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Suddenly! Inflation? Really?

* BLS says inflation is soaring.
* So dollar gets sold, currencies & metals rally!
* Tent revival for Global Growth is shaky..
* Rickards says dollar down, Gold up!

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

Good Day. And a Tub Thumpin’ Thursday to you! I can’t recall in all my years coming down to this area, a string of just absolutely gorgeous days, weather wise, like the one we’re having. Oh, I’m sure I just jinxed that string but I’m just amazed at how beautiful the days have been. And in a row! WOW! I know that’s probably difficult to read for you who are up north and have been belted with snow.. Sorry.. The Allman Brothers greet me this morning with their song: Revival, which works out pretty good, given that I’ve got an update on my idea that a Tent Revival is going on for Global Growth.. More on that in a bit.. Ready? Let’s get going so we can start Tub Thumping!

Well, all signs point to a March rate hike after the bump up in the hedonically adjusted CPI yesterday. January consumer inflation as reported in the CPI print rose 0.6%, the fastest monthly pace in over 4 years! Now, let’s think about this for a moment.. Has inflation suddenly, out of nowhere, sprang into action? No way! But this is very suspicious from my viewpoint in the cheap seats, that suddenly inflation is soaring here in the U.S. Well, we are talking about the BLS, and their hedonic adjustments in CPI.. Remember a couple of weeks ago, I told you how those hedonic adjustments came to being?

Oh, and not that I want to spend the whole first part of the letter today talking about data from yesterday, but it’s what moved the markets so I have to pay some homage to it, right? Well, what I wanted to point out is that Retail Sales were quite strong in January, too! There are two things that I want to point out about the Retail Sales numbers. First: Auto sales, which had been driving the economy, fell flat on their face, and that’s why the headline number that includes Auto sales, was only up 0.4%, but when you take the Auto Sales out of the picture, the January Retail Sales jumps to 0.8%! Now that’s a number that any economy would be proud of! But. and you knew there would be a “but”, the 0.8% gain contained price increases across the board.. So, it wasn’t so much that a ton of goods got sold, but that a fair amount got sold, but at higher prices.. And didn’t I ask you yesterday if you were ready for higher inflation?

There was more data, that was not so good, but let’s wait on that, and talk about what’s going on in the currencies and metals.. So, Janet Yellen gave the second leg of her 2-days of speeches on Capitol Hill yesterday, and it was simply a rinse and repeat from the day before, so nothing new here, except that the markets are on board with her now that a rate hike in March should be viewed as a strong possibility.. The Fed Fund Futures odds on a rate hike in March have risen to 40%..

So, we had consumer inflation rising at the fastest pace in 4 years (out of nowhere too!) and the Markets getting on board with the strong possibility of a rate hike in March, and the dollar.. . drum roll please.. OK, that’s good, the dollar got sold! Wait! What? Shouldn’t these things you just talked about, Chuck, push the dollar higher? I hear you, I hear you, dear reader.. But remember the other day when I was talking about India, and said that just because the Reserve Bank of India (RBI) was most likely to cut interest rates at their next meeting, it didn’t mean what it used to ,to debase one’s currency, and in today’s crazy world, sometimes a rate cut brings about currency strength, due to the idea that the rate cut promotes growth..

We have the opposite going on in the U.S. the odds of a rate hike next month are rising quickly, but yet the dollar is getting sold.. Let’s look at why this is possible.. First: the markets are crazy, and have been since 2008, fundamentals take a back seat to sentiment and that’s just not right, but it is what it is. Second: Maybe, just maybe, because you never know, the markets fear the sudden rise in inflation? Ahhh, grasshopper, that could be what’s behind this dollar selling. the powers that be, decided to spring a fast paced rising inflation number, and it backfired on the dollar.. go figure.

Here’s another thing that is weighing heavily on the dollar. I read about the resignation of Fed member, Tarullo, a couple of days ago, and thought about what that would mean. This would make 3 openings at the Fed that needed to be filled by President, Trump. One would think that once he gets around to naming 3 replacements at the Fed, that they would be Republicans, which would make the 7 FOMC members 4-3 Republican. So, the Tarullo resignation is a BIG DEAL.. I hadn’t written about it because 1. I didn’t remember to, and 2. I thought it bordered on political talk too closely.

On that note. I was reading the 5 Minute Forecast ( ) yesterday, and Dave Gonigam, the artful, masterful, guru that puts the “5” together along with his thoughts 5 days a week, was talking about this, and quoting James Rickards, who sees the Tarullo resignation the same way I was thinking about it. But then Rickards carries that discussion over to the dollar and Gold, so let’s listen in to James Rickards.

