What Are The Bond Guys Telling Us?

A Pfennig For Your Thoughts

June 5, 2018

* Currencies are unable to hold their gains…
* Lots of reasons for a Gold rally…

Good Day… And a Tom Terrific Tuesday to you! Well, did you like my song from Carousel yesterday? And all this time you thought I was just a rock-n-roller, eh? I was trying out for a lead part of that Musical back in High School, when a teacher’s strike interrupted the school year, and deep sixed that production… Oh well, I soon left to join my band that was based in Midwest City , Okla. We lived on the outskirts of town, down the road from Tinker Air Force Base… And Believe it or don’t, but Steely Dan greets me this morning with their song: My Old School… Kind of apropos, eh?

I was just sitting there thinking about stuff last night, when I thought to myself… What is the Fed going to do when the recession starts? Did you know that during the last 10 recessions the average Fed Funds Rate was over 9%… Our Fed Funds rate today is less than 2%, at 1.75%… So, when each of the recessions started in the past, the Fed had a quiver full of arrows in rate cuts to help bring the economy out of the recession… What will the Fed do when they reach for an arrow this time and find none? Uh-oh! Full disclosure here… I wrote that in last week’s Dow Theory Letters…

OK, enough of that!… The currencies, for the most part weren’t able to hang onto their gains from the previous night’s trading, but they remain within striking distance of those previous night’s levels. And Gold is still wallowing in the mud, looking for a strong bid. The price of Oil has really been for a ride on the slippery slope, and the 10-year Treasury’s yield remains below 3%…

Ok, let’s break these things down. First, the currency traders just don’t seem to be on the same page or singing from the same song sheet these days… One day it’s all about commodities, the next day, not so much… Then they switch to Trade Wars, and then back off from that trade… I’ve been around currencies since 1985 (the year Don Denkinger stole the World Series from the Cardinals, I’ll always remember that, and will always contend that he stole the World Series from us), but back to 1985, I’ve been writing a letter about currencies since 1992, and I don’t believe I’ve ever seen a time where traders flip-flopped their sentiment so easy and often.

So, we’re in uncharted waters folks… Which I would think would lead us eventually back to the underlying weak dollar trend… That’s my Pfennig’s worth on that thought!

Gold continues to fight for its ground every single day, and it makes no sense to me whatsoever! I mean look at the backdrop that should be supporting the price of Gold every day… We have upcoming headlines on steel tariffs, we have upcoming headlines on China trade negotiations, we have NAFTA, we have an uncertain political backdrop in Italy, we have a new government potentially in Spain, and we have bombs, bullets and fighting in several parts of the world… Afghanistan, Syria, Ukraine, and a few others, right? And still Gold is being held down, by short Gold paper trades…

Oh, and it’s not just geopolitical things that should be supporting Gold… The countries like Russia, China, India, Turkey, Iran, and others are upping the ante on the amount of Gold they purchase each month… I shrug my shoulders and walk away, I’m not wrong here, folks… but it sure seems that we’re fighting a battle against the short paper traders… I do believe we’ll eventually win that battle, but when is the question…

The price of Oil has really slid backwards in the past week. First it was the announcement of Russia and Saudi Arabia, that the OPEC members that are hurting will be allowed to increase production… Then the shale producers pile on, by pounding their collective chests, proclaiming that they will add to supply by the boatload…

And what is up with the yield of the 10-year Treasury? Two weeks ago, it appeared to be ready to set sail for higher yields after pushing past the psychological 3% level… But what have we here, now? The 10-year’s yield has fallen back below the 3% level. I was always taught to pay attention to what the bond guys were doing, for they always had their finger on the pulse of the economy… So, if that remains intact, then the bond guys are telling us that the Fed is all wet, and the economy is shaky…

But here we are… less than 10 days away from the next Fed meeting, where the odds are 91% that they hike rates again, this time brining their whopping Fed Funds rate to 2%… That’s right, all this hub bub about the Fed’s higher interest rates is a bunch of malarkey 2%! 2% is NOT a high interest rate, and we’ll all find that out when the economy finally slips into a recession… (see discussion above)

