RBA and RBI Leave Rates Unchanged

And now… today’s Pfennig for your thoughts…

Good day, and a Tom terrific Tuesday to you!

The Reserve Bank of Australia (RBA) did exactly as I said they would when they met last night (Tuesday for them). They left rates unchanged but kept their easing bias in place. And to RBA Gov. Stevens credit, he didn’t throw the Aussie dollar (A$) under any bus, but the markets are quite aware of the fact that the RBA kept their easing bias, and while the RBA might hold off longer than most economists have forecast for the next rate cut in Australia, the fact remains that as long as that easing bias remains, there’s always a chance that interest rates could be cut further here. And that fact hangs over the A$ like the Sword of Damocles.

The A$ is down 1/2-cent this morning, and is dragging its kissin’ cousin across the Tasman, the New Zealand dollar/kiwi down by 1/2-cent too. It’s just gotten too much for the A$ to shoulder. Chinese economic weakness, and mixed signals from their own economy causing the RBA to even consider cutting rates again.

The Bank of England (BOE) will meet this week. I read a very funny, to me, that is, article on BOE Gov. Mark Carney, and his calls for rate hikes that go back 18 months now, and how they have dissipated into the atmosphere as each BOE meeting comes and goes without a rate hike. I told you dear readers from the very start, that he was bluffing, and there would be no rate hike, until things changed drastically in the U.K.

But getting back to the BOE and the rate decision this Thursday morning… Pound sterling traders have had it to eye level with Mark Carney, and they are taking their frustrations out on the currency, and rightly so. The currency should have never been allowed to rally based on Carney’s bag-o-promises, and I said that months ago!

The rest of the currencies are struggling to keep their heads above water this morning. The euro has carved out a gain, along with the Chinese renminbi, and the Czech koruna, but other than those it’s difficult to find any others with gains.

Yesterday I told you about the end of the four-day rally in the Russian ruble, and put the selling down to profit taking. But, then the price of oil began to slide downward again, and that opened up Pandora’s Box of selling the ruble once again. And the ruble is getting whacked, and I mean whacked hard this morning.

The other high yielder on the globe, the Brazilian real, was firmly on the rally tracks yesterday, until the Brazilian Central Bank (BCB) came out and talked about a Selic Rate cut (Selic is the name of their official internal rate, like our Fed Funds Rate). Sure, we can’t have the currency on the rally tracks now can we BCB? Apparently not! But add to that noise from the BCB, the price drop of oil, and the real’s trip on the rally tracks has been derailed.

I just thought of something, that I haven’t really talked much about, that could be also weighing on the pound sterling this morning. BREXIT.  Recall GREXIT? Well, BREXIT is what they call Britain’s call to exit the European Union. It’s not the same as a GREXIT, in that Britain never joined the euro, but leaving the EU is a BIG DEAL, and we are supposed to get the update on the whole process this morning. I expect the EU to give away the store to Britain to keep it in the Union.

As I said above, the euro is carving out a gain vs. the dollar this morning, and is back above 1.09 as I write. The gain can be attributed to a better than expected labor report from the Eurozone’s largest economy, Germany. German Unemployment dropped -20,000 in January, beating the forecast for a drop of -8,000. This brought the unemployment rate in Germany from 6.3% to 6.2%… That’s it folks. No hedonic adjustments, no changes to the surveys because it “feels right”, just a plain ordinary report on the unemployed in Germany.

By this time next week, we’ll have seen German Construction, Factory Orders, Industrial production, the Trade Balance, the Current Account Balance and their Services PMI. All of this data taken together will give us a better picture of the status of the nascent recovery that’s been going on in Germany. And with Germany representing the largest economy of the Eurozone, it’s important to keep tabs on what’s going on in Germany.

Overnight, the Reserve Bank of India (RBI) kept their key policy interest rate unchanged, which was a surprise to the markets who half-expected the RBI to cut rates and had traded the rupee accordingly. And just to add more fun and games to the rupee’s attempts to break this downward trajectory that it is on, the RBI left the door open for future rate cuts.