“Trump wants a weaker dollar to help U.S. exports and to help create U.S. export-related jobs,” Jim reminds us. “Trump complains about China, Germany and Japan using a cheap currency to hurt U.S. workers. Now Trump will pursue a cheap dollar to fight back.”

“A cheap dollar means one thing – higher gold prices. Gold is just a form of money like the dollar, euro or yen. If the dollar is strong, the dollar price of gold goes down. If the dollar is weak, the dollar price of gold goes up. It’s that simple.”- James Rickards

The dollar is getting sold, the currencies, for the most part are all participating in the dollar selling, by rallying, and the precious metals are really pushing the appreciation envelope across the desk this morning.. Silver has risen past $18 this morning. Now, in recent times, every time Silver goes above $18, it gets whacked by the paper trades, so let’s see if that happens this time too, eh? Gold gained $5.40 yesterday to close at $1.233.20, and has gained another $5 in the early morning trading today. Hey! if the BLS is going to spring a fast rising inflation print on us, then Gold should be responding like this!

The euro gained back the 1.06 figure yesterday, and has pushed higher within that handle, again as it should, given the fact that the euro is the offset currency to the dollar, and any dollar weakness shows up in euro strength. We’ve been through that exercise a number of times in the past, so let’s just leave it at that! And Japanese yen is stronger this morning too, thus helping the Dollar Index recover from yesterday morning’s print of 101.47, and come in this morning at 100.70.. Euros and yen make up a HUGE percentage of the component weighting in the Dollar Index, but you knew that, right? Of course you did, for you’ve been to class every day and heard me explain that a gazillion times!

Last night, before I went to bed, I checked on the currencies, and saw the dollar selling going on, and noticed that the Aussie dollar (A$) was trading over 77-cents.. But this morning, the A$ has seen some profit taking, and it is trading at .7687.. The Aussie labor report was better than expected, once again, and that print helped the A$ get past 77-cents last night. I say, once again, because just about every month for the past year, the so-called experts call for a cooling off of the strong labor reports each month.. And then the labor report prints and silences those so-called experts..

Well, I’ve been promoting the Tent Revival for Global Growth, and things seem to be going smoothly for the revival, but then there’s always a Party Pooper! One of the items that I noticed a few months ago that was rebounding was iron ore.. that was good for Australia, and the A$, and tells us. that China was recovering too, if they were ramping up their imports of Aussie iron ore, and thus the price increasing in iron ore. You know the ankle bone is connected to the leg bone, which is connected to the knee bone, and so on..

Well, an analyst over at the publication called Money Morning came out with an article and call that the rally in iron ore is about over. He thinks that China is just stockpiling the iron ore for future use, and that now that the price of iron ore has breached $100/ ton, that China will stop stockpiling the iron ore, and that will be the end of the rally.. And if that happens, then one leg of my Revival Tent will have been removed.. I’ll keep an eye on this folks, for sure, because I’ve put a lot of time, research and work into this Tent Revival for Global Growth!

Since December’s Review & Focus ( ) when I spent a ton of time talking about how China, Russia and Saudi Arabia were either selling Treasuries or just not reinvesting when Treasuries matured. I had all the numbers, the charts/ graphs and so on to prove what I was saying, I even told the reader what each country was doing with the dollars they received for selling their Treasuries.

But yesterday, a dear reader, sent me a note, and asked the question that I didn’t have an answer to.. I even said to my wife, “you know I’ve read 10 articles today about China, Russia and Saudi Arabia selling their Treasuries, I know what they’ve done with the proceeds of the sale, but not one of these articles tell me who bought the Treasuries?”

And that was the question.. Who was buying these massive amounts of Treasuries? Well, it appears that other foreign Central Banks are picking up the slack, because after 12 consecutive months of Treasury ownership by Foreign Central Banks in December bought $18.6 Billion of Treasuries.. This data is available through the TIC’s report. That used to be called: the net foreign purchases report.. And yes, it’s quite stale data, but that’s what we have to work with.. And don’t forget the little trick I taught you a few months ago, regarding the Fed’s Balance Sheet, and the 10-year Treasuries yield..

The Brazilian real continues to stretch its legs, and run further every day.. In my Sunday Pfennig from two weeks ago which can still be read in the archives at I pointed out that the real was the best performing currency in the past 12 months.. The Olympics rally has grown strong legs and is running further and further. Brazil has been cutting their Selic Rate (internal interest rate) , but deposit rates in Brazil remain quite high, and when you add in the fact that the interim gov’t .there hit the ground running, no stumbling, and opened up trade, and passed laws to promote growth. I mentioned this the other day, but it bears repeating.. the BRICS currencies have all been pushing the currency appreciation envelope across the desk, and that’s another sign that Global Growth has a chance to get off the canvas before the count of 10!

