Fed Speakers Sing From The Same Song Sheet!

* Dollar bugs dance on Fed speakers quotes.
* Aussie Wage Price Index rises.
* Oil rises past $48!.
* Japan 1st QTR GDP beats expectations.

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

Good Day. And a Wonderful Wednesday to you! The rain has stopped for now. Yesterday, when I left the office, the rain was blowing sideways, and it was cold. The walk across the bridge made me think it was November. And certainly not May! An awful night sports-wise for our town, as both the Blues and Cardinals lost! UGH! They win together, and lose together is sure seems. Scorpion greets me this morning with their arena rock ballad: Still Loving You. A very good song I must say! And the fave song of a certain friend of mine. Right, Laura Lou?

Well, the softness of the dollar the first day and next morning this week, really got tossed to the side of the road yesterday, and the dollar bugs were set free! I told you that there were some Fed members due to speak this week, and yesterday the duo of Williams and Lockhart sang from the same song sheet, and talked about rate hikes. Williams said that two to three rate hikes were possible this year, and Lockhart said that action could be taken at a June meeting. The currency traders were moved by these comments and began to buy dollars once again, on the thought that “yes, rates are going higher in the U.S. and that will support the dollar”.

The Fed Funds Forwards still only have a 10% chance of a rate hike in June, and believe that only one more rate hike will take place this year. So, I agree with these guys on the 10% chance of a rate hike in June, but still don’t see how the Fed will be able to live with themselves if they hike rates this year. So, the small gains that the currencies were able to carve out on Monday and Tuesday morning were wiped out as we went along through the day yesterday, and that theme has carried through the overnight sessions.

One of the anti-dollar assets hasn’t succumbed to the dollar bugs dancing in the street, and that is Oil. The price of Oil pushed through the $48 handle overnight, and is now trading at a 6 month high. Of course 6 months ago, it was sliding downward, so this is an opposite direction high for the price of Oil this morning. Oil production disruptions have really played a part in Oil’s recent resurgence, as supply from Nigeria, Venezuela, and Canada has been cut, and the supplies of Oil in the U.S. have fallen again. Add in to this production disruption, the news that Goldman Sachs aka Lola, who has long been a bear with their outlook for the price of Oil, has seemed to ease up on that thought, saying, “The Oil market has gone from nearing storage saturation to being in deficit much earlier than we expected.”

It will be interesting to see if Oil can maintain this stabilization of its price, given that all three disruptions Nigeria, Venezuela, and Canada are expected to be ramped back up very soon. And Goldman, I mean Lola, made a good point of something, and that is if the Oil price does rebound to $50, it could put the Oil supplies back in the positive once again, as more production would be done at $50 a barrel, than is being done now at sub $50 prices. And the Petrol Currencies are feeling the heat from the dollar bugs this morning and are not able to rally on Oil’s latest move.

There are no data releases by the U.S. Data Cupboard today, unless you count the Fed’s Meeting Minutes that will print this afternoon. These minutes are from the last meeting in April when they left rates unchanged. I doubt these minutes have anything earth moving but could have some subtle changes to the language they previously had on Global risks, as you must remember in April, things looked better for the Global economies, as the dollar was getting sold, and the pressure cooker that all of the Global economies were in was removed from the burner. So, we could have to listen to the Fed talk glowingly about how things have improved globally. But we all know that what happened in April, stayed in April, and it’s a completely different story in May.

Well, James Rickards doesn’t agree with me, but that’s OK, I’ll still go on writing. I’m talking about my call that the so-called Shanghai Accord was already fading, and showed that yen had gone from 106 to 109, and euros from 1.15 to 1.13 in recent weeks, after rallying throughout April. Jim says that Japanese Prime Minister Abe recently admitted that the U.S. will not tolerate a weaker yen. And he pointed to this article on Reuters: http://www.reuters.com/article/us-japan-economy-hamada-yen-idUSKCN0Y20WX

So. What can I say? The Japanese policy makers according to the article, have escalated their verbal warnings to investors against pushing up the yen too much. I still don’t get the move from 106 to 109. That’s 3 whole figures is that considered, too much? I guess not. But it would be in my book! Well, if the so-called Shanghai Accord is still in play, then we should be expecting more gains in euros, yen and renminbi, and weakness in the dollar. And that’s not happening today!

Yesterday, I mentioned that I thought we would see a currency regime change in the next 5 years.. Many of you will recall that in 2010, I said that by the end of this decade we would have a currency regime change. And by that I mean the dollar is no longer the reserve currency of the world. Well, I still believe in the end of the decade call, but I was fitting yesterday’s comment within the parameters of someone’s question to me and that’s where the 5-years timeline came from. So, I’m getting the feeling that the Fed members aren’t that enamored with the fact that the dollar is the reserve currency of the world. Let’s listen in to what Fed member William Dudley had to say about this when speaking at an event in Zurich, Switzerland yesterday. “If other countries’ currencies emerge to gain stature as reserve currencies, it is not obvious to me that the United States loses,” he said, as long as it “is being driven by their progress, rather than by the U.S. doing a poorer job.”

