Everybody is Talking Rate Hike

Good day. Some additional dollar bias carried us through the day yesterday, with no real movement to speak of. The Japanese yen continues to feel the heat of the nuclear bomb detonation by N. Korea, and the euro is receiving all kinds of verbal support, but nothing carrying through on the trading side. Japan’s Vice Finance Minister, Watanabe, has seen enough yen selling and basically said, that’s enough!

The dollar has not looked back since we heard about the Bureau of Labor Statistics’ revision to jobs that will show up next spring to the tune of 810K jobs. I’m still of the belief that this number will be revised down, sometime after the elections. Of course that’s just conspiracy stuff on my part, no real evidence…

The verbal support I’m talking about consists of ECB ministers, including ECB President Trichet, all hitting the streets, and singing from the same song sheet about the strength of the Eurozone economy, the threat to price stability, and removing accommodating interest rates. In normal times, this would be the kind of stuff that really lit a fire under the euro…but these are not normal times. I listed all the things that should have the dollar on the run yesterday, but the markets have shrugged them off…for now…

Yesterday Trichet told reporters that there are threats to price stability and that interest rates were still too accommodating. He went on to say that the ECB would remove that accommodation. For those of you new to class, that’s central bank parlance for “interest rates are going higher.” You see, the ECB now has a bone to pick with domestic credit expansion or money supply growth. Long ago, I explained to you that the ECB had taken on some (most) of the Bundesbank’s (Germany’s central bank) old policies on how to provide price stability. This includes the monitoring of both money supply and inflation when making interest rate decisions.

Inflation may have backed off from a combination of preemptive rate hikes by the ECB, and the fall of the high oil price, but…money supply, which turns into domestic credit is still expanding, which is why Trichet said that interest rates were still accommodating! I’m still expecting another rate hike from the ECB, most likely in December…that would bring their overnight repo rate to 3.5%.

The Bank of England’s Gov. King, has been as quiet as a church mouse recently – until he saw the weakening pound sterling, and all this nonsense going on in the currency markets right now. Mr. King, decided to throw the currency markets a bone, and tell them that he’s “open to another rate hike.” Of course he’s “open to another rate hike” rates are still too accommodating in the U.K. too!

Speaking of rate hikes…there’s a line drawn in the sand down in New Zealand. On one side are those who don’t believe we’ll see another rate hike in this currency cycle by the Reserve Bank of New Zealand (RBNZ), and on the other side are those that includes me, that believe things are not as cut and dried as that, and there’s probably one more rate hike in the RBNZ.

The RBNZ is now facing an unenviable position, where inflation risks are simply becoming too paramount to ignore.  The slow-down to date is simply not dissipating inflation. Another late cycle rate hike is needed, much like an insurance policy. The RBNZ continues to bang the drum as a warning, but has been ignored. I think they take the next rate meeting as an opportunity to put an end to being ignored!

New Zealand’s kissin’ cousin across the Tasman, Australia saw its first Reserve Bank of Australia (RBA) meeting under the new Gov. Stevens, and he hit the ground running as far as I’m concerned. Let’s listen in on some of his speech: Stevens said the central bank must be more alert on inflation with the economy near full employment and he described the international environment as one of “strong growth.” His comments were hawkish, and suggests to me that the Reserve Bank is on course to deliver a rate hike at the next rate meeting which is scheduled for November 7th.

Oh…and consumer confidence jumped last month in Australia 3.9%, and has now recouped all of the 16% fall in confidence seen after the RBA’s last rate hike in August.

Back to the U.S. for a minute… Hey! Did you see this story yesterday? D.R. Horton Inc. said Tuesday fourth-quarter net sales orders for new homes dropped 25% from a year earlier on sluggish demand for housing. Hmmm…that just doesn’t sound good, but then U.S. consumers are CONFIDENT! So, to them, this is nothing…no big deal…no reason to not spend money instead of saving it. Yes, the stars are in alignment and the karma is flowing, man…consumers are CONFIDENT!

Today in the United States we’ll see the minutes of the last FOMC meeting. No biggie, unless the Fed Heads said something else in their meeting besides, “By Joe, you’ve sunk my battleship!” Look for some tough Fed-speak today, as Richmond Fed President, Lacker, will probably remind everyone that he is the “Head Hawk” among Fed Heads, and that he was the lone ranger voting for a rate hike at the last meeting. This should stir up the dollar bulls.

The South African Central Bank is meeting for two days (I just shake my head when I hear about these two day meetings), to discuss rates. There was an article in a South African financial newspaper last week calling for the Central Bank to raise rates 200 BPS! Now, that would be something to see! The markets are expecting the Central Bank to add 75 BPS, which would be a helpful to the rand, which has really fallen on hard times with the price of gold backing off, and living with the previous (non-warranted) rate cuts made by the central bank…

I’m really surprised by the lack of interest in the Swiss franc after the N. Korea bomb detonation earlier this week. Are we becoming comfortably numb to these things? Well, I’m not. As I said on Monday…N. Korea detonating a nuclear bomb scares the bejeebers out of me!

Currencies today: A$ .7460, kiwi .6610, C$ .8815, euro 1.2550, sterling 1.8580, Swiss .7875, ISK 68.56, rand 7.7725, krone 6.7075, SEK 7.3875, forint 213.60, zloty 3.1125, koruna 22.49, yen 119.35, baht 37.49, sing 1.5860, HKD 7.7925, INR 45.67, China 7.9149, pesos 11.05, dollar index 86.91, Silver 11.14, and Gold… $572.43

That’s it for today. Cardinals and Mets in the National League Championship Series (NLCS), and it all starts tonight! For the first time in three years, we’re the underdog going into the NLCS, so maybe this will work better for the Cardinals! All out of things to say today, so…have a great Wednesday!

Chuck Butler
October 11, 2006