The Fed Turns Hawkish!

* Yellen throws a cat among the pigeons!.
* 3 more rate hikes for 2017?
* The dollar is king of the hill!
* Aussie job creation beats expectations!.

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

Good Day. And a Tub Thumpin’ Thursday to you! I think you would be shocked to know what time of the middle of the night I’m writing this letter today. Woke up, couldn’t get back to sleep, (steroids have me thinking of 1 million things at once) and decided to just get up and begin to write. I have a doc appt. early morning and then I’ll head into the office to say Merry Christmas to everyone, as I will not be back before Christmas, which is traditional for me, as I take my winter vacation every year, same bat time, same bat channel. The Blues Image greets me this morning with their song: Ride Captain Ride.

Well, they did it. The deed is done. or as AC/DC sang. Dirty Deeds done dirt cheap. The Fed hiked rates for the 2nd time in a decade yesterday, but as I had already told you the rate hike of 25 Basis Points was a foregone conclusion. What everyone was waiting for was the press conference by Janet Yellen that would follow the rate announcement. And in that press conference, Yellen threw a cat among the pigeons, and sounded like the guy in the Lego movie.. “Everything is awesome” So, to follow that song up, she said that the Fed was looking to hike rates another 75 Basis points in 2017. That would mean 3 hikes of 25 Basis Points sprinkled throughout the year. Of course, I don’t think I need to remind you that last year, she told us that the Fed would deliver 100 Basis Points of rate hikes (4 rate hikes) in 2016. And only 25 BPs were done and that was in the last meeting of the year! So, will the markets play along with that comment or just ignore it, because of what they
got burned on this year?

But I was wrong, I took too long, I got caught in the rush hour, fellows started to shower you with love and affection, look out it’s coming in your direction! Sorry, but before I knew what I was doing those song lyrics were down, and once I put something down, it stays! But I was wrong about what Janet Yellen was going to say, I was wrong about the direction of the dollar afterward. I’m talking about the markets’ reaction to the new-found Hawkish Fed. Didn’t we play this game last year at this time? Why, yes, Chuck, we did! But does this time seem like the Fed will carry through with their plans to hike rates multiple times in 2017? I doubt it. But I was wrong on 3 counts yesterday, so I can see where you might not want to listen to what I have to say.

Because one bad apple doesn’t spoil the whole bunch! I’ve been wrong before, but in the whole scheme of things, I don’t think it’s happened that often. Dizzy Dean said it years ago, “it’s not braggin’ if you can back it up” So. let’s just see where this all takes us and then we’ll reach some understanding when we see what the future brings. Ok, with that said, the dollar has gone on a moon shot, folks. Don’t scroll down to see the currency roundup at this point, you’ll not like the looks of it. I will tell you that yesterday, before the Press Conference, that the Dollar Index traded at 100.93. This morning the Dollar Index is 102.39. That’s quite a move and most of it is reflected in the selling of the euro, yen and sterling. Yes, the other currencies like the Aussie dollar (A$) and loonie are also getting sold, but the major currencies make up the Dollar Index, and they got whacked yesterday afternoon, and overnight.

So, the Fed’s “dot plot” has been moved forward and updated, and 3 more rate hikes are in the “dots” for 2017. I wonder what happened to those “dots” this year? And I know it seems like I’m beating a dead horse (no animals were hurt here!) but our internal rate in the U.S. is still below 1%! Historically, it wasn’t that long ago that a Fed Funds rate of 3/4% would have sent the dollar to the woodshed to stay! But, now in this current world rate environment, where rate cuts are the norm, 3/4% seems like a world beater of a rate to the market participants. apparently!

And that thought will be on display today, as three Central Banks around the world will be meeting to discuss rates. Norway’s Norges Bank, The Bank of England (BOE), and the Swiss National Bank (SNB). There will be no rate hikes from any of these Central Banks, and that will highlight the dollar’s rate advantage, albeit a small one now, but if the Fed keeps to its promises for 2017, could be much larger going forward. I can tell you that 50 or 75 Basis Points doesn’t seem like much of a rate advantage on the outside, but when you’re trading bonds, to pick up some yield in a swap like that, is a BIG Deal. So, the markets will be forward looking and champing at the bit for more rate hikes from the Fed this year, and every scheduled FOMC meeting will be highly anticipated with thoughts of sugar plum fairies, no wait, rate hikes!