It sure isn’t a ringing criticism of the reserve currency, but it’s also a sign that there’s some ambivalence toward the dollar’s reserve currency status. Why would that be? Well, think about that for a minute. The dollar is the reserve currency of the world, so that means that its widespread use in everything around the world is interfering with the Fed’s domestic policy. and their desire to hike rates..

The Fed can’t hike rates because of the tremors it sent through the global financial markets and economies when they hiked rates in December and said they would hike 4 more times in 2016. But isn’t not hiking rates going to cause more problems down the road for these countries around the world? For if dollar borrowing rates remain low, more loans will be booked at those low rates, and then there’s even more dollar denominated debt around the globe that can’t tolerate rate hikes making borrowing costs higher, and repayment costs higher. Oh, the tangled web we weave.

OK, back to the currencies and metals. Last night Japan printed their 1st QTR GDP, and it printed better than expected! 0.4% growth was recorded VS the consensus of 0.1% for the 1st QTR. But get this, over half of the quarterly gain was explained by the Leap Year, additional day. Really? One day made the difference? OK, I guess I get that, but wouldn’t that mean that the 2nd QTR will most likely unwind this gain? Yes, it does, and good on you for saying that, you’ve come a long way grasshopper! So, in reality, Japan’s economy is still a basket case. PM Abe is ready to announce his new economic program. Recall that none of his “3 Arrows” hit their mark, or any mark, as long as we’re taking names here. Well, Abe is ready to announce his Abenomics 2.0. Well, unless he’s ready to address the awful demographics in Japan, a shrinking overall population, and restrictive immigration laws, he’s barking up the wrong tree.

I dear reader sent me a note the other day, and he is also a financial newsletter writer, so he sent me his latest letter called Ruminations. In it he had a great line that I’m going to borrow here when talking about the shortage of population, especially work-age people.. “Short of fathering 10 Million children, the board members of the Bank of Japan cannot solve Japan’s problems.”

In Australia last night, their 1st QTR Wage Price Index printed at 0.4%, which didn’t meet the expectations of 0.5%, but in reality this was a solid enough print in my opinion, especially given the strong employment growth in Australia in the past 6 months. The Aussie Jobs report for April will print tonight, and I keep hearing each month that this is the month that the jobs report will finally slow down, but each month the actual print defies that notion of a slowdown, and so will this be “the month”? If it is, then all the good that the previous months of strong employment growth built up, will be washed under the bridge, and gone. Poof! It was good to know ya! The Aussie dollar (A$) had its “one day in the sun” yesterday, and overnight the markets didn’t like it that the Wage Price Index didn’t meet expectations, and sold A$’s enough that they wiped out the previous nights’ gains. UGH!

I was reading a piece last night on the BREXIT stuff. The latest national poll had the “don’t leave” vote widening their lead over the “leave” vote. For those of you knew to class. BREXIT is short for Britain exiting the European Union / EU. Two years ago we had the Scotland exit vote, late last year we had the GREXIT, Greece exiting the euro, and now the BREXIT. And the BREXIT stuff has really been a burden for pound sterling, which has taken on new trading clothes. Pound sterling doesn’t seem to trade on economic news but more on BREXIT news these days. I mentioned this to the DR the other day, and said that I didn’t think Britain would leave the EU, and when the referendum at the end of June verified that, we could see the pound recover some of the BREXIT losses, but remember, the U.K. economy is still in shambles, so any real recovery would be muted.. Of course that’s just my opinion and I could be wrong.

And right on cue from yesterday’s revealing of the amount of U.S. Treasuries the Saudis own ($116.8 Billion), the U.S. Senate has unanimously passed a bill to let families of people killed in the 9/11 attacks sue Saudi Arabia for any participation in the act of terrorism. Recall me yesterday questioning the Saudi threat that they would sell $750 Billion of Treasuries and other assets if this law is passed. Well, now it’s up to the House, and then the President who has lobbied against this bill. I won’t comment on that, because I want you to receive the letter today. OUCH! Aye, aye, aye, I just had to put my eye shell back in as I had rubbed my eye to aggressively and pushed it out of the socket.. And putting it back it was painful this morning. I guess I’m out of practice, because I haven’t had it out in a long time. But there I was walking through the office with my eye shell in the palm of my hand. Good thing I’m the only one here! But all back and looking normal again. I’m talking about the eye, not me! HA!

The U.S. Data Cupboard yesterday had one piece of real economic data, that being Industrial Production/ IP. And I have to shake my head at the media for making the positive deal out of this data that they did, and the currency traders for buying dollars on the data print. Why do these outlets never stop, look under the hood, and then make a decision of whether to dance and buy? Sure IP rose 0.7% in April (remember the dollar was getting sold in April, not so much in May), but a significant downward revision for March (from -0.6 to -0.9% MoM) enabled April to beat the expectations of 0.3%, there are still warts here. While this is the biggest monthly jump in Industrial Production since Nov 2014 the year-over-year weakness continues with IP -1.07% Year on year for the 8th month in a row! Industrial production has never fallen for this long – in 96 years – without the U.S. economy being in recession. YIKES!

