Japan Implements Negative Rates

And now… today’s Pfennig for your thoughts…

Good day, and a happy Friday to one and all!

Well, the BIG NEWS overnight is that Japan has joined the Swiss, Eurozone, and Sweden in the negative rates club. Japan has been at 0% for so long now, it hit me strangely that the Bank of Japan (BOJ) was moving interest rates. Remember some years ago, when the BOJ tried to hike rates to 0.15%? That move was scrapped very quickly! Anyway, the BOJ announced last night that they will implement a three-tiered system for deposits. Existing deposits don’t change, and neither do the reserve requirements for banks, but any newly created deposits will be charged -0.1%…

I’ll tell you right here, right now, that this is a way to slowly introduce negative rates across the board in Japan, and I wouldn’t be surprised if we see that happen in 2016. Yen got whacked and whacked with some sting on the news, losing two whole figures. So, back to a 120 handle for yen, which looks more like what yen should be wearing to me.

When I first turned on the screens this morning, it appeared that there were only a handful of currencies with gains vs. the dollar, but now, a half hour later, things seemed to have settled down, except for the euro, Canadian dollar/loonie, Norwegian krone, Swedish krona,  pound sterling, and the aforementioned yen. The rest of the currencies are carving out gains vs. the dollar this morning, some small gains, and some larger gains, but gains nonetheless.

The euro’s performance this morning is troubling to me. Eurozone 4th QTR CPI did print this morning and consumer inflation as measured by CPI rose 0.4% up from the third QTR’s 0.2% print. So, it doubled! But the euro traders weren’t impressed, and have taken a chunk of flesh from the euro’s value this morning. The single unit remains above 1.09, but with questions.

Last Sunday, the BIG BOSS, Frank Trotter, submitted a piece for the Sunday Pfennig, on Nicaragua. In it he mentions how the euro has been resilient above 1.05. I usually try not to say stuff like that, because when I do, it’s usually the kiss of death for the respective currency I’m talking about! So, I hope the BIG BOSS has better luck with that than I do!

The Central Bank of Russia, (CBR) left rates unchanged overnight, and a lot can be said for timing, eh? Think about this for a minute. Ten days ago, the ruble looked to be teetering on a cliff. If the CBR had met at that time, they might have been moved to hike interest rates to protect the ruble. But fast forward to this morning, and the ruble has been on a winning streak ever since last Friday morning, when the price of oil bounced off the cycle low of $26.75. And now the CBR can breathe easier, and leave rates unchanged. Timing…

That used to be one of my fave jokes. I would say, “I’m a mentally challenged comedian, ask me what the most difficult part of my job is” And so the person I said that to would start to ask me, “What’s the most” and I would interrupt them and say, “timing”. I guess you had to be there! HA!

Things are back to normal with the Chinese renminbi and Indian rupee today, with both showing gains vs. the dollar. There’s been some divergence between these two currencies in recent trading sessions that I’ve pointed out to you, but today, things are back to normal!  The renminbi was allowed to appreciate at the fixing by 120 ticks, so a larger appreciation than yesterday, and continued an eight consecutive days of daily appreciations in the fixing.

No, none of the daily appreciations have been large, but, as I pointed out the other day, an appreciation is an appreciation, let’s not look a gift horse in the mouth!

Pent up frustration has got to be what turned the rupee traders around. For there was no economic data to speak of, and the only thing actually going on in India is a speech by Finance Minister, Jaitley, who did say something that I thought was good, and is something more FM’s should think about using. Jaitley said, that the Indian economic growth of 7 to 7.5% was “below potential”.  Yeah, that’s right Mr. Jaitley, but that’s always been the problem in India, unlocking the potential.

I thought that Reserve Bank of India (RBI) Gov. Rajan was on the right road to doing just that a couple of years ago, but the same old roadblocks and potholes on the road to unlocking the economy stopped him. Then I thought new PM Modi would unlock the economy with his proposed reforms, but that hasn’t happened either. So, Mr. Jaitley, you acknowledge the problem, what will you do about it?

I’m very surprised to see the Canadian dollar/loonie and Norwegian krone getting sold this morning, as the price of oil inched higher to a $33 handle overnight. The other Petrol Currencies of: Russia, and Mexico are firmly on the rally tracks this morning. And Brazil is just opening up, and while it’s down at the moment, that can change once real traders get a handle on the rise in the price of oil.

In the discussion further down about the U.S. Data Cupboard, we’ll discuss the U.S. 4th QTR GDP. But this space is reserved for a discussion on the Canadian November GDP, which will also print today. You may recall that the Rocktober GDP print for Canada was flat as a pancake at 0%, so a we’re looking for a positive November print. And that’s why the loonie is getting sold this morning, because loonie traders just don’t believe the forecasts of a rise in GDP of 0.3%…

They’re betting that it will be disappointing, and that will lead to rate cut talks, and they’re just trying to get ahead of the crowd here. So, the risk for these guys is that Canada’s November GDP prints 0.3% or higher, that would cause a short squeeze in the loonie, and turn this ship around this morning.

