China Reserves Continue To Drop

And now… today’s Pfennig for your thoughts…

Good day, and a marvelous Monday to you.

We’ll have a lot of dominating this week, from the old Humphrey-Hawkins (no longer called that, because the bill requiring the Fed Chairman to testify before the House and Senate, expired years ago), a Fed Chair, Janet Yellen will make two trips to the “hill”, and deliver her testimony on the economy. The markets will have their ear to the ground to listen for any clues as to whether Yellen still sees March as the correct timing for the next rate hike.

I told you last week, that the Bond markets had said nyet, to another rate hike, and bond yields dropped significantly, and that the Currency Traders finally were playing catchup with the bond markets. Stocks haven’t gotten the memo just yet.  And get this, I read this weekend that a rate hike for March is only 10% price in. I wouldn’t call that conviction, would you?

So, what we have here is simply the markets looking for confirmation of their trading positions. So, there is a lot of risk as we head into the first testimony on Wednesday and then she rinse, lather and repeat that talk again on Thursday. And she’ll have ALL of the markets’ attention, as the data cupboard is light this week and we have to wait until Friday to see January’s Retail Sales. And the European data cupboard is also pretty barren, as we only have the first look at fourth QTR GDP for the Eurozone as a whole, and a Riksbank (Sweden) meeting on Thursday.

And with everyone waiting with anticipation, Carly Simon style, until Wednesday brings about round one of the Yellen testimony, we have markets that are just drifting along, kind of moving sideways with no major moves being made. So, with that said, I think I’ll do a Readers Digest version of Rip Van Winkle, and to back to sleep until Wednesday morning. I’ll talk to you then, have fun, and be careful out there!

OK, well, you know me better than that I guess, because you kept reading on. And I’m still here! I guess I could go out on a limb and talk about what I think Janet Yellen will say. But that would be suicide!  I once had four sisters, I learned early in life that you don’t attempt to figure out what they are going to say! Not that there’s anything wrong with that, I’m just saying.

There was some news from the weekend, so let’s go to that first. Well, the big news over the weekend from China was their release of their Monthly Reserves number, which in recent months has fallen from $4.6 trillion before China’s slowdown to January’s figure of $3.230 trillion. For January along a drop of $99.1 billion was the damage.

This $99.1 billion drop was less than what was forecast ($120 billion), but the damage to their Treasure Chest of reserves has been made. I read a report last week, that said that China could see their reserves drop to no lower than $2.8 trillion, as that was the amount they needed to have on hand to facilitate their economy. Now I don’t know if that’s true or not, but it seems reasonable.

The markets feel somewhat good about that lower than expected number from China, and the Aussie dollar is the best performer overnight. The rest of the currencies are for the most part up slightly vs. the dollar this morning. Not much conviction from Currency Traders as we start the week. But with the wild card of not one but two Janet Yellen speeches this week I guess I don’t blame the Currency Traders for not going out on a limb right now. But for those of you keeping score at home, the currency roundup will reflect these small changes.

China is celebrating their Lunar New Year holiday, this week. That’s right I said “this week” and in fact the celebration goes through next Monday! WOW! And we get all lathered up here in the US. Over a three-day holiday weekend! Anyway, the Chinese renminbi will remain at 6.5314, all week. How’s that for Steady Eddie! HA!

Russia reported late last week that their inflation rate had fallen, which means a couple of things. the Russian economy is suffering, and that the high interest rates in Russian have done their job in slowing inflation. Which brings me back to the U.S. Fed. The Fed claims that they want to see inflation rise in the U.S., but at the same time they are hiking interest rates. Isn’t hiking rates counter-acting the goal of the Fed? Oh well, of course the Fed knows what they are doing. Who am I to question their moves?

Well, everyone in the U.S. can breathe a sigh of relief now, because Goldman Sachs says that the chances of a U.S. recession are still very light.  Really? Is Goldman drinking the Kool-Aid now? I contend that apples to apples, oranges to oranges, that the U.S. is already in a recession. Fourth QTR GDP is going to be sub 0.5%, and if the government hadn’t added R&D to the GDP calc last year, we would be looking at a negative number around -2.5%… Apples to Apples folks. That’s what needs to be done, and quit adding stuff to make things look better.

I told you above that Sweden’s Riksbank will meet this Thursday, but what I didn’t tell you, I’m going to tell you now. Now Chuck? Oh, that’s big of you! HA! The forecasts for another rate cut by the Riksbank are 50/50.  So, I’ll say that the Riksbank will say that they aren’t happy with the krona strength, and they’ll go deeper into negative rates by 10 Basis Points (BPS). Now to you and me, the krona hasn’t really been “strong”. The chart of the krona’s performance for the last year, looks like the mouth of a saw-toothed pumpkin! But to the Riksbank, they would like to see the krona weaken much more than it has. and the Riksbank’s concern is that the krona gets out of whack with the euro.