In addition, the RBI announced that they were leaving their forecasts for economic growth, as measured by GDP, unchanged for this year and next year, at 7.4% and 7.6% respectively, while keeping their inflation rate forecast at 5%… That equals roughly 2.5% “real interest.” Is that enough for investors to take the risk with this Emerging Market? I don’t think so, although the net is larger than most countries can muster up.

Yesterday, I told you how the fourth QTR GDP had its first print and it was a measly 0.7%. Measly is being nice to the result, especially given that last year 3% was added to the calcs in the form of R&D that the government determined was important enough to add on an annual basis.  But getting back to the 0.7%, the GDP tracker that I use, showed me that the next print of fourth QTR GDP is going to be just 0.5%! I know, I know, how can GDP be at just 0.5% and have the Fed hike rates?

I was reading a piece by friend, Jeff Opdyke, he of the Sovereign Society, and formerly of the Wall Street Journal (WSJ). Jeff had some searing things to say about the Fed that I can’t repeat here, in his latest letter, but one thing that he did say that I can repeat here is that:

If the Fed is going to talk, then at least it should prepare the markets for reality instead of offering worthless platitudes. Though, by law, the Fed should be prevented from opening its collective mouth ever again because ‘Fed speak’ unnecessarily roils markets and creates volatility that hurts investors who have the most to lose.

The U.S. Manufacturing Index (ISM) had a tiny pop upwards from the revised downward previous month’s number. In other words, December’s ISM originally printed at 48.2, but was revised downward to 48. Then yesterday, January’s ISM printed at 48.2. So the downward moves were halted. But I have to think that this was just a one and one blip upward. And if they hadn’t revised the December number downward, it would have been a flat print vs. December.

In addition, the powers that be, were hoping that Construction Spending (CS) would make a comeback after the -0.6% print in November.  And it did, but not to the degree that economists thought it would, giving us a December print of just 0.1%… That’s not much of a comeback now is it?

Personal Income outpaced Personal Spending in December, no surprise there, given that we already saw December Retail Sales print negative!   And for those of us that are on the edge of our seats, wanting to know what the “Real Personal Spending” data showed. Well, now you’ll know. It was up a whopping 0.1% in December. WOW! Now that made my day, now knowing that!

And don’t look now, no wait, it’s OK you can look now if you want by clicking here, or you can just take my word that the U.S. National Debt just passed $19 trillion! The total number changes every second, but just for grins and to get this out there so everyone can see it, at 7:11 ET the U.S. National Debt was $19,003,163, 289,100 looks pretty intimidating when drawn out like that, eh?

Gold is giving back some its recent gains this morning, not much, but some, as it trades down by $4 this morning. It was a choppy day for gold yesterday, gaining ground, then losing ground, then gaining ground to close up for the day.

I want to highlight platinum though today. This version of a shiny metal has been in a beatdown for a couple of years now, which makes no sense to me, given that the platinum market has been in shortage of since 2012. What that means is that the amount of platinum that has been taken out of the ground/mined, is less than the demand for the metal. Now doesn’t that just scream supply & demand price discovery to you? It does to me, and I have to go yell at the wall now, because this doesn’t make economic sense to me whatsoever!

Well, I was in heaven yesterday between naps, I was able to read my fave writer, Grant Williams, he of the Things That Make You Go Hmmm, newsletter. And while I can’t give you any quotes that are his, I can tell you about something from another letter that he uses. Like the Financial Times (FT)…

The value of debt issued by junk rated U.S. energy companies has plummeted to the lowest level for more than two decades, sending a warning signal about the outlook for the North American Oil Industry. The average high-yield energy bond has slid to just 56-cents on the dollar, below levels touched during the financial crisis in 2008-09.

Chuck again. Remember me telling you on more than one occasion that the “financialization of oil” here in the U.S. was becoming a problem and would eventually disrupt the good times in the shale oil business? Well, it certainly looks as though that’s coming into play here. Be forewarned.

I’ll get out of your hair for today, and hope you have a Tom terrific Tuesday!

Regards,

Chuck Butler
for The Daily Reckoning

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