The Aussie and New Zealand dollars (A$’s and kiwi respectively) are flat to up a tiny bit this morning. I don’t think A$ traders are as risk-minded as the loonie traders, because it appears to me that the A$ traders don’t want to make any bets ahead of the Reserve Bank of Australia (RBA) meeting on Monday.

The price of oil inches higher to a $33 handle.  I was doing some reading yesterday, and came across an interesting piece regarding oil production and how the Russians are proposing cuts in production. Russia has asked the OPEC members to cooperate with a cut in production, which would boost the price of oil, which is what Russia needs badly. Of course, Saudi Arabia could use a higher oil price too, as well as some of the other OPEC Members.  I guess we’ll have to wait-n-see what happens here. I for one am doubtful that Russia can pull this together, but then stranger things have happened on earth.

And gold is off by a couple of bucks this morning, after giving back some of its recent gains in yesterday’s trading. After touching $1,125 the other day, gold has slid backwards to today’s level of $1,113… UGH!  Ed Steer had some numbers on the short positions in gold and silver this morning. Check these out: the short position in SLV is 11.22 million shares/troy ounces, which is an increase of 8% from 10.35 million.

In GLD, the short position is 919,270 troy ounces, but 4.7% from 877,700.  And one would ask why these short positions are so large? And who’s regulating this? Let’s just slip back to 2007 for a minute here. The U.S. financial meltdown. I’ve always maintained that U.S.  had the regulations to keep the country from getting where it went, but the powers that be chose not to enforce them, and now the U.S.  has even more regulation.  Are the short positions in gold and silver reliving 2007? Who’s minding the store?

Yesterday’s Data Cupboard printed some ugly data. December Durable Goods Orders fell -5.1%, (the forecast was for -0.7%) and November’s flat print as revised downward to -0.5%… Now I admit that this data can be volatile at times as it uses airplane orders that can really skewer the data, but this is ridiculous, month after month these negative prints. And Capital Goods Orders printed as bad, falling -4.3% in December.  And the Fed hiked rates last month? I’m still scratching my bald head over that one!

Well, the U.S. Data Cupboard is chock-full-o-real-data today. Of course, when I say “real data” I don’t mean to say that the data is free of hedonic adjustments, it’s just that we’re talking about market moving data, whether it’s “good data” or not. And leading off for us is the first look at 4th QTR GDP. And the forecasts are for this data to print no more than 0.8% 4th QTR Annualized. OUCH! Did that hurt anyone else? That “snap back” in GDP is sure to catch someone’s attention at the Fed.

Now is when I remind everyone that last year, the government added R&D to the GDP Calculation, and it was supposed to be responsible for up to 3% per year in the total. So, take out 3% and you have negative GDP. So, before the hedonic adjustment, we would be talking about recession here in the U.S. timing. again.

We’ll also see the 4th QTR PCE (personal consumption expenditures) which is the Fed’s preferred inflation gauge.  So, the third QTR PCE was 1.4%, nowhere near the Fed’s 2% target. What do you think the fourth QTR PCE will be? I’m saying that it will slip backwards, to 1.3% or maybe even 1.2%. In addition, there are some other data prints today that don’t carry the weight that these two that we just talked about do. The Chicago PMI (manufacturing for the region), the U. of Michigan Sentiment for the first two weeks of January, and the Advance Goods Trade Balance for December.

I pulled this from my daily MarketWatch email and when I saw that Ed Steer had pulled it too. I thought, by golly, I have to use it now! For if it’s good enough for Ed, it’s good enough for me! You can find the whole article here, and here’s the snippet:

‘Weak data, such as Thursday’s durable-goods-orders report, signal that the Federal Reserve made ‘a major macro mistake’ raising interest rates in December,’ said Danny Blanchflower, a Dartmouth College economist.

In December, not only did the Fed raise rates for the first time in nine years, but they signaled there would be four more hikes this year.

Now, ‘there’s a 50/50 chance the next move is a cut.as with all the other rate hikes since 2009 this one will have to be reversed.’

Chuck again. I had to stop and reread the line I’m about to tell you. That Traders who bet on rate hikes are now betting that the Fed’s next rate hike won’t take place until September!   Well, I have to take issue with that, because I believe by September, the Fed will be reversing their rate hikes, and coming back to the QE table!

That’s it for today. I’m going to head to the corner of Fantastico and Friday, I hope you can make it there too!

Regards,

Chuck Butler
for The Daily Reckoning

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