuries price off expectations for 1. Growth, 2 inflation and 3. Future interest rate levels. Point being, there are less variables in the bond markets and the markets is more liquid. That equals more efficiency.

Right now, that more efficient market is screaming that future economic growth and inflation will be disappointing, and that the Fed is going to hike rates, regardless.

The disappointing economic growth and inflation can be extrapolated from the decline in the 10 and 30-year Treasury yields. The fall because markets expect lower longer-term economic growth and inflation, which equates to a lower rise in interest rates over the longer term. After a brief bump in late ’16, 10 and 30-year yields are telling us that the slow-growth economy is here to say. (so around 2% GDP growth)

However, the short end of the curve (2-year yields) are saying that right now, the Fed will continue to hike rates.

Think of it this way: From 2015 to 2016, earnings growth was flat and stocks went nowhere and volatility was high. Then, last year, earnings growth started to be re-vised higher, and stocks have rallied.
If the bond market is right about economic growth prospects and interest rate hikes, then that will hit expected earnings growth, and stocks will fall.” – Tom Essaye from the Sevens Report

Chuck again… Tom and I are on the same page with regards to why we watch the bond market… It’s a better predictor of future 1. Economic growth 2.inflation and 3. Interest rates…

Currencies today 6/8/17… American Style: A$ .7550, kiwi .7207, C$ .7405, euro 1.1250, sterling 1.2983, Swiss $ .9663, … European Style: rand 12.8720, krone 8.4787, SEK 8.7036, forint 274.14, zloty 3.7420, koruna 23.2712, RUB 56.67, yen 109.89, sing 1.3821, HKD 7.7964, INR 64.34, China 6.7939, peso 18.24, BRL 3.2755, Dollar Index 96.78, Oil $46.04, 10yr 2.19%, Silver $17.63, Platinum $946.92, Palladium $847.00, Gold $1,287.50, and SGE Gold… $1,297.64

That’s it for today… Another 7th inning debacle by the Cardinals last night.. I pin ½ of this one the manager who took his starter, who was cruising along, out of the game in the 6th, knowing all too well, how badly this middle relief has been this year… And well, the $30 Million dollar man we signed in the offseason, blew the game once again… I’m getting this out the door early today, hopefully that is, because I have to show up at the infusion center right out of the starting blocks this morning. I prefer to get this over with early in the day, before things get backed up and crazy there, and… the sooner I get it taken care of the sooner I’ll feel better tomorrow! Sometimes the lights all shining on me, other times I can barely see. Lately it occurs to me, what a long strange trip it’s been… yes, that’s the words of Jerry Garcia, and while I was never really a BIG Grateful Dead fan, I love those words… That how I feel right now… More on that tomorrow, but for now, we’re going to let tomorrow be… Seals and Crofts take us to the finish line today with their very apropos song: We May Never Pass This Way Again… OK, I won’t be joining you today, but please go out and do some Tub Thumpin’ for me! And Be Good To Yourself.. Bye~

Chuck Butler
Managing Director
EverBank Global Markets
Creator / Editor of: A Pfennig For Your Thoughts


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