One-And-Done For The Fed?

And now… Today’s Penning for your thoughts…

Good day, and a tub thumpin’ Thursday to you!

The last “full-day” of trading this week, as the markets will thin out, big time, tomorrow afternoon, as traders attempt to get out of town, and beat the rush. I thought my little conversation between trade and wife the other day was quite funny, but then most of the time I wonder if I’m writing to amuse myself! HA!

Well, I truly wish I could tell you something different today about the currency trading. For the most part the dollar has the conn, but there are some currencies carving out gains vs. the dollar, so it’s not an all-out assault by the green/peachback.

I was going through the stories that were posted on the Bloomberg this morning, and one caught my eye, as the headline read: “September or not, Market says Fed’s One-and-Done until Late 2016”.  And I thought to myself, “Hmmm, why go through the effort of hiking rates once now, and then wait a year to revisit that hike?” That seems pretty silly to me.

But then it would be exactly what I told you it would be, when I told you IF the Fed decided to hike rates this year, the rate hike would be small, and they would only be doing it to save face with the markets, to whom they’ve promised a rate hike would be around the next corner for over a year now.

So, that’s the Big News this morning.  That and the fact that the Swedish krona is the best performing currency overnight!  The poor beaten and beleaguered krona gets to have a day in the sun, because the Swedish Central Bank (Riksbank) left rates unchanged yesterday, which I’ll remind you is a negative -.35%.

The Riksbank told the markets after the rate announcement that their decision was not a reaction to the volatility in the Global Markets, but instead, they patted themselves on the back saying that their loose money policy is having the desired effect on the economy that they thought it would.  So, bask, krona, it’s your day, and tomorrow, you will be back on the selling blocks, because who really wants a currency that charges you interest to hold?

The biggest positive mover this week has been the Chinese renminbi.  But there will be no more movement in the renminbi this week, because the Chinese are on holiday for the rest of the week!  And I have to say that I think that this shutdown for the holiday came at a very good time, because things were beginning to get really confusing with what was going on with the currency, the policy changes to the currency, and everything else.

Speaking of China… In the past month I’ve highlighted the fact that China has lowered their U.S. Treasury Holdings.

Well, according to an article on Reuters, it’s not just China doing the unloading of U.S. Treasuries holdings. Let’s listen in:

As of last week, foreign central banks had reduced their holdings of agency debt and mortgage-backed securities at the U.S. central bank for six straight weeks to $285.21 billion, the lowest level since early May, according to the Fed data released last week. Last week’s decline was $10 billion, the steepest drop since June 2012.

Even the Fed reports the lower Treasury holdings for foreigners in their reports. I would think they might want to hide something like that, because just knowing that Holdings are being unloaded, could cause yields to rise.

And one very important point here: the U.S. uses Treasury sales to finance our debt.  and this plays into the possibility that yields might have to rise, for if the debt is not getting financed, the one thing that can be done is to raise yields, to make them more attractive to foreign investors.

Of course getting a double bang for their buck would be if the dollar were weaker. Cheap, cheap.

And to go even further with China on my mind, as opposed to Georgia on my mind.  Well, remember when I told you that not only had China’s exports fallen but so too had South Korea’s?

Well, I found this on www.businessinsider.com  and just had to cut and paste it here for illustration, that these countries are sounding the warning horn on Global Growth, is Janet Yellen listening?

China -7.6%
Europe -7.7%
Japan -20.9%
ASEAN -3%
Latin America -19.3%

These numbers were taken for the article from Bloomberg.

Well, the European Central Bank (ECB) is meeting as I write this morning. They normally end their meeting and head to the press conference right about the time I’m hitting “send”, so I have to go out on a limb normally, and say what I think the ECB and its President, Mario Draghi, will say and do.

Well, I don’t think the ECB will do anything this morning, but I do believe that Draghi, is going to dig his heels in on how slow it’s taking for inflation to rise in the Eurozone. Patience, Mario, patience, and remember to gather the gold coins as you go along. HA!

I guess that last line is only going to register with about half of the readers. Sorry, but it was an opportunity to throw in a funny and I went for it!

That’s the problem with Central Banks these days. They have no patience. They implement a monetary policy and they thing it will change things immediately.

Hey! Memo to Central Bankers: economies how large or small they are not like Ferraris and can turn the corner in a heartbeat, they are more like a large cruise ship, and it takes a while for the ship to make a turn like that!

But who do I think I am telling these gurus of monetary policy about how economies work? They know it all! Don’t you forget that for one minute!  OK. I’m about to fall out of my chair laughing here, so I had better go on to something else!

Getting back to the ECB and other things Eurozone related this morning…

The Eurozone composite PMI (manufacturing index) printed this morning, and actually was revised higher from the flash estimates, that had already showed the economy continuing to improve. So, for the record, the Eurozone PMI for August was 54.3, vs, 53.9 in July. The 54.3 reading is the highest this data set has seen a few years. In fact, in August 2012 the index stood at 46.1, so that has been a nice climb higher, slow, and steady, eh?

Recall that yesterday, I showed you how the U.S. manufacturing index was falling.

Now, of course the main mover of the Eurozone PMI was Germany, which is the largest economy of the Eurozone. And once again, brings me to dreamland, this is where I dream that I can buy just Germany. But then I’m awakened into reality! UGH!

The Polish Central Bank left rates unchanged yesterday, which was expected, as there’s really not much going on here. The Economy is soft, but not in recession, and their internal interest rate is relatively interesting at 1.5%… I’m still leaving a light on for when Poland decides to join the euro.