Hmmm, Gold was able to carve out a small gain yesterday of $3, and has given that $3 back in the early morning trading. Our metals Guru, Tim Smith, sent me a note yesterday, from an article he read on the WSJ online: http://www.wsj.com/articles/chinese-bank-to-buy-giant-london-gold-vault-1463408198 Of which he pointed out that China was buying a $90 Billion vault for Gold storage from London. And that this is in addition to the vault China bought last year for Gold storage! WOW! That’s the “fun news” on Gold this morning.. and now for the “not so fun news” on Gold. This is a quote from Turd Ferguson, of TF Metals who does a lot of research into price manipulation, and had this to say about the whacking that Gold got last week.

“Having the ability to create an endless supply of anything gives you direct control over whatever market you ‘make.’ And for three years this has provided a stream of easy profits for these bullion bank trading desks. They would simply issue as many new contracts as necessary to wait out the speculators. Eventually price would top out and momentum would stall. All it would take was usually one good shove from the bullion banks and down would go price. The speculators would all rush for the exits and the banks would use the ensuing selling to buy back and cover nearly all their recently issued shorts.”

I thank the folks over at GATA for sending this to me. Maybe.. because reading it and typing it out has got my blood pressure soaring this morning! UGH!

To recap. the soft dollar that had held the currencies attention on Monday and Tuesday morning, was quickly disposed of and tossed out the window, as two Fed member speakers Williams and Lockhart, sang from the same song sheet, talking about rate hikes that they see coming. And that got the dollar bugs all lathered up, and dancing in the streets. Japanese 1st QTR GDP beat expectations, but it was soon attributed to the extra day (Leap Year) in the 1st QTR. Aussie Wage Price Index rose 0.4%, but missed the expectations of 0.5%, and the A$ lost all the gains from the night before. Gold gained $3 yesterday, and has given that back this morning. And U.S. Industrial Production on the outside showed a nice gain of 0.7%… But you’ve gotta look under the hood, folks.

For What It’s Worth. I found this on Zerohedge.com yesterday, and can be found in its entirety here: http://www.zerohedge.com/news/2016-05-16/they-are-scared-death-ceo-explains-single-biggest-reason-why-people-are-buying-preci And it’s about Gold.

And here’s the snippet: “We can talk about technical charts, supply and demand fundamentals, and price manipulation, all of which point to significant increases in the value of gold and silver for the foreseeable future.

But according to Golden Arrow Resources CEO Joseph Grosso, who is credited with the discovery of the largest silver deposit in history, the single biggest reason that retail investors, institutional players and governments around the world are gobbling up physical precious metals, resource stocks and ETF’s at unprecedented levels is that they are scared to death of the state of the global economy and where it will go next.

Like an expecting father waiting for five years to see a baby being born, we are at the inception of a mining economy. There is a pause, a slight pause towards the U.S. dollar and that pause is allowing the oldest currency in the world, gold and silver [to rise] and that is now in favor.

.Because there is fear. When there is fear, that’s when gold does best.

. Right now, this is a scary time. People want to hop out [of traditional assets] and find safety in precious metals.”

Chuck again. Yes, here are the 3 items I think are in favor of Gold right now. And that 1. The “fear factor” 2. Negative interest rates and global low interest rates 3. Geopolitical fears always a reason, when is the last time we could say the world was a peaceful place?

Currencies today 5/18/16.American Style: A$ .7280, kiwi .6775, C$ .7712, euro 1.1288, sterling 1.4415, Swiss $1.0166, . European Style: rand 15.7910, krone 8.2830, SEK 8.2150, forint 279.92, zloty 3.8890, koruna 23.9405, RUB 65.27, yen 109.30, sing 1.3770, HKD 7.7646, INR 66.99, China 6.5352, peso 18.42, BRL 3.4888, Dollar Index 94.74, Oil $48.31, 10-year 1.78%, Silver $17.07, Platinum $1,042.05, Palladium $581.69, and Gold. $1,273.60

That’s it for today. My last day in the office this week, as tomorrow is an infusion day, which starts in the early morning and doesn’t end until after noon! UGH! And Friday is my usual “whacked out Friday” this happens every two weeks. That sure was an ugly hockey game last night. I did not stay up to watch it all, as I could tell that it would take a tilt of the hockey ice in favor of the Blues for them to win that game! Hey! Looky there! The Sun just came up and it’s bright and sunny outside! YAHOO! Maybe we can get back to the temps that are normal for the middle of May! Steely Dan takes us to the finish line today with their song: My Old School. And I’m never going back to my Old School! A great old song! And with that I’ll get out of your hair for today, and send you on your way to hopefully a Wonderful Wednesday! Be Good To Yourself!

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