Brazil Hikes Rates Again

What a rally in the risk assets yesterday! And for once, when the rally fizzled out yesterday afternoon, profits weren’t taken in the overnight markets… Instead we saw a consolidation, if you will, of the price gains on Thursday in the overnight markets. That’s nice to see, eh? For it had been the pattern of recent times to just sell off any gains, and end up back on square one, or even lower than the starting level. So, like I said, this was very nice to see… I checked the levels last night before I went to bed, and noticed that there had not been any sell off, and thought, what a great Friday it would be tomorrow, if these can hold throughout the night… And they did!

So… Yesterday morning, I told you about the Chinese exports data and how a huge sigh of relief came over the global growth campers… The Chinese had also thrown the euro a bone by making a statement about how they viewed Europe weathering the storm there. Australia had great employment data, and New Zealand raised rates… These things all ganged up on the Risk Aversion crowd, and a rally was on!

But it didn’t just stop there! And this one caught me by surprise, so my bad… The Brazilian Central Bank raised rates for the second consecutive meeting, and once again they didn’t dawdle around with 25 BPS hikes… They went for the full Monty… 75 BPS or 3/4%… The Central Bank issued a one sentence statement that acknowledged the 75 BPS hike was to keep inflation moving toward their target… To me, that just leaves the door open for more rate hikes, although, at some point, the 75 BPS variety will have to be lowered…

But… The real loved the move! Well, better put I think would be to say, buyers of the real loved the move! The real booked a very nice gain yesterday, another wild swing, but this time it was positive! So, it’s all good!

So… Here we go! (to borrow the phrase from Bud Light) We’ve got Australia, Brazil, Canada, New Zealand, and Norway, that are on the roster of countries that have raised interest rates from historical lows… These countries have done the “right thing” in keeping their eyes focused on their own fundamentals, and not those of the world… Good Show!

The currencies had a nice rally VS the dollar yesterday, but Gold saw the other side of that trade… This has really been strange lately, as Gold trades alongside the dollar… That certainly won’t last long… Gold is the alternative dollar… So trading alongside is strange… Very strange…

The U.S. trade deficit widened slightly in April to $40.29 billion as the value of crude imports hit the highest level in a year and a half. Exports declined from the previous month.

To that I would like to point out the dollar’s strength for the past 6 months… I warned that dollar strength would go right back to a rising Trade Deficit, and there you go! Exports declined… Those in the U.S. administration that know all too well that a very weak dollar is needed to pay our debts, are squirming right now, with this dollar strength… Actually, I would love to watch them squirm right out of office, along with 90% of the lawmakers, but I don’t think I can justify those personal wishes VS the need for us to get the dollar weaker again!

And one further point here… I heard a couple of TV guys saying “don’t blame the dollar”… Saying it takes months for trade costs to filter through… Hmmm… Let’s look at the facts here… The dollar began to gain back ground VS the euro and other currencies back in December… What was December’s Trade Deficit? $35 Billion… So, in 6 months it has gone to $40 Billion… You make your own decision on this one, but it seems clear to me… How clear? Crystal!

Well…  I’m just going to follow up on the Big Ben testimony again this morning, and mention that all this talk about the U.S. recovery, and that deficits don’t matter, etc., has me thinking… And one day it will come across traders, hedge fund managers, and investors too, that… The U.S. can go about all this deficit spending right now because of the “flight to safety”… But while we go about gorging ourselves at the deficit spending trough, Europe is taking steps toward getting their deficits back in the atmosphere… And one day, when no one is looking… The U.S. debt to GDP will be 100%, and once there it won’t take long for it to go to 150% of GDP… And Europe? Well, they had to deal with insurrections when they cut their spending, but now… It didn’t kill them… And I always say… What doesn’t kill you, makes you stronger!

The U.S. data cupboard gets reopened this morning, with Retail Sales for May… I told you earlier in the week that the Butler Household Index (BHI) indicated that this report would be disappointing… That and the fact that gas prices were down in May! Later in the morning, we’ll see the color of the U. of Michigan Consumer Confidence report for the first two weeks of June. Look for the survey to show Consumers being “more confident”, for some unknown reason! Uninformed, would be the answer, I guess…

Yesterday, besides the Trade Deficit, we also printed the Monthly Budget Statement, which was $135.93 Billion for May… So, far this year, the total is $548 Billion, so more than $100 Billion per month… Don’t worry, we’ll get to $1.6 Trillion without a sweat! The spending is just getting going again!

Let me just say this and hopefully it hits a nerve with someone… The Trade Deficit, and the Budget Deficit are the monsters under out beds… When is our Gov’t going to do something about these monsters?

The Weekly Initial Jobless Claims, were expected to fall last week, but instead were greater than expected… This is the 800 lb gorilla in the room folks… As long as people are still losing their jobs by 450,000+ each month, our economy is going nowhere!

Well… Did you see / hear U.S. Treasury Sec. Geithner ripping the Chinese yesterday? YIKES! Ahem… Timmy… You do know that the Chinese make it possible for you to deficit spend, right? I don’t think calling them names, and ticking them off is the way to go about things, do you? This is just another example of biting the hand that feeds you… And he just doesn’t get it!

Point the blame finger! That’s what this administration likes to do! Yes, let’s point the blame finger at China, and say it’s all their fault! Now… He admitted that he was considering trade restrictions on Chinese products… Geez-o-Lou!

OK… I have to stop there, before I say something that gets me hot water!

The Canadian dollar / loonie is back to 97-cents this morning… Quietly and stealth-like, the loonie gains ground VS the green/ peachback… Oh! Canada posted a Trade Surplus yesterday, albeit lower than forecast, but still… A SURPLUS! What a novel idea, eh?

So… Around 9:30 CT today, the world’s focus will shift from European sovereign debt, the economic growth in Asia, and the deficit spending here in the U.S. to… The World Cup! The World Cup begins today, as the host country South Africa plays the first game, as tradition would have it. The BIG KAHUNA for us here in the U.S. will be tomorrow mid-day, as the U.S. plays England… Our Ty Keough’s dad, the great Harry Keough, played for the U.S. in that famous game of 1950, when the U.S. beat England… Wouldn’t it be great to see a repeat of that upset of 60 years ago?

Then there was this… As reported this morning by the Washington Post… New estimate suggests that, if the flow has been more or less consistent since the April 20 blowout, approximately 53.6 million to 64.3 million gallons of oil have emerged from the well. That is roughly five to six times the amount spilled in Alaskan waters in 1989 by the Exxon Valdez.

The new figures, obtained Thursday by The Washington Post and soon to be officially announced by the U.S. Geological Survey, indicate that early estimates of the flow rate by the federal government and oil giant BP were not even close to the mark.

To recap… The rally in risk assets held steady through the overnight sessions, with Gold the only risk asset selling off. Brazil hiked rates 75 BPS for the second consecutive meeting. The Trade Deficit and Budget Deficit are monsters under our bed folks… And the data cupboard gets reopened this morning…

Chuck Butler
for The Daily Reckoning