Is There Whispering Among The Fed Heads?

A Pfennig For Your Thoughts

Rocktober 25, 2018

* Bad Data day for the U.S. changes the course of the currencies
* And Gold continues to gain new investors… Follow the money!

Good Day… And a Tub Thumpin’ Thursday to you! Man o man, I can’t catch a break these days with something always causing me pain somewhere in my body… I woke up yesterday morning with the gout… Now, I already needed a cane to walk with, and now I limp at the same time! A couple of days of steroids will knock that out, then what will come next? Only the shadow knows…. I’m always reminded of a TV commercial, that I used to imitate the announcers aggravating voice, and say that’s Jim he can’t skate he’s got the gout! I haven’t done that voice since my former colleague and longtime friend Ann Hopkins left the bank… She always requested that I do the voice… Ok, Loggins & Messina greet me this morning with their live version of: Angry Eyes…

Well, I bet you wish you could cut me down with those angry eyes…
A nasty first part of the day yesterday, saw the euro drop below 1.14, and the A$ lose about ¼-cent, and even though the Chinese said they were going to stabilize the renminbi, that hasn’t happened, and that went through the morning, until… a couple of headlines… First, it was an article in the Financial Times that said that “Foreigners cut back purchases of Treasuries as Deficit Grows” And now we’re talking about more tax cuts? What am I living in a nightmare here or what? Ok, back to writing… The second headline was from MarketWatch that said, “New-home sales plunge to a near two-year low as housing picture deteriorates”

After the markets got a strong whiff of those headlines, the dollar bugs began backing off their assault on the currencies, and in turn, the currencies got to kick some sand in the dollar bug’s face! Will that be enough to turn this dollar strength around for good? We will know something more definitive by the end of the day tomorrow…

Last night I was checking the currencies and saw that the kicking of the sand in the dollar bug’s faces had come to an end, as now the focus shifted to the European Central Bank and their meeting this morning… So, after all the gyrations of yesterday and the overnight markets, we begin this morning with the currencies wearing the same clothes as last night, except for the loonie…

The Bank of Canada, (BOC) didn’t surprise many watchers yesterday, when they hiked their internal rate to 1.75%, from 1.50%, making this the highest rate that Canadians have seen since 2008! And the loonie responded marvelously, gaining more than 1-cent! I can hear my good friend Mike Kettler, laughing right now, he always kids me that I get too excited about 1-cent, or something near that, gains… but in the whole scheme of things, a full 1-cent move in one day for a currency is HUGE… You have to remember, as I always respond to Mike, that the currency market is $5 Trillion a day in size… Large sums of money trade currencies…

The Riksbank (Sweden) left their negative (-.50%) rate remain in place yesterday, and the Norges Bank issued a communique that they will announce their rate decision today… It was just yesterday, that I talked about bad timing for these two Central Bank in that they would love for the European Central Bank (ECB) to go first, and not the other way around… Well, the Norges Bank bought themselves a day, and all they did was leave rates unchanged at .75%… UGH!

The ECB has already stated that they intend to end their bond buying program at year’s end. So, that’s a start… They also have stated that the negative deposit rates would remain until next summer… The markets are so keyed up about this, and any sign, intentional or unintentional will be reacted to and found in the euro’s moves. ECB President, Mario Draghi, isn’t new at this… And I doubt he’ll slip up, so any remarks that are made will be intentional, with the hopes that it moves the markets one way or the other… In this case, I don’t think he’s going to move up the negative deposit rates, timeline for removing them, and that will leave traders with sour tastes…

Well, Gold started the day yesterday down a couple of bucks, and ended the day up about $5 bucks… The Wall Street Journal, which normally has to search their roster to find a writer that can do an article on Gold, found one the other day, and check out this heading… “Gold Regains Its Shine Among Investors”, and then followed that article up with another heading that said, “Other Market’s Woes are Boon to Gold prices”… We’ve seen the usual Central Bank suspects, Russia, China, India, making announcements that their Gold reserves are growing , and we’ve seen some newcomers like Hungary, and Poland come around to the Central Bank Gold buying party going on… My dad always told me to “follow the money”… Where the money goes is where you should go with your money, and then he would add, that is when you get some money!”

Yes, all of these Central Banks are backing up the trucks to the Gold window because the price of Gold has dropped so much, and in my humble opinion, that’s what you should be doing too! I’m just saying…

The U.S. Data Cupboard yesterday, had more housing data, and it wasn’t very good, as we discussed above… One of my fave economists, Danielle di Martino Booth, chimed in on Twitter that “with housing stocks down 40%, investors hope Fed gets the message”… I found that interesting because she’s been behind the Fed’s rate hikes 100%, until now…

As mentioned early this week, we finally get a piece of real economic data today with the print of September Durable Good and Capital Goods Orders… I expect the Durables to be negative, and the Capital Goods, which I prefer to refer to as CAPEX, which stands for Capital Expenditures, should be unchanged, which is to say… SLOW!

