Fed to Announce Rate Decision - Will Janet Play Ball?

And now… today’s Pfennig for your thoughts…

Good day, and a wonderful Wednesday to you!

Well, THE March day that everyone has been pointing to is here. Yes, today is the day we’ll hear Fed Chair, Janet Yellen tell us that the Fed will not hike rates today, and then she’ll spend an inordinate amount of time telling us why the Fed will still be looking to hike rates in 2016. 

So, will Janet Yellen play ball with Mario Draghi? Or will she play ball with BOJ Gov. Kuroda? That’s what today is all about folks for these two Central Bankers. They’ve shot monetary policy stimulus out of a bazooka at their respective economies and now need the Fed to play along with a U.S. rate hike.

Why, you might ask? Both Draghi and Kuroda feel that they need weaker currencies to stimulate growth, and they think that IF the Fed would hike rates today, it would be the icing on their respective cakes. Because after throwing the kitchen sink at their economies, their respective currencies both rallied. I find this to be amusing, sort of, given that these Central Bankers are now reaching – grabbing for straws – and I’m afraid they are going to come out of today empty handed. What will they feel they need to do then?

Logic says that a no rate hike today by the Fed, would weaken the dollar and thus strengthen the currencies. The markets have no logic in them any longer, no rhyme, no reason. So, let’s talk about this rate hike decision today a bit… If the Fed passes on their opportunity to hike rates today, when will they return to complete their call for four rate hikes this year? Well, June seems most likely, and the last chance saloon since hiking rates any later than June would be too political, and one party would accuse the Fed of taking sides, etc.

The Fed is in enough hot water with lawmakers, they don’t want to make the water boiling hot! And June might, just might be too late, but I think it will be OK. And besides in December I told you that I thought the Fed would hike in March and June and then before year-end, have to be seriously thinking about reversing those rate hikes, and/or coming back to the QE/bond buying table.

So, that’s what’s on the docket today. The currencies are mixed this morning, and gold is flat. I wouldn’t think that any traders would be going hog-wild on a currency or metal ahead of the Fed announcement this afternoon. There’ll be time enough for that once the Fed put away all the board games, and tally up the score, to see who the two-day winner is, and makes their rate decision.

There’s some disturbing news from China this morning that we need to spend some time talking about, so there’s better time than now. It appears that China is getting very close to implementing a Tobin Tax. In the true sense of the term, a Tobin Tax is intended to put a penalty on all spot conversions of a currency. It’s meant to stem the speculating in a currency. But the Chinese version of this would not be designed to curb transactions related to hedging or trade activity. It would be squarely implemented to curb speculation.

But there’s more to this than just a tax or penalty on a trade. And the damage that something like this can do to an economy is just as risky as the good things it brings can be beneficial to an economy. In other words, an economy could go either way. And when you have an economy that’s experiencing a slowdown, it’s a scary proposition, as far as I’m concerned.

There’s nothing concrete on this yet, folks. But here are the facts; It has been reported that China is drafting rules on a Tobin Tax. And Peoples Bank of China (PBOC) Vice Gov. Yi Gang has previously announced his support for a Tobin Tax in publications endorsed by the Communist Party in 2014, and 2015.

What have I always told you about the Chinese leaders? That they don’t say things willy-nilly, and without reason. if they say something they intend to make it happen. The same can be said about policies. If they write a policy, they intend to make it happen. So, I believe we can fully expect to see a Tobin Tax implemented in China. At this time, I don’t believe this will affect our Chinese renminbi deposit accounts, but we haven’t seen the devil in the details yet. Of course I will let you know, when I know! Oh! And the Chinese pushed the renminbi down last night at the fixing.

The euro is trading in the same clothes as yesterday. Actually, it’s down 10 ticks from yesterday’s currency roundup price. Last week it was the U.S. with an empty data cupboard, and this week, we’ll have to wait until tomorrow to see some data that counts in the Eurozone. On Thursday, February final prints of CPI will show their faces. No changes are expected from the flash reports that printed earlier this month and showed that consumer inflation (CPI) in the Eurozone had gone negative again, after a couple of months of getting its head above water.

One more note on the Fed rate decision today. This rate decision will determine if the recent uptick in risk sentiment continues or is snuffed out. The risk sentiment has, as we’ve seen, been very important to the Aussie & New Zealand dollars, and gold. The A$ and kiwi are both up a tiny bit this morning as both wait for the Fed. 