The only Central Bank of the 3 meeting today that has a snowball’s chance in hell of a rate hike is the Norges Bank, where inflation is currently running over the 2% target, but I just don’t see the Norges Bank going out on a limb, while the European Central Bank (ECB) is still in negative rates, and buying bonds. So, nix that thought about a Norges Bank rate hike. But that would be the move of the year wouldn’t it? And the Norges Bank would win back my admiration, that it lost when it went along with everyone else and cut rates to the bone. Yes, like I’ve told you many times previously. When my kids would say, “but dad, all the other kids are doing “x”” I would say, “but don’t you want to be better than everyone else?” The same applies to Central Banks. But they don’t see it.

They don’t see that having a strong currency is in the best interest. The U.S. has a strong dollar right now, and I would bet a dollar to a Krispy Kreme that they don’t want it! A strong currency fights inflation, and what does the Fed want? At least 2% inflation. And they will have a difficult getting there (minus the stimulus that the President-Elect has promised) with the dollar as strong as it is. I’ve followed Central Bankers for 25 years now, and there have only been 2 that coveted a strong currency. Don Brash from the Reserve Bank of New Zealand, and Hans Tietmeyer from the Bundesbank in Germany. One might think that Paul Volcker would fit this description, but Volcker was simply an inflation fighter, he wasn’t concerned about the value of the dollar.

And that brings me to 1985. Interest rates in the U.S. were coming down from their highs in the early part of the decade, but were still more than 10%, and the dollar was the shining star of currencies. So much so, that Finance Ministers from the major countries met at the Plaza Hotel in NYC, to discuss what to do about the soaring U.S. Current Account Deficit, and the strong dollar. This meeting brought about what was known as the Plaza Accord, where it was agreed that there would be a coordinated effort by Central Banks to sell dollars, and weaken the currency. Why did the U.S. agree to this? Because they didn’t understand the value of a strong currency. do they now? I doubt it.. In fact, if you listen to the likes of Paul Krugman, he would tell you that 2% inflation is not enough, that the Fed needs to allow inflation to rise to 4-5%…

On a sidebar. I was reading my Things That Make You Go Hmmm. letter by Grant Williams, and came across this little “retraction” by Paul Krugman after the election. this will tell you just how much economists lip flop. “At 12:42am, November 9, 2016. Paul Krugman issued this statement: “if the question is when markets will recover, a first-pass answer is never. so we are probably looking at a global recession, with no end in sight.” http://www.nytimes.com/interactive/projects/cp/opinion/election-night-2016/paul-krugman-the-economic-fallout

And then 5 days later.. :Paul Krugman issued this statement: “Don’t be surprised if economic growth actually accelerates for a couple of years.” 1:26pm, November 14, 2016. By which he says that negative impacts will probably take a while to materialize. http://www.nytimes.com/2016/11/14/opinion/trump-slump-coming.html

OK, back to our discussion. but before I go on, I have to wonder what we would do without him? HAHAHAHAHA!

In Australia overnight, their November Jobs report printed better than expected with a rise of 39,100 jobs for the month. (consensus was 17,500). Australia is currently fighting to maintain full-time job creation over part-time job creation, as they don’t want to fall into the same trap that’s going on here in the U.S. And full-time job creation has been strong this year, but is still is below the previous year’s creation by 45,800 jobs, while part time job creation has risen by 126,500. What this does is keep wage growth in check, and that keeps inflation lower. On one hand that’s a good thing, but on the other, part time jobs, while they give you flexibility, are bread winner jobs, and that doesn’t help an economy. So, fight on Australia, get your full-time jobs back!

I read a research report from a dealer last night, talking about how the divergence in rates has begun between the U.S. and Canada, and that this is not something new for the two countries. They reasoned that Canada is still struggling with the housing bubbles in Toronto and Vancouver that are begging for a rate hike, but none is coming because the struggle in the economy from the low price of Oil is too great of a factor right now. I agree, but still think the Bank of Canada (BOC) should have the intestinal fortitude to deal with the housing bubbles. I’m very disappointed in the BOC, and I’m sure that keeps BOC Gov. Poloz up at night! HA! The loonie had risen to trade over 76-cents yesterday, and nice move forward, only to take two steps backward after the press conference in the U.S.

