The Aussie inflation report that printed last night certainly is going to give my thought of no rate cut a lot of problems. Aussie first-quarter CPI rose just 0.3% from the previous quarter.
The forecasts ranged from 0.5-0.6%, so the lower inflation is going to be the straw that stirs the drink for the Reserve Bank of Australia (RBA), who had hung their rate cut hat on this report. Now that it has printed and was very weak, I don’t see how the RBA doesn’t cut rates. So much for me leaving a light on for no cut, eh?
And the “pricing in of the rate cut” began immediately after the inflation report printed, which means the Aussie dollar (AUD) got sold. Now, the thought in the markets is that since the inflation report was so weak, the RBA would go for an even deeper rate cut in May. Now, the markets may be getting a little ahead of themselves with that thought — have they already forgotten that the most-recent jobs report showed that 44,000 jobs were created in March, which was nearly seven times the forecast for the increase of jobs?
Oh, well, onto other things. The currencies, other than the A$, range traded overnight. The euro (EUR) has gained a tiny bit this morning after it was announced that the Dutch had a successful bond auction.
There are additional things going on in the Netherlands, as the current cabinet handed in their resignations and the current prime minister, Mark Rutte, has offered to resign, too, if his proposed budget that meets European Union guidelines (which means lots of austerity measures) isn’t approved.
So the euro’s gains are muted by the questions in the Netherlands. And don’t forget that the pain in Spain continues.
The British pound sterling (GBP) was once again on the rally tracks overnight, but just when investors begin to look seriously at the pound once again, a report that illustrates what I’ve warned about printed that U.K. debt has gone past 1 trillion pound sterling — which, in dollars, is, $1.6 trillion.
Sure, that sounds like chicken feed compared with our $15.7 trillion debt. But it’s still significant. The problems as I see them in the U.K. include the fact that interest on debt is growing at a huge clip — just last year, 10.1%-plus — the economy continues to drag and tax receipts are missing the mark — growing at 3.9% last year, rather than 4.8%, which is what was needed or planned for in the budget.
Do those problems sound familiar? Yes, they sound very familiar, for they, too, are the some of the problems we face here in the U.S. Tax receipts that don’t cover the government spending… an economy that drags and increased cost on debt.
The pound sterling may be on the rally tracks, but I fear that it’s about to get derailed. But maybe not. Maybe people who assess value on assets don’t care about this stuff any longer.
Speaking of not caring about this stuff any longer — no, I’m not talking about me! What I’m talking about is what I’ve been begging for since 2008, and that’s a return to fundamentals. We’ve had to deal with this risk-on/risk-off trading since the collapse of Lehman Bros.
In the risk-on/risk-off trading, all the so-called “risk assets” of stocks, currencies and commodities all get thrown together, and either get bought on a “risk-on day” or sold on a “risk-off day.”
Prior to 2007-08, this was never the case — stocks, currencies and commodities all had different pricing mechanisms, and a low correlation to each other. So is there a new model for investment allocation? There might be, in my opinion, though it will be short-lived, in the overall scheme of things. That’s right — four years from now is a small time period in the overall picture.
I guess the next question would be: What will trigger this change back to “the way things were”? And that, I don’t really know. But if you really nailed me down on this, I would say that when the questions about the ability of sovereign governments to function are put to bed, then we could see a return to the fundamentals.
And then the question would be: When will that happen? Oh, goodness me, maybe it never does? With all the debt in the world, one has to wonder if we as a world ever get out of this mess? It’s a complete systemic failure of the principles that I learned from my economics mentors. You see, in the risk-on/risk-off trading scheme, it’s all about safe havens, and not fundamentals.
Do you see what all this debt is doing to the principles of investing? But I remain steadfast in my belief that the fundamentals will return, and we will get past this risk-on/risk-off bull dookie.
Wow! I really went down a road I was not prepared to go down, but see how quick I am on my feet? HA! Oh, and today looks like a risk-on day, so we have that going for us!
OK, this Friday (our Thursday night), the Bank of Japan (BOJ) will meet, and there are all kinds of rumors being whispered about what the BOJ might do. All of these rumors, though, come back to the thought that the BOJ will ease this week.
OK, I hear you saying, “But Chuck, they nothing left to ease.” Ahhh, grasshopper, that’s right, but just like here in the U.S., having nothing to ease doesn’t present a roadblock! The BOJ will probably announce that they are going to expand asset purchases, let’s say up to 10 trillion yen (JPY).
But hasn’t the BOJ been down this road before? Oh, yes — for about two decades now! They are the godfather of quantitative easing (QE), and they will show us once again that implementing QE doesn’t achieve economic growth one iota. I think the markets have all see this game played by the BOJ so many times now that they automatically begin to sell yen. Which would also be a goal of the BOJ’s, so to them, another round of QE does half the job.
