Dudley Does Come To The Dollar’s Rescue!

* A dollar reversal today.
* Wait, What? Treasuries are getting sold? .
* Healthcare costs are up 4% in past year!.
* Oil price continues to recover.

And now. Today’s A Pfennig For Your Thoughts.

Good Day. And a Wonderful Wednesday to you! I almost didn’t answer the bell this morning, but here I am, late as usual, so, l promise not beat around the bush this morning, but get right to the meat. You have to eat your meat! You can’t have your pudding until you eat your meat! HA! Some words from Pink Floyd to get us going this morning. I have The Charlie Daniels Band greeting me this morning with their song: The South Is Going To Do It Again. Now, that song will get the blood flowing to the brain!

See? I told you a Dudley Do-Right would come to the rescue of the dollar yesterday. And it was an unscheduled speaker that did the trick! Fed member Dudley, was talking on TV and said that “A September Rate Hike is still possible given the improving economic trends” He argued that the markets has underpriced the Fed and that a rate hike in December is very likely. And well, that great day the currencies and metals were having wasn’t affected at first. But as the day wore on, the words of the Fed member began to take hold, and Snidely Whiplash was defeated once again!

Oh the tangled web we weave, right? First of all, if I were the TV person listening to Dudley, I would have jumped all over him and asked him to give me examples of the “improving economic trends”, other than housing! He knows in his heart of hearts that the Fed isn’t going to hike rates in September ahead of the election. I wrote about this yesterday for the next Review & Focus that can be found online now at www.everbank.com/reviewfocus Now, longtime readers know that I don’t get into politics, and I stay as far away from that subject as I can. But here’s something to think about. Yellen and the person that has Yellen’s right ear, Lael Brainard, are staunch Democrats. Why did I tell you that? Well, it’s because I truly believe that When or IF the Fed hikes rates, they are going to be sending the teetering economy into a recession, and if that happened before the election, that wouldn’t be good for the Dems. So, it’s my humble opinion, that Yellen and Brainard are not going to allow that happen on their watch. See, that wasn’t so bad. I’m just pointing out something, not saying if I like it or not, etc.

So, the dollar has won back the conn from the currencies and metals overnight and in the early morning trading. Hey! I have to wonder if this move by the dollar is going to be a classic “dead cat bounce” (no animals were hurt here!, this is just a classic trading desk/ market saying). There’s even another saying about a dead body, but I don’t care for that one as much. But this bounce in the dollar is all too reminiscent of past bounces by the currencies when they were inside the strong dollar trend, but only now the trend is reversed.

I know that I’ve been talking about why the dollar was getting sold, and placing most of the blame on the Fed and their rate hike rhetoric not generating an actual rate hike. But there’s something else out there that I came across yesterday, that I hadn’t seen up to then, and we really need to pay attention to this folks. So, here we go!

I have a friend, Tony Fox, that sends out some of his thoughts each day, very condensed version and always includes the latest comments by Art Cashin. Well, yesterday’s Cashin report was dominated by Peter Boockvar, chief strategist at the Lindsey Group, who had this to say about the latest report on Treasury holdings around the world.

“Just out, for the 3rd straight month in June there was large net foreign selling of US Treasury notes and bonds. In June, foreigners sold $33b worth of notes and bonds after selling $18.3b in May and $75B in April. This brings the year to date selling to $143b, the most on record in any 6 month time frame. This compares to net selling of $20b in 2015 and purchases of $165b in 2014, $41b in 2013 and over $400b in both 2011 and 2012. In notes and bonds, the 2 largest holders, China and Japan were both net sellers. If we include Hong Kong, these 3 regions sold a net $52b of notes and bonds. Japan was a big buyer of bills which more than offset their selling of longer maturities. Looking at Europe and their suffocating problem of negative interest rates, barely any money came into US notes and bonds. They bought a net $950m with an M.

Bottom line, this wall of money that so many have thought has been piling into US Treasuries in order to pick up some yield is not at all evident in this data and in fact, the exact opposite is happening.”