The euro got pounded yesterday, and traded below 1.05 briefly overnight, but sits right at the figure as I write this morning. This morning, The Eurozone’s Flash PMI’s for this month printed and beat expectations, coming in at 53.9 VS 53.7 expected.. The PMI’s are the manufacturing indexes, and any number above 50 represents expansion. So, a 53.9 number is a strong number for a recovering Eurozone economy, folks. And a number that shouldn’t be taken lightly. Unfortunately, the pull from the dollar right now is just too much for economic data to offset, and the euro isn’t seeing much love from this print.. UGH!

Yesterday, I spent some time going through some of my thoughts that will be reflected in the Review & Focus (www.everbank.com/reviewfocus) in January, regarding U.S. Treasuries. And then yesterday, I received a note from Doug Casey, (somebody I respect and listen to intently all the time) and he was talking about how he thought the Biggest Financial Bubble of all time (Treasures/ bonds) is about to pop! Doug also enlisted a couple of BIG Bond guys, Ray Dalio of Bridgewater Associates, and Jeffrey Gundlach of DoubleLine Capital to offer up their opinions that they too think the bull market for bonds is coming to an end..

What that means folks, is that bond yields are no longer going to be low, they’ll be rising in this scenario, and that would mean the prices of those bonds would be dropping. So anyone owning a bond with a low yield, and needed to sell the bond, would experience a loss. And if they held the bond to maturity at the low yield, they would be missing out on the higher yielding bonds that were being issued subsequently. I’ve got the bruises on my forehead to prove that I have banged my head on my desk for a long time, since first calling for the Treasury Bubble to pop. So, excuse me if I sit on the bench for this call at this time, for I know all too well, what happens when the Fed steps in and buys bonds. the bubble doesn’t get popped and everyone that bought the short Treasury trade, got their hats handed to them.

Imagine there’s no debt. It isn’t hard to do. You say I’m a dreamer, but I’m not the only one. I hope someday you’ll join us, and the world will be as one. I just heard Imagine by John Lennon on the iPod and it got me thinking about debt. Oh well. time to talk about Gold. As you can imagine, Gold got whacked yesterday. The shiny metal lost $15.40 from its price the day before. I would have to say that this move was overdone in my opinion, which could be wrong. The rate hike was already priced in, but wasn’t priced in was the hawkish statement by Janet Yellen in the press conference, and to me, I don’t see what the fuss is about. Last year, we saw the same scenario, and Gold got whacked, only to recover the first 8 months of 2016. With that in mind, is this a good time to back up the truck? I guess only you can answer that one!

Whew, I’m so tired now.. .yes, now, that I’ve been up for a couple of hours, sitting here having my fat fingers fly across the keyboard, oh, you should see them, they are as if “the Flash” were typing! HA!, but now that I’ve been up for a couple of hours, I’m tired, yawning, and having difficulty keeping my eyelids open. Have you ever tried typing with your eyes closed? It’s fun! Except you have to go back and correct all your errors! Well, Chuck, let’s move along, and get through this, and then go back to sleep before going to see the doc this morning! Sounds like a plan!

The U.S. Data Cupboard had the data prints we talked about yesterday; Retail Sales, Industrial Production, and Capital Utilization, and Retail Sales sure was a bummer. I told you that the BHI (Butler Household Index) indicated that the print would be OK. Not great, but not bad. Well, it was in between, not meeting expectations, and only growing 0.1% month on month. And I was incorrect with my thought that auto sales would drive Retail Sales higher (pun intended) . Auto Sales fell -0.5% for the month of November, which is a real shock to me, but it is what it is. My GDP Tracker has 4th QTR GDP at a less than 2% pace right now, 1.9% to be exact. But not to worry, the Fed hiked rates yesterday.

And Capacity Utilization (CAPU) fell -.3 points for November to sit right at 75%… CAPU is one of the few forward looking pieces of economic data. And while the Fed plots their dots for more rate hikes, CAPU tells us they shouldn’t be bothering. Add in the Capital Expenditures, the real deal of an expanding economy, and you’ve got a picture that doesn’t include any “dots”. I’m just saying.

To recap. The Fed turns hawkish! Just like that! Janet Yellen went from being balanced in her speech two weeks ago, to transforming into Paul Volcker, yesterday.. The Fed says that rates will rise 3 more times in 2017. (they told us they would raise 4 times in 2016, and we only saw 1 rate hike) So, Chuck questions all this and the “dots path”. But for now the dollar is king of the hill, and is kicking some tail and taking names later! It matters not that right now the future of rate hikes here in the U.S. not carved in stone, the markets think the Fed has credibility, and therefore the dollar is the beneficiary. for now, that is.

