Eurozone Inflation Bumps Higher

Good day… Well… Front and center this morning, I have to tell you that Eurozone inflation came in higher than expected (more in a minute), and that news has the euro (EUR) pounding the dollar into submission.

OK… Not my usual start, but I had to get that out, front and center this morning! So… A Wonderful Wednesday to you! It’s a Wonderful Wednesday for euro holders for sure! The single unit has reached an all-time high versus the dollar this morning. I’ve seen a bit of profit taking since I turned on the screens, but so far it has been muted at best.

So… Yesterday, we saw the currencies led by the Big Dog, euro, drift with a bias to sell them. I read an article in Forbes called “Demise of the euro”. Geez Louise, when will these guys give up? Sure the euro will weaken again some day… But not for reasons these guys keep dragging out of the trash bin and recycling! Spain and Italy aren’t going anywhere!

You see… For years now, pundits have written about how Spain and Italy don’t like the “one policy for all” that the European Central Bank (ECB) uses, and that would lead them to leave the euro… HOGWASH! They may not like the policy, but being a part of the euro, is BIG TIME for them, and they know it!

OK… So, back to the euro rally… Inflation in the Eurozone bumped even higher than the previous 3.5%, hitting the 3.6% level in March. This represents the fastest pace of inflation in 16 years. I don’t think the ECB is going to go forward with a rate cut in May, or anytime soon for that matter! Recall, that a couple of weeks ago, I pulled the May rate cut forecast because of this nagging inflation, and now it’s gone higher!

I don’t think it means the ECB will entertain a rate hike… But, it certainly means they will not entertain a rate cut either! And THAT, my friends, is what is driving the euro higher this morning. ECB rates will remain steady Eddie, while the U.S. rates are going lower, and lower… How low can you go? Recall, that I told you a couple of weeks ago, that I fully expect 75 BPS total of rate cuts from the Fed at the next two meetings… That would bring rates here in the United States to 1.50%. The Eurozone would have 250 BPS in their favor. I don’t have to tell you that 250 BPS represents a HUGE differential, and that favors the euro!

I find this interesting in that, I was all prepared to talk about the drifting euro this morning, and instead, I did a 180-degree turn!

So… The Big Dog, euro, isn’t the only currency with the rally hat on this morning. But it has the brightest light shining on it for sure! So… There!

Yesterday, the TIC data came in below the $80-85 billion needed each month to finance the deficit, once again. The total was a net of $64 billion, and the previous month was revised down $2 billion.

I find it strange that I keep hearing people say that “Deficits Don’t Matter”. What a bunch of dolts! The TIC Net Flows tell us that they sure do matter if you can’t finance them!

I read a report by David Walker, the former Comptroller of the United States, where he was explaining the depth of the fiscal budget alone. He estimated that balancing the Federal Budget by 2040 would require actions as large as: 1. Cutting Total Federal Spending by 60%, or 2. Raising taxes to 2X today’s level.

He also states, “Closing the current long-term fiscal gap based on reasonable assumptions would require real average annual economic growth in the double digit range every year for the next 75 years.

Keep in mind that: During the 1990’s, the economy grew at an average 3.2% per year. So… “As a result, we cannot simply grow our way out of this problem.”

Well… Now that’s something to help wake you up, eh? But deficits don’t matter; so don’t worry about what the former Comptroller of the U.S. says… HA! You won’t catch me taking that bait! David Walker is a very smart man, and has been the Lone Ranger in the Government when it comes to pointing out the problems with these deficits.

OK… Remember a few weeks ago when I tried to explain why the Fed’s stepping in to bail out Bear Stearns wasn’t a good thing in the long run? And that the Fed taking mortgage securities as collateral at the lending window also wasn’t a good thing? Well… I don’t know if this scares you like it scares me, but the Fed’s holding of Treasuries, as collateral, as fallen from 92% to 65%. Remember… These are the same mortgage securities that no one else would take as collateral! But the Fed did! YAHOO! NOT!

I don’t know where this all leads us… But it sure looks as though it will lead us to the same place it led brokerages to last summer.

And inflation in the United States? Well… We’ll see the stupid CPI report this morning… But as I’ve explained on many occasions in the past, CPI doesn’t reflect “true inflation” because of all the changes that have been made to the index over the past 20 years. And, to make matters worse, the media, and the Fed only look at the “core” rate, that excludes food and energy.

OK, I understand when the monthly numbers are pushed around by volatile food and energy, but when these two push higher and higher every single month, shouldn’t someone take notice of them? Of course they should! And right now, food and energy are what’s eating away at our wallets… Escalating food and energy costs attract global concern, and should be a source of price support for gold. Let’s hope it plays out that way, and not just leave us with escalating food and energy costs!

And, yesterday, I talked about the bump in retail sales… And then I read a report by Dr. Irwin Keller of MarketWatch, that helped explain the real rot in the numbers. Here’s a snippet…

“Don’t be fooled by the slight rise in retail sales last month. The 0.2% increase in March compared with February was in dollar terms – unadjusted for inflation. And, as any consumer will tell you, prices of consumer goods have been soaring of late.

“Once you take out the effects of inflation, shoppers bought less last month than they did the month before. For the first quarter, consumer spending on goods took a header – pulling a big chunk of the economy down with it.”

He went onto say… “Anyone who thinks that the U.S. economy will stop sliding and start climbing as early as the second half of this year is ignoring the 70 percent of the economy that is in deep trouble – the hapless consumer.”

Enough of that scary stuff! Let’s talk about one of my fave currencies, the Norwegian krone (NOK)… The currency of the world’s fifth largest oil supplier has moved below the 5 figure, and is currently trading at around 4.95. With oil hitting $114 yesterday, I’m actually a little disappointed in the krone’s inability to take advantage of oil’s push higher… But not THAT disappointed!

Have I ever told you… No wait, I’ve probably told you 100 times… Norway’s pension plan fully covers every citizen, and they have even started funding plans for “future citizens”… In other words, the unborn! Talk about a stable country!

I just had to end this on an upbeat note… The scary stuff was really getting to me this morning… And I was writing it! I can’t imagine how it sounds to someone reading it while sipping on their coffee, or chewing their frosted Shredded Wheat!

Currencies today 4/16/08: A$ .9330, kiwi .7885, C$ .9925, euro 1.5945, sterling 1.9750, Swiss 1.0040, ISK 74, rand 7.9880, krone 4.9550, SEK 5.8950, forint 159.45, zloty 2.1475, koruna 15.60, yen 101.10, baht 31.45, sing 1.3525, HKD 7.7930, INR 39.96, China 6.9918, pesos 10.46, BRL 1.6785, dollar index 71.35, Oil $114.46, Silver $18.07, and Gold… $937.50

That’s it for today… I left my apple in the car this morning… UGH! Good thing I have some strawberries to eat in place of the apple! I’ve become such a nut when it comes to eating a piece of fruit each day. I doubt it reverses all the “bad” stuff I did for 52 years, but maybe going forward… A long day yesterday… I fully expect another one today too. It’s crazy here on the Trading Desk these days… I don’t know that I ever imagined fully how big this Trading Desk could become. When we brought the deposits home to EverBank in June of 2000, the Trading Desk was ME! And Operations was Cheryl Lee! WOW!

So… To borrow a line… We’ve come a long way, baby! I hope your Wednesday is Wonderful. The sun is coming out, and we’re supposed to actually see 70 degrees today! YAHOO!

Chuck Butler
April 16, 2008