Man, you’re certainly not in a good mood this morning Chuck… Well, 4 hours of sleep will do that to you! I make no excuses though, for they never won a ballgame for anyone… And I’m better than that! Maybe it’s because there was no baseball (besides college playoff games) to watch last night! HA! At least I know I’m not a baseball “junkie”, for those college games just don’t hold my attention. I guess it’s the aluminum bats they use…

The U.S. Data Cupboard had one piece of economic data yesterday, and it was what I call “real economic data”. Factory Orders for April printed, and were negative… For newcomers to the Pfennig, Factory orders represent the dollar level of new orders for both durable and nondurable goods. This report gives more complete information than the advance durable goods report which is released one or two weeks earlier in the month. So, this “more complete information” was negative -0.8% for April… That’s not a good reading for the economy folks… But that won’t stop the Fed from its appointed rounds with a rate hike…

There are a couple of prints in the Data Cupboard today, but none of them amount to a hill of beans, so the dollar will have to deal with trader sentiment, which flip flops from day to day… UGH!

To recap… The currencies couldn’t hold their gains yesterday, but remain within shoutin’ distance of those levels this morning. Gold lost a whopping $1.60 yesterday, and Chuck lists the things that should be supporting the price of Gold, so you won’t want to miss that! And what are the bond guys telling us these days? All this and more in today’s Pfennig, man you would think you would have to pay big bucks for a letter like this! HA!

For What it’s Worth… Well, it didn’t take long for the retaliations to begin… And Mexico was the first to retaliate with an announcement, and the article can be found here: http://thehill.com/policy/finance/390045-mexico-counters-trump-tariffs-with-new-duties-on-us-products

Or, here’s your snippet: “The government of Mexico announced on Thursday it would implement new duties on various U.S. products in response to President Trump’s decision to levy steel and aluminum tariffs on the country.

“Mexico reiterates its position against protectionist measures that affect and distort international commerce in goods,” the government said in a statement.

“In response to the tariffs imposed by the United States, Mexico will impose equivalent measures to various products like flat steels (hot and cold foil, including coated and various tubes), lamps, legs and shoulders of pork, sausages and food preparations, apples, grapes, blueberries, various cheeses, among others, up to an amount comparable to the level of affectation.”

Chuck again… And the Mexicans had a little extra than just announcing tariffs in retaliation. The ministry also said it was opening a 350,000 tonne tariff-free quota for imports of pork legs and shoulders from other countries. Be creative, think outside of the box, and do something that gains people’s attention! That was me, in a nutshell, so I think it’s pretty cool when you see someone else do that!

Currencies today 6/5/18… American Style: A$ .7620, kiwi .7023, C$ .7705, euro 1.1685, sterling 1.3365, Swiss $1.0140, … European Style: rand 12.6550, krone 8.1240, SEK 8.7637, forint 272.56, zloty 3.6668, koruna 21.9450, RUB 62.03, yen 109.80, sing 1.3351, HKD 7.8465, INR 67.09, China 6.4088, peso 20.21, BRL 3.7518, Dollar Index 94.09, 10-year 2.92%, Silver $16.39, Platinum $893.97, Palladium $989.62, and Gold… $1,294.90

That’s it for today… I just read an article that our All-World catcher, Yadier Molina is set to return tonight, after missing a month with an injury. This is a Big Deal for Cardinals fans, and the Cardinals! Man someone turned the outside air conditioner up, it’s only 60 degrees outside this morning! It’ll warm up, but what a great way to start a day! Nice, but cool air… What on earth did I do to deserve this, I ask myself? Oh well, it’s a double dose of Steely Dan today, as they also take us to the finish line with their song: Rikki Don’t Lose That Number… And with that, it’s time to go… I hope you have a Tom Terrific Tuesday, and remember to Be Good To Yourself!

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

) The Daily Pfennig is no longer published by EverBank and it is now published by Aden Research Group.