Remember when St. Louis Fed head James Bullard was asked whether the two rounds of QE had achieved the Fed’s goals, and he answered with a resounding, “yes, it had,” and then listed — among other things — the “fact that the dollar had weakened” as one of the goals of the Fed?
Central bankers know that when they want a weaker currency going forward, all they have to do is implement a round of QE.
Of course, the Fed heads don’t call it QE any longer. Instead, they do their bond buying in the smoky, dark backroom… Or at least that’s my version of what’s going on… just being Chuck.
OK, onto China. A week after their announcement that they would widen the trading band for the renminbi/yuan (CNY), I sit here and watch the currency be stuck in the mud. The forward points in renminbi have really widened out on the curve.
For all you new to class, the forward points for most currencies represent the difference in interest rates between the two countries’ currencies and the length of the forward, so how far out in time does the trade go. But with currencies that are called NDFs (nondeliverable forwards), the speculators get to instill their will in the forward points. So when the points in Chinese renminbi are positive, that adds to the price, making it cheaper to buy in dollars in the forward market, and vice versa.
What the markets are telling me right now is that they don’t believe the renminbi will reach convertibility in the next two years. But that doesn’t mean the Chinese will drop their slow appreciation of the renminbi — that’s bound to continue, although nothing is a given.
The dollar has at least two more years and probably more before the renminbi is ready. And every time I talk about the Chinese wanting to remove the dollar standard, I get a few emails telling me that China will never have the reserve currency of the world because they are a communist country. I say that will be overcome, the Chinese are more capitalists than we think they are and that will continue. Mark my words, I truly believe this.
Canada will report their latest retail sales today. The only reason I mention this is all the talk I had last week about Canada, and how the Bank of Canada (BOC) governor, Mark Carney, had made a point of saying that an interest rate hike could come sooner than later. If Canadian retail sales are stronger than expected (0.1%-plus), that could be a feather in the rate hike’s cap!
The Canadian dollar/loonie (CAD) has really been Steady Eddie in recent weeks, bound by a very tight trading range. My charts friend tells me that the loonie is ready to break out, but the break out could go either way. That plays well with what I’m about to say: The markets will hang around this range trade for a while, but if they don’t see concrete evidence that rates are going higher, they will back away from the loonie. But if they do see concrete evidence, the loonie could shoot higher from here.
Here in the U.S. today, the data cupboard will produce the February S&P Case-Shiller Home Price Index, which I would think would continue to show rot on the home price vine. We’ll also see consumer confidence and new-home sales data. A busy day at the data cupboard. And if recent data play through, the weaker data will be dollar negative today.
And moving south from here, I once again shake my head in disgust at the way the Brazilian government and central bank have gone about decimating the real’s (BRL) value. The real has lost 8.7% in the past two months, as the government tripled a tax on foreign loans and the central bank slashed interest rates 350 basis points (3.5%) since last August, and continued to sell real and buy dollars.
You know, it occurred to me the other day — when I was thinking about this assault on the real by the Brazilian government and central bank — that they are probably hurting most large businesses in Brazil, because most large businesses carry a large portion of their debt in dollars. It reminds me of the old saying about not cutting off your nose to spite your face.
Then there was this from Forbes.com this morning:
“The news in the Social Security trustees’ annual report released Monday wasn’t good — the trustees now project that the old age and disability trust funds combined will be unable to pay full benefits in 2033, three years sooner than projected in last year’s report. That’s in 21 years, the shortest period to trust fund ‘exhaustion’ since before the last fix to Social Security’s finances in 1983. The grimmer outlook is due largely to changes in the trustees’ economic assumptions — for example, they’re now projecting lower wage growth and higher unemployment — as well as a higher-than-predicted 3.6% cost-of-living increase for beneficiaries in 2012.”
My take on all this is that as I’ve talked about this for years now. The government needs to make some tough decisions about these plans, including Medicare. But the longer they wait to do something, the deeper the cuts will have to be, and will affect the young people the most. And here I go again with the pointing out how our kids and grandkids are going to have to deal with this stuff, we have successfully kicked the can down the road, they won’t have that choice.
To recap… The Aussie inflation data printed very weak, thus suggesting to the markets that a rate cut will take place at the RBA’s meeting in May, and that deep-sixed the A$ overnight. In Europe, the Dutch successfully auctioned bonds, and the euro was able to gain a bit on the news. Japan is set for more QE because it has worked so well in the past — NOT! And Chuck talks about risk on/risk off.
Chuck Butlerfor The Daily Reckoning
Chuck Butler is President of EverBank
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