And the S. African rand dropped below the 13 handle briefly last night.. As an old ESKOM Bond trader, I recall when in S. Africa there were two currencies.. the commercial rand which is what you had to buy to complete the purchase of the bond, and then you had to swap it for the retail rand that the bond would be held in and the interest payments would be paid in the retail rand. Sound confusing? Oh, brother, I would have to have my thinking cap on when I called S Africa to buy ESKOM’s! And the rand traded around 5 back then! That’s right rand was around 5, and most times it trade with a 4 handle! That was quite strong for the rand, but then it was considered an Emerging Markets currency, and a buyer had to sign a separate Emerging Markets paper saying they understood the volatility that Emerging Markets bring.

And kiwi has started to recover from the selloff it saw last week after the Reserve Bank of New Zealand (RBNZ) left their easing bias as a part of their monetary policy. I’ve been spoon feeding you tidbits about how kiwi after the selloff was looking like an opportunity to buy a cheaper currency ahead of a rate hike possibility. And now kiwi is starting to move higher, crossing above the 72-cents handle last night.

Well, the U.S. Data Cupboard has some other data yesterday that I mentioned at the top. And it wasn’t good! Industrial Production (IP) printed negative, as I said it would I must say!, at -0.3%.. And Capacity Utilization (CAPU) didn’t drop as much as I thought it would, did drop 0.2% from the previous month, to come in at 75.3%.. The Home Builder’s Index fell from 67 to 65 in February. And then there’s this.. Business inventories for December dropped from 0.8% to 0.4%.. Inventories are a piece of GDP, so this print will probably cause the 1.4% 4th QTR GDP to be revised downward a tiny bit.

The Precious Metals sure had a good day yesterday, and overnight too! I already told you that Gold gained over $5 yesterday and is up $5 today so far, and that Silver had bumped up over $18, but what I didn’t tell you is that Platinum added $13, and Palladium added $9, yesterday. I can hear the Gold and other metals traders taunting the BLS.. Saying something like: Go ahead make our days, print your hedonically adjusted CPI report showing inflation coming out of nowhere, and we’ll see that , and raise our metals prices!

To recap.. CPI bursts higher according to the BLS, and Retail Sales beat the expectations, and all signs now point to a March rate hike here in the U.S. but.. the dollar is getting sold! The currencies, for the most part are all participating in the rally VS the dollar this morning, along with the precious metals who have taken off for a planet unknown since the BLS decided to show CPI rising at the fastest monthly pace in 4 years. The Tent Revival for Global Growth might be taking a hit, and then again maybe not! James Rickards says higher prices for Gold and lower prices for the dollar are on the way..

For What It’s Worth.. Well, there is no FWIW today, folks. I’ve searched and searched for something worthy, but had no success. So, I move along for these are not the droids we’re looking for.. . I apologize to those of you who really look forward to what I might have here each day. But sometimes the well is dry.. and the need for rain is strong! Let’s go to the currency roundup now..

Currencies today: 2/16/17. American Style: A$ .7687, kiwi .7220, C$ .7663, euro 1.0630, sterling 1.2565, Swiss $1.0020, . European Style: rand 13.0038, krone 8.3210, SEK 8.9053, forint 289.67, zloty 4.0582, koruna 25..4178, RUB 57.19, yen 113.65, sing 1.4190, HKD 7.7605, INR 67, China 6.8686, peso 20.36, BRL 3.0762, Dollar Index 100.70, Oil $53.16, 10-year 2.48%, Silver $18.04, Platinum $1,012. 35, Palladium $791.25, Gold $1,238.90, and SGE Gold $1,236.99

That’s it for today.. Boy our Blues sure have turned things around since firing the Head Coach a couple of weeks ago. The Blues just had a 5 game road trip, and they swept the road trip! They won all 5 games, finishing up last night in Detroit with a 2-0 win! WOW! I was about to give up on them for their sloppy play, and suddenly they are back in the Stanley Cup discussion! .The old head coach was going to step down at the end of this year, but with the team in funk, he was forced to step down early. I can tell that I’m going to need to take a nap this morning, as I was just sitting here, and almost dozed off! UGH! Full squads will report to Spring Training tomorrow, and that’s when I’ll venture over to Roger Dean, and take in some of their practices and drills.. I sit in the stands and mind my own business, and watch practice.. that’s how much I love baseball folks.. And with that I have the Commitments taking us the finish line today with their remake of the song: Try A Little Tenderness.. and Otis Redding song, that 3-dog Night also copied. If you love rock music, you should find the movie: the Commitments, it’s about an Irish band that redid R&B songs, like Mustang Sally, and other songs. Alrighty then, let’s go make this a Tub Thumpin’ Thursday, and be sure to Be Good To Yourself!

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

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