For What It’s Worth. I found this on Ed Steer’s letter this morning, and he took it from Bloomberg, and it’s an article about the changing of the LBMA in London where the Gold price fixing is about to get overhauled in the way it’s done. here’s the link to the article: https://www.bloomberg.com/news/articles/2016-12-13/titans-of-finance-facing-off-over-5-trillion-london-gold-market

Or Here’s your snippet.. “Some of the biggest names in finance are fighting for control of the London gold market — a $5 trillion, three-century-old trading hub that is being forced to adapt to a digital age.

As the London Bullion Market Association revamps over-the-counter trades that are the market’s major pricing benchmark, new ways of buying and selling precious metals are set to start next year from CME Group Inc., Intercontinental Exchange Inc. and the London Metal Exchange. Some big banks have stakes in the outcome, including Goldman Sachs Group Inc., HSBC Holdings Plc and JPMorgan Chase and Co.

Almost half the world’s known gold trading occurs in London. OTC transactions are sealed by virtual handshakes, leaving default risk with buyers and sellers rather than relying on clearinghouses, which use collateral to manage and offset risk. But since the financial crisis, all markets have been reevaluating how they do business and manage risk as regulators step up scrutiny. That’s particularly true for major price-setting exchanges, after it was discovered in 2012 that banks were manipulating a key benchmark for global interest rates.

A push for fewer risks and more disclosure has forced the LBMA to seek changes that would make it more transparent and secure for customers. The association, which counts HSBC and JPMorgan among its members, will introduce trade reporting for its members and a new trading platform in the first half of next year. That’s also when competitors plan to unveil new precious-metals derivatives built around the clearinghouse models.”

Chuck again. I personally think they are wasting their time and money. to me, the Shanghai Gold Exchange (SGE) is the real deal, and will one day rule the roost for the global Gold exchange. Let the boys and girls in London have their paper trades, I’ll prefer the SGE. And I wouldn’t be surprised to learn that large dealers and institutions and investors are buying Gold on the LBMA and taking it to the SGE to sell, since there is a price different between the two of about $45. per ounce, so when you’re talking about tonnes of Gold, that’s quite a profit, eh?

Currencies today 12/15/16. American Style: A$ .7395, kiwi .7082, C$ .7522, euro 1.05, sterling 1.2528, Swiss $.9763, . European Style: rand 14.0615, krone 8.5677, SEK 9.2877, forint 298.83, zloty 4.2327, koruna 25.73, RUB 61.88, yen 117.90, sing 1.4366, HKD 7.7591, INR 67.79, China 6.9285, peso 20.57, BRL 3.3715, Dollar Index 102.39, Oil $51.29, 10-year 2.60%, Silver $16.60, Platinum $922.16, Palladium $725.44, Gold $1,138.90, and SGE Gold. $1,182.56

That’s it for today. Today is my younger sister’s birthday.. Happy Birthday Terri! Terri, successfully beat back breast cancer a few years ago, and happy and healthy living in Houston, TX, with my other younger sister, Joanie. A few of you have asked me recently about my older sister, who was diagnosed with ALS last year. Barbara is hanging tough, as a Butler would, but that disease is so devastating. ? The moon isn’t a supermoon any longer, but it sure is big and bright this morning. Oh that’s right, it’s the middle of the night! Kathy comes home tonight, so I had better clean up all the dishes in the sink! (there aren’t that many, when you eat pizza every night! HA!) Well, this does it for me until after Christmas. I’m sure that I’ll be sending Chris, Frank and Mike some notes from time to time, while I’m on vacation, given that I’ll still be looking at the markets from time to time. And of course there’s always the Christmas Pfennig to look forward to.. .No rehashing the
previous year’s effort for this year, it’ll be all new! So, as I always say in the R&F , I’m a Merry Christmas kind of guy, and I say that in hopes that it doesn’t offend anyone. It wouldn’t offend me if someone said Happy Hanukah to me, I would just respond, “Thank you, I celebrate Christmas”. So, Merry Christmas to all you dear Pfennig Readers. I hope your celebration is blessed, and that you enjoy friends, family, loved ones, etc. for that’s what it’s all about, not gifts, but love for each other. May the light of faith, the warmth of heart, and the love of family be your gifts this year. Talk to you again after Christmas. and Be Good To Yourself!

Chuck Butler
Managing Director
EverBank Global Markets
Editor of A Pfennig For Your Thoughts
1-800-926-4922
https://www.everbank.com