After the James Bullard speech last week that we talked about on Monday, more Fed Heads hit the speaking circuit this week, and all them have had a different spin on their rate hike expectations… There’s whispering among the group, folks… Will there be an uprising? I think the Fed Heads see what everyone else is seeing, with regards to housing, and the stock market, not that they care about the stock market, tsk, tsk… Or to put it another way, I sure hope to hell that the Fed Heads see what we see!

I got a big kick out of a headline on the Bloomberg this morning… Get this… “• The U.S. economy is doing great. Why isn’t housing? I can’t believe, no wait, I can believe, I just find it ridiculous to think that we’ve gone so far as to believe that the economy is the stock market… The stock market should be a result of the economy, right? That is unless stock buybacks skewer the results… Anyway, I hope Bloomberg found the answer to their question…

To Recap… The currencies got to kick some sand in the faces of the dollar bugs yesterday, after a couple of headlines warned that rate hikes are slowing the economy, at a time when debt is exploding higher… But the overnight markets took those gains off the table, and we’re back to the same clothes as yesterday for the currencies, ahead of the ECB meeting, taking place as I write. Gold is getting warmed up in the bullpen for a late inning save for investors… wink, wink…

For What It’s Worth… I’ve long been a big fan of James Grant and his Interest Rate Observer newsletter… Jim is a deep thinker folks, and his comments aren’t usually available to anyone outside of his subscriber list, so when I see them in the public’s view, I grab them immediately! Ed Steer found them first, so kudos to Ed… But here’s James Grant talking about interest rates… and can be found here: http://thesoundingline.com/james-grant-if-interest-rates-normalize-the-national-debt-will-cost-more-than-the-military/

Or, here’s your snippet: “It took rates exactly ten years to go from 2.25% in 1946 to 3.25% in 1956. Now already, we have gone on the ten-year from 1.375% to 3%. So rates have more than doubled in the course of two years. So the tempo… now would seem (to be) a bit more brisk… Mortgage activity has been dampened. Companies that have borrowed at floating rates are now having to re-budget. You know the federal government has got some debt and it has been paying the most concessionary rates. I think less than 2% on average. So, if the interest bill for the federal government were to go back to… 6%… on $18 or $20 trillion of market holdings, the interest bill would surpass the defense budget… Look at the number three (3% interest rates), of course it’s a small number, and it is small as measured against the evident rate of inflation. So, since the past 50 or so years, the 10-year treasury security has yielded something like 2.7% in excess of the rate of inflation on average… So the rate of inflation now is generously reckoned at… 2%… that would make the 10-year yield not at three-ish but at four-and-a-half-ish or higher and I think that would truly bite… People say, for that reason, it can’t happen. We cant afford that. Well, just because it would be inexpedient doesn’t mean it can’t happen.”

Chuck Again… yes, I’ve said this before, and this looks like a good place to say it again, and PLEASE pardon the language, I’m just repeating it as said by then Presidential Candidate Trump… “If interest rates get to 4%, we’re screwed”…

Currencies today 10/25/18. American Style: A$ .7078, kiwi .6522, C$ .7756, euro 1.1401, sterling 1.2895, Swiss $1.0003, European Style: rand 14.5302, krone 8.3260, SEK 9.1047, forint 284.30, zloty 3.7822, koruna 22.6471, RUB 65.45, yen 112.27, sing 1.3795, HKD 7.8397, INR 73.08, China 6.9393, peso 19.60, BRL 3.7006, Dollar Index 96.33, Oil $66.86, 10-year 3.13%, Silver $14.72, Platinum $827.00, Palladium $1,095.00 and Gold… $1,232.60

That’s it for today and this week… I know if you’re a fan of either team in the World Series, the games are interesting, but for me, they can’t hold my attention very long. Maybe it’s the pace of the game with all the commercials and time spent adjusting batting gloves, but something’s not right for me this year… It’s a BIG GAME this Saturday for my beloved Missouri Tigers, who will take on the #12 rated Kentucky Wildcats… Come on Drew Lock, you’ve got to beat this team once in your time at Mizzou! The Great Carlos Santana takes us to the finish line today with an oldie but goodie, classic rock song: Black Magic Woman… The first time I ever heard Carlos Santana was when I went to see the Woodstock movie. I Immediately found my way to the record store to buy a Santana album! that was 1969… Almost 50 years ago… WOW OK, let’s see what we can do to make this a Tub Thumpin’ Thursday, and Fantastico Friday! And remember to Be Good To Yourself!

Chuck Butler
Creator & Editor of:
A Pfennig For Your Thoughts