But the Riksbank is breathing a bit easier in recent days, due to euro strength. Speaking of euro strength, there is none this morning. When I turned on the currency screen this morning, the euro was up vs. the dollar, but not by much, and now has stumbled, bumbled and fumbled that positive figure into a negative figure. Eurozone fourth QTR GDP will print on Friday this week, and I don’t expect the report to show much difference from the third QTR 0.3% print.

European Central Bank (ECB) president, Mario Draghi, won’t like GDP remaining steady, and so you can expect some statements from him on Friday that he still has tools he hasn’t used yet to stimulate the economy, and Draghi, being Draghi will get more mileage out of this comments than any Central Banker ever could get out their own respective comments, and he’ll probably move the euro weaker on Friday. But that’s Friday, four trading days until then. Anything and everything can happen in those four days, so stay with us.

The Russian ruble, which has seen one day down, the next day up, is up today. I told you above that Russia’s inflation fell according to a recent report. I think that this inflation report is going to cause a lot of anguish at the Central Bank of Russia (CBR), given that they know if they lower interest rates, it could damage the ruble, which has been on tenterhooks for the last couple of months, but they would like to remove some of the protection of higher interest rates for the ruble, and having inflation fall represents an excellent opportunity for the CBR to cut rates. But will they?

The price of oil remains above $30, but I have to say that last week when the price of oil rose to $33, the feeling for the future of the oil price was much more upbeat than it is with the price at $30. Now that the price of oil has hovered around $30 for the last three trading sessions, the petrol currencies aren’t getting any bang for their buck. So, the price of oil needs to make a move in either direction.

Gold is up barely by $2, and has been negative this morning. So, let’s just call it flat today. But Friday, gold rose $18, after the Jobs Jamboree disappointed. That was quite a move by gold on Friday, after spending the overnight session and early morning session searching for a bid. I’ll repeat what I said last week, folks. the trend is your friend… wink, wink.

The U.S. Data Cupboard is basically empty today, but Friday, we had the Jobs Jamboree, along with other data prints. Now aren’t you proud of me, I went throughout the majority of this letter without taking any shots at the Jobs Jamboree! Well, January added 151,000 jobs per the BLS, which was far below the ADP jobs report that showed 205,000 jobs added in January. I got a kick out of some TV news people trying to explain how the jobs number was disappointing, but the Unemployment Rate had fallen to 4.9%… They tried, bless their hearts.  But this disappointing jobs total for January sent the rate hike campers home, and sent gold higher, and the currencies were able to hold to their earlier gains on the day.

The things I’m more concerned with the Avg. Hourly Earnings rose by 0.5% month on month and 2.5% year on year. It’s a good figure, but that’s all nothing to get all lathered up about, and certainly not going to push the wage inflation envelope. The Avg. Weekly Hours worked rose from 34.5 to 34.6, so nothing here to look at, and the Labor Force Participation Rate held at 62.7%… bang on expectations.

There were two other data prints on Friday that were pretty interesting. December Consumer Credit (read debt) rose from $14 billion in November to $21.267 billion in December. I had mentioned Friday that it would be interesting to see how much debt was taken on in December, and well, the answer is a lot!

We also had the Trade Deficit for December and the number was quite significant folks. The Trade Deficit widened in December to $43.36 billion but that wasn’t the real news here. Exports fell 0.3% in December putting the 2015 decline in exports at -4.8%, which put exports in the negative for the year for the first time since 2009.  And why are exports so bad?  Well, the rest of the world is suffering from slower economies, and the dollar is too strong. The Fundamentals don’t back up the stronger dollar, and it’s really becoming a major problem for exports, and companies doing business overseas.

Well, thank goodness for Ed Steer! I pulled this from his Saturday letter, and he pulled it from the U.K. Telegraph, and can be found at this link, or here is the snippet:

The global oil industry is caught in a self-feeding downward spiral as falling prices cause producers to boost output even further in a scramble to service $3 trillion of dollar debt, the world’s top watchdog has warned.

The Bank for International Settlements fears that a perverse dynamic is at work where energy companies in Brazil, Russia, China and parts of the US shale belt are increasing production in defiance of normal market logic, leading to a bad “feedback-loop” that is sucking the whole sector into a destructive vortex.

‘Lower prices have not removed excess capacity from the market, but instead may have exacerbated it. Production has been ramped up, rather than curtailed,’ said Jaime Caruana, the general manager of the Swiss-based club for central bankers.

The findings raise serious questions about the strategy of Saudi Arabia and the core Opec states as they flood the global crude market to knock out rivals in a cut-throat battle for export share. The process of attrition may take far longer and do more damage than originally supposed.

Chuck again. Very interesting commentary I believe. And something that I just finished reading about in Grant Williams’ letter. All this production, is going to drown out the oil producers if they don’t do something about it fast!

That’s it for today. Now, go out and make this a marvelous Monday!

Regards,

Chuck Butler
for The Daily Pfennig

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