I think after the Greek excitement earlier this summer, that the Polish leaders would be prudent to let enough water under the bridge before talking about joining the euro again. Not that the Polish leaders want to “fool” the people, but rather, wait for the pain to be forgotten!

And imagine this: the British pound sterling is getting sold because — drum roll please — the markets are coming to the realization that the hopes of a rate hike are fading in the wind.

Oh, really? You mean there is not going to be a rate hike, like Bank of England Gov. Carney promised there would be?  I chuckle at the thought that the markets believed Carney and his bag of promises.

Well, gold is down $7 this morning. The thought here is that the Jobs Jamboree tomorrow is going to yield a jobs report that the Fed likes, and pushes them toward a rate hike.

Every day there’s something different with this “rate hike talk”.  One day, the markets are convinced there’s no way the Fed will hike rates, and the next day, they reverse their thoughts.

The U.S. Data Cupboard had another mixed bag-o-data yesterday. This economy is proving to be so uneven, I can’t believe the powers that be don’t see it for what it is.  For instance, Factory Orders failed miserably to meet expectations of a 0.9% gain, and only booked a gain of 0.4%, and when you take out Transportation the number fell to -0.6%.

But on the other side of the coin, Mortgage Applications were up 11.3% in August. As I’ve said before, better to get them in now, and not worry about whether the Fed raises rates or not. And the ADP Employment Change, which is supposed to be a good indication of what the BLS Jobs report will print on Friday, saw that it too couldn’t meet expectations of 200,000, instead printing at 190,000, with the previous month getting revised down by 8,000, no big shakes.

I’ve been doing a ton of reading and it appears that August isn’t a good month for job creation, with the last 2 years prior to this year, with jobs prints that failed to meet expectations and printed at 180,000 in ’14, and 193,000 in ’13.  The expectations for those years were 213,000 and 256,000.

Well, the consensus forecast for August 2015, is for 218,000 jobs to have been created in August.

Well, did you know that after Friday’s Jobs Jamboree, there will be another boondoggle beginning? This one is called G-20. I normally say G-20, Schmee-20m, as rarely is it that we see something that moves the markets come out of this meeting, but this one is going to start off with a bang.

Japan has requested that China’s economy be put on the agenda.  And the U.S. President’s administration has urged China to carefully explain its policy changes to financial markets and to shift it economic focus toward consumer spending so that its economy can keep growing.  So, there you go!  I hope China tells them to mind their own business, take care of their own houses, and sit back and watch China recover from a recession, something that Japan, and the U.S. have failed to be able to do!

Yesterday’s 5 Minute Forecast, which I’ve told you many times before is a required daily read for me, had a comment from a reader, who must have been in the audience of the Vancouver Investment Symposium a few years ago, for he said  what I told the audience that year! Only this time, he was talking about how everyone was up in arms about China devaluing their currency and that the U.S. had done this before to the dollar.

Here’s what I said in Vancouver a few years ago. Actually, July 2009!

The U.S. realized a dollar devaluation of 41% in 1934, when the Gov’t raised the price of Gold from $20.67 to $35 an ounce, through a series of Gold-related actions.

Do you believe in co-inkee-dinks? I’m not sure I do. So therefore the only reasonable explanation to this is that he was there, taking notes, like a good attendee, especially when I was talking!  HAHA!

And just like a roller coaster ride, the price of oil is back up this morning. Up, down, and all around for the bubbling crude, Black Gold, Texas Tea. Then the next thing you know, Old Jed’s a millionaire. What a great/funny old show!

For What It’s Worth. Well, talk about wishy-washy. I’ll not get all mean about this, but I had to laugh when I saw this on Reuters yesterday. And the good thing is that I had forgotten about it, until going through Ed Steer’s letter this morning, and he pointed it out as a critical read, so if Ed thinks it’s critical, then so do I!

The link for the whole article can be found here:

Bond guru Bill Gross, who has long called for the Federal Reserve to raise interest rates, said on Wednesday that U.S. central bankers may have missed their window of opportunity to hike rates earlier this year and doing so now could create “self-inflicted” instability.

In his September Investment Outlook report, Gross wrote that his concept of a neutral policy rate closer to a nominal 2 percent “now cannot be approached without spooking markets further and creating self-inflicted financial instability.”

The neutral rate is the point at which the rate is neither stimulative nor contractionary.
The Fed seems intent on raising the federal funds rate at its policy meeting this month if only to prove that it can begin the journey to normalization, said Gross, who runs the $1.5 billion Janus Global Unconstrained Bond Fund.

“They should, but their September meeting language must be so careful,” that “one and done” is an increasing possibility, Gross said. The “one and done” approach represents the Fed raising rates once and not again, at least for the next six months, Gross said

Chuck again. So, now you see what I mean when I say this is “wishy-washy”. But he’s Bill Gross, the bond king!  And I guess that gives him the freedom to go from saying they should hike rates to saying they shouldn’t hike rates!

But I think he nailed it when he said this:

The Fed is beginning to recognize that 6 years of zero bound interest rates have negative influences on the real economy – it destroys historical business models essential to capitalism such as pension funds, insurance companies, and the willingness to save money itself.

A decline in saving would lead to other problems like decreases in investment and long-term productivity.

But, I think he forgot to mention that carrying a HUGE Debt does the same things.

That’s it for today. I hope you have a tub thumpin’ Thursday!

Regards,

Chuck Butler
for The Daily Reckoning

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