Chuck again. Wow! When you dance around the numbers like the Gov’t officials do here, you can’t ever really get a true picture of what’s happening. But when someone fishes out the numbers for you, then you can really get the true picture of what’s going on, and that is that Foreign Central Banks are selling Treasuries. Are they doing so to remove their long dollar positions? Or doing so before the Treasury bubble pops and they are left holding low yielding bonds? Probably both!

So, in addition to the lack of a rate hike in the U.S. beating on the dollar, we also have this net selling of HUGE Treasury positions. So, then, why aren’t yields going higher, as the bond prices have to be going lower with all these sales? Ahhh, grasshopper, good question. And one that maybe Janet Yellen can explain to us. Janet? Hello? Are you there? Yes, it’s me, your main problem child out here, we have a caller that wants to know why there is this big disconnect between yields of Treasuries dropping, and the actual Treasuries getting sold? What’s that, I couldn’t hear you? We must have had a bad connection, for she hung up. Oh, well, I guess we’ll just have to take a stab at this question. Oh, could it be the Fed that’s buying these bonds through the back door? I guess we’ll have to look closely at their balance sheet the next time it gets printed, eh?

Oh, that was fun! I need to make that call to the Eccles Building more often! I just cracked up yesterday hilariously at the thought that I was calling for a Dudley Do-Right to come save the dollar, and it was fed member, Dudley that came to the rescue! HAHAHAHAHAHA! Now that’s funny I don’t care who you are! Oh, and one more thing on this whole Treasury selling thing. Remember last week when I told you in the FWIW section that the cost of hedging dollar exposure was rising? Now this all comes together in a nice neat package with a bow on top! When Central Banks buy Treasuries, they then in essence own dollars, and they hedge that dollar exposure. if the cost of hedging dollar exposure is rising, that might just be the last nail on the coffin to get hammered down, as a reason why China for one, is selling Treasuries.

In the South Pacific last night, Australia and New Zealand bot had economic reports print that should have boosted each respective currency, but that was not in the cards, so we come to this morning’s trading with both currencies trading below their levels of yesterday. In New Zealand the 2nd QTR Labor Report showed that the Unemployment rate fell to 5.1%, but traders thought that changes in the methodology used in this report made it incomparable to previous reports, and they sold kiwi. In Australia, the 2nd QTR Wage Price Index rose 0.5%, which is a sign that inflation is rising. But traders preferred to cast their lot with tonight’s Employment Report for July, which is expected to show employment backed off in in the month, and the A$ got sold.

The euro seems to have found a good place VS the dollar, as it has not succumbed to the pressures the dollar has on the other currencies this morning. That’s strange, in that the dollar index showed a jump, but the dollar index is heavily weighted with euros, so something is awry this morning.

The price of Oil is up again in the past 24 hours, and now trades with at $46 handle. But the dollar’s pull on the Petrol Currencies is too strong for this bump up in the price of Oil to help the Petrol Currencies.

The U.S. Data Cupboard was mixed yesterday, with the stupid CPI falling, and Industrial Production rising. The stupid CPI printed 0% growth in July and even the less food & energy number was only 0.1%, so nothing to view here. Except the statement about the numbers from Bloomberg. Get this. “Two important categories – Medical & Housing – both show life. Medical care prices jumped 0.5%in July.” They say that like rising Medical care costs is a good thing! Everybody that reports this stuff has lost their center. I just don’t get why anyone would think that rising Medical Care Costs is a good thing.

In fact, Healthcare costs are up 4% in the past year. Now Riddle me this Batman. How can the biggest costs to consumers be up 4% in the past year, but both CPI and ECI remain below 2%? Come on Batman, you’ve got to have an answer for this! You don’t? Well, I don’t either! And that’s why I continue to harp on the idea that the Gov’t’s inflation reports are malarkey! Hogwash, and other dastardly names I couldn’t come up with right now! I’ve got to move on, this is getting my blood pressure soaring!

Oh, and the Fed’s FOMC Meeting Minutes from July will print this afternoon. And as I told you on Monday the Traders will be looking for any “hints”, “winks” or “nods” that the fed members might give them in the Minutes of a rate hike.