The latest Aussie labor report will print tonight. You might recall that Aussie job growth in the fourth QTR was outstanding, but January showed that the strong monthly job gains could be over. So, this Feb labor report is important, remember, I told you earlier this week, that we have to watch the data from Australia. I think that the January weak report was a one and done, and that February’s report will return to strong job growth. And that should be good for the A$… But that would be logical.

Well, the U.S. Data Cupboard yesterday had some interesting data for our review, so let’s do that! The Big piece of data yesterday was February Retail Sales, which I said would be disappointing at best, and that’s what they were! With February’s total printing at -0.1%, and it wasn’t bad enough for the Feb data to print negative, the January Retail Sales were revised downward from 0.1% to -0.4%! I watched and read about this Retail Sales data all day yesterday, and no one was talking about the downward revision. That’s shameful in my opinion!

U.S. PPI (wholesale inflation) dropped to -0.2% in February vs. January, and the annual PPI was 0.0%…  No pipeline inflation folks. Can you believe that? I can’t.

Today’s Data Cupboard has two of my faves. Industrial Production (IP) and Capacity Utilization (CAPU). These two pieces of “real economic data” have really been weak for some time now, and I expect that to remain the same for February. And I have to mention this, even though I don’t want to. The stupid CPI for Feb prints today.

Gold closed yesterday, down $3 ($3.20 ), and like I said above, is flat this morning. My guitar playing, investment analyst guru friend, Steve Sjuggerud, had this to say about gold yesterday in his Daily Wealth newsletter than can be found on the stansberryresearch.com website:

In short, in a world of negative interest rates, gold should outperform. Yes, gold has run up in 2016, but I feel strongly that the move in gold is just getting started.

Steve was referring to negative rates, as negative “real rates.” I’ve explained this before, but you get “real rates” when you take the interest rate and subtract inflation. Here in the U.S. our “real rates” have been negative for some time, with the percentage rate of the negative rate determined by whatever figure you use for inflation.

I also received a comment on the Pfennig website yesterday, from the Daily Pfennig on Monday. Let’s tune in to what the reader said, which can be found in the comments section of the letter:

You are wasting your time talking about Gold when the criminals are in charge of the casino. Fundamentals and your thoughts are worthless.

Seems you can’t make all the people happy, all the time, eh? Makes one wonder why someone would take the time to read something that contains worthless thoughts? It’s a good thing my mom has passed, for she would not be happy to read that her favorite son’s thoughts were worthless.

CPI might not show it. The ECI might not show it, and any other government measure that tracks inflation might not show it. but according to ShadowSats.com and John Williams, inflation is around 7%. Ambrose Evans-Pritchard  thinks that inflation is rearing its ugly head here in the U.S.  This is an interesting article and can be read in its entirety by clicking here, or, I have a snippet for you:

The trigger for the next global recession is at last coming into view after a series of loud distractions and false alarms.

The Atlanta Federal Reserve’s gauge of “sticky-price” inflation in the US soared to a post-Lehman peak of 3pc in February. This index is a ‘pure’ measure of core inflation – the underlying story once the noise is stripped out.

The Cleveland’s Fed’s ‘median consumer price index’ jumped to 2.9pc, with big rises are in medical services, housing rents, car insurance, restaurants, hotels, women’s clothing, jewelry, and car hire. This is the long-feared inflexion point we all forgot about in those halcyon days of deflation, now just a fond memory.

Chuck again. Yes, we all agree that food has shown price increases, insurance, medications, baseball tickets, the list goes on and on with things that have seen inflation , but one major item you won’t see is wage inflation. Wages are going nowhere, fast, and that’s the inflation the Fed needs to see.

That’s it for today. Tomorrow is St. Patrick’s Day, and with me having Irish blood, I try to be as Irish as I can on that day!  So, let’s end today’s letter with an Irish Blessing:

May the road rise up to meet you.

May the wind always be at your back.

May the sun shine warm upon your face,

and rains fall soft upon your fields.

And until we meet again,

May God hold you in the palm of His hand

Happy St. Patrick’s day, one day early. I hope you have a wonderful Wednesday, and be sure to be good to yourself!

Regards,

Chuck Butler
for The Daily Pfennig

P.S. Be sure to sign up for The Daily Reckoning — a free and entertaining look at the world of finance and politics. The articles you find here on our website are only a snippet of what you receive in The Daily Reckoning email edition. Click here now to sign up for FREE to see what you’re missing.