ISM Is Melting Away…

Good day. Well, the Major League Playoffs begin today. Good luck to anyone’s team that is not playing my Cardinals! There are two New York teams, and one Los Angeles team in the playoff mix, so don’t expect to see the small market teams, like Minnesota, St. Louis, etc. during PRIME TIME!

Speaking of prime time…the dollar got thrown for a loop yesterday when the national ISM manufacturing report printed, and showed some real weakness, not only in the manufacturing, but in the prices paid part of the report. But still after all that, the dollar weakness was contained by the trading range. I’ll come back to this report in a minute, but first there is some breaking news regarding Japan and N. Korea that is moving yen, so let’s go to the tape!

The yen has spiked downward vs. the dollar this morning on reports that N. Korea has issued a statement saying they will conduct a nuclear test. This has been a knee jerk reaction to this statement, and hopefully cooler heads will prevail after this initial reaction. I say this because while N. Korea has said on several occasions in the past that they possessed a nuclear bomb, they have never conducted any known tests.

Back to the ISM report yesterday…the September ISM index came in at 52.9, below the “experts'” forecast of 53.5. Like I said yesterday, still “expanding” albeit at a slower pace than earlier this year, and a much slower pace than last year. Manufacturing is ever so close to falling below the 50 level, which is the line drawn in the sand between expansion and contraction for the sector. What this tells me is that simply, the dollar has fallen “enough” to allow manufacturing to keep its head above water, but more weakness from the dollar is needed to kick start manufacturing, before it begins to contract.

Reminds me of the scene in the greatest movie ever, The Wizard of Oz, where Dorothy throws the bucket of water on the wicked witch, and she starts screaming, “I’m melting, I’m melting.” The ISM is melting…

The prices paid part of the ISM report took the markets by surprise, falling 12 points in September after falling 5.5 points in August. While it is clear to me, but probably not the Fed or the dollar buyers, that inflationary pressures do exist in the economy, these last two reports on prices paid may provide some comfort to the Fed…

The euro recovered about 1/2-cent vs. the dollar, and pound sterling really caught some wind in its sails after they posted a strong manufacturing report. Aussie and New Zealand found a tourniquet, and stopped the bleeding they had seen all last week, as the ISM prices paid report in the U.S. put the flood lights back on them as yield advantage currencies. Even the Icelandic krona got in on the rally, showing once more that the “risk aversion” that swept the markets about 10 days ago, has abated…

Someone wrote me yesterday and asked my opinion of the future of interest rates here in the United States. Basically, I thought the Fed was wrong by waiting so long to hike rates two years ago… and that the Fed was wrong to go about it with measly 25 BPS rate hikes. But I thought the Fed was correct in pausing two months ago, because they hadn’t seen the full effects of their 17 rate hikes. But…it is my contention that inflationary pressures are not just driven by oil prices, and that inflation in this country is running at a much higher level than the goofy CPI report indicates… Therefore, I suspect they Fed will raise rates one more time once they do see the full effects of their 17 previous rate hikes. However, having said that, I believe the Fed will have to look to cut rates in the second half of 2007.

Whew! That was long winded! None of that scenario for the future is dollar friendly. Yes, a rate hike would get the high yield campers all lathered up, but for the most part, the markets will view it as a last gasp effort, knowing all too well that rates are going to come down in 2007. So…I just don’t see the dollar getting any fun in the sun going forward…

There was a report on the last week, that examined whether the yen or the renminbi were the most undervalued currencies. The Economist, like me, thinks it is Japanese yen, and asked this question, “If the yen is the most mispriced currency on the planet, why are Japan’s trade partners not complaining loudly, as they do about the renminbi? Well… Most of that reason is the fact that the Japanese yen theoretically floats freely, while the renminbi is held down by a currency policy. In the end though, the said… “Last week was the 21st birthday of the G-7’s Plaza Accord, which triggered a huge rise in the yen. The yen is much more undervalued today than it was then.”

Thailand has a new Prime Minister…and while the job is on an interim basis, the new PM has made some good decisions. Basically staying out of the way! The Central Bank Gov. who is hanging onto his job at this point made a great statement last night, “There’s no more fear among businessmen. There will be less double standards from the government, and next year, growth will exceed this year because politics will be more stable.” Good stuff! Now we just need to get that Thai baht back on the rally tracks!

Gold has fallen back below the $600 level, as oil prices continue to weaken. Also, we had big time gold buyers all on holiday yesterday… India, and China…China remains on holiday all week, while India will return, along with their pent up demand for the shiny metal. I noticed something the other day regarding gold. Gold imports by Turkey surged 47% in September…WOW!

There’s no real meat on the bun regarding economic reports from the United States today. The ECB and Bank of England meet on Thursday, and we finish the week with a Jobs Jamboree Friday. Right now, the surveys show that the “experts” believe that the United States will have added 120k new jobs in September. I know the markets and the media will put a positive spin on that number, but I just want to say that if the economy was as strong as it is played out to be, we would be creating more than 120K jobs each month!

Not much else on the docket today…so I’ll head to the Big Finish!

Currencies today: A$ .7475, kiwi .6605, C$ .8950, euro 1.2745, sterling 1.89, Swiss .8040, ISK 69.30, rand 7.6850, krone 6.5550, SEK 7.3180, forint 215.51, zloty 3.09, koruna 22.1350, yen 117.70, baht 37.55, sing 1.5825, HKD 7.7910, INR 45.78, China 7.9040, pesos 10.97, dollar index 85.61, Silver $11.35, and Gold… $593.80

That’s it for today. I’ve got my red on…and ready for the game today! A local cable station was showing the 1985 Cardinals / Dodgers playoff game last night, the one where the Wizard of Oz, Ozzie Smith hit a game winning home run, and our loved and legendary announcer, Jack Buck, told the people to “Go crazy, folks.” Chills still go down my spine when I hear him say that! Talk about funny looking uniforms! Those 80’s uniforms are an absolute riot! Have a great Tuesday!

Chuck Butler
October 3, 2006