And before I move on to Gold, I wanted to make sure you saw this news, that Macy’s announced that it will shutter 100 more stores in addition to the 40 stores closed in January this year. I guess you have to do something when you have a 95% reduction in profits. Another sign of the times, folks..

Well, Gold gave back some of its early morning gains yesterday. In the early morning Gold was up $10, but only ended up $7 on the day. But the bad part is that it’s down $9 this morning. But there’s good news here. And it comes from China, where their Gold Market Infographic informs us that 16,000 tonnes of physical Gold are held within China’s borders. And that Chinese demand for physical Gold in 2015 was 2,596 metric tonnes, which was supplied by Chinese mining more Gold than any other country in the world. And this doesn’t even count the imported amounts of Gold that China brought into the country. The Shanghai Gold Exchange (SGE) is already the largest market in the world for physical Gold trading, with its 10 million institutional customers, 8.3 million individual customers, and 55 certified Gold vaults.

For What It’s Worth. Today’s piece comes to us from Reuters, and was brought to my attention by Ed Steer. This is about China expanding their stock market, and the article can be found here: http://www.reuters.com/article/china-hongkongshenzhen-stockconnect-idUSL3N1AX30Z

Or here’s Your Snippet: “HONG KONG, Aug 16 In the biggest capital market reforms since last year’s stock market crash, China approved the launch of a long-awaited scheme to allow stock trading between Hong Kong and Shenzhen, the world’s second-busiest, and tech-heavy, exchange.

It also scrapped overall quota limits for an earlier scheme linking Hong Kong to the Shanghai stock exchange, and said there were no overall limits for the new scheme – a restriction that has been a sticking point for big institutional investors on market access issues.

By giving the green light to the final links of an ambitious plan to connect Hong Kong to China’s mainland markets – giving foreign investors more exposure to Chinese stocks – Beijing appears to strengthen its case for the inclusion of Chinese shares in global index providers such as MSCI.

“Shenzhen Connect should move China further along the road to MSCI inclusion. We see this announcement as a significant catalyst for Chinese markets,” said Douglas Morton, head of Asia research at Northern Trust Capital Markets.

Chuck again. Just another baby step folks. The MSCI they are talking about is the Morgan Stanley Capital International. You may recall that it was thought that Chinese stocks would be added to the MSCI Index months ago, but were left at the altar. Well, China thinks that spreading their stocks to a wider distribution will get them inclusion in the MSCI Index.

Currencies today 8/17/16. American Style: A$ .7620, kiwi .7230, C$ .7755, euro 1.1270, sterling 1.30, Swiss $1.0383, . European Style: rand 13.4540, krone 8.2415, SEK 8.4205, forint 275.26, zloty 3.8670, koruna 23.9835, RUB 64.16, yen 100.77, sing 1.3450, HKD 7.7551, INR 66.76, China 6.6351, peso 18.16, BRL 3.2022, Dollar Index 94.95, Oil $46.13, 10-year 1.58%, Silver $19.62, Platinum $1,113.59, Palladium $699.75, and Gold. $1,347.70

That’s it for today. I recovered nicely this morning, and I haven’t had a cup of coffee yet either! I receive quite a few emails from dear readers that send their wishes, thoughts and prayers for my health, but this one yesterday, got me. the dear reader sent this: “Find a cure for Chuck Butler’s health issues. Really enjoy his writing and view point. Of course I know that you cannot do what I wish but I sure want him to continue on. Chuck has a down home way of representing EverBank and making a person want to do business with you and trust you.” I truly appreciate these kind words. Well, my beloved Cardinals have become a team that depends on the Home Run to win games, and they got two HUGE ones last night, so they won! Last year the team couldn’t hit a home to save their lives, but this year, no problem! The Alan Parsons Project takes us to the finish line today with their song: Eye In The Sky. And with that, class is dismissed for today! HA! I hope you have a Wonderful Wednesday, and Be Good To Yourself!

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