A Data Dependent Fed

Good day. Well, from what I saw going on in the currency market on Friday, I’m not that surprised at what I see as I turn on the screens today. The dollar has really moved higher, on the news of the Middle East fighting. Traders have forgotten about the awful data that came out on Friday. They have forgotten about the Fed’s words of how the next rate move would be data dependent. They are focusing on the heated tensions and fighting in the Middle East.

For reasons that don’t have anything to do with currency movements, I hope that things can settle down in the Middle East, very soon.

On Friday, retail sales printed an unexpected decline of 0.1%. It was forecast to increase 0.4%. June sales were held back by slower sales of motor vehicles and parts, department store merchandise, building/garden equipment and electronics. Increased purchases at gasoline service stations and at furniture and food stores limited the June decline. The thing that caught my eye as I reviewed the report is how much second quarter retail sales fell from the first quarter. The first quarter retail sales grew at a mighty 13.3% annualized pace, while the second quarter grew at only 3.6% annual pace. Uh-oh.

The other piece of data last Friday that should have knocked the stuffing out of the dollar was the University of Michigan consumer confidence for the first part of this month. While this data was expected to increase, it too fell to an 83 reading from 84.9 the previous month. Let me just to get my data scorecard up to date, so I can keep track of what the Fed’s watching. Last week, we saw consumer credit soar, the trade deficit widen by almost one percent, initial jobless claims pushing higher, retail sales falling, along with consumer confidence. Hmmm, I wonder what Big Ben thinks about all this?

Today, we’ll see that dumb empire manufacturing report that’s all over the board each month, industrial production and capacity utilization for June. Later this week, we’ll see CPI inflation data for June, and that’s the Big Kahuna for the week. Right now, the “experts” have forecast June CPI to be weaker than May’s. I’ll believe that one when I see it. No wait, I don’t believe anything that CPI has to offer, so I have no idea why I said that! But seriously, CPI is expected to weaken. Somehow!

I’m not trying to bore you with data. But since the dollar is soaring because of Middle East tension, I thought it to be important to show why it shouldn’t be! Oh, and there’s   one more thing: Big Ben Bernanke is going to give us a report on the economy and Fed policy on Wednesday. That ought to be interesting!

As one might expect, Gold has been well bid during the Middle East fighting, and Swiss francs has retained more of their value than other currencies (that’s currency parlance for it hasn’t lost as much ground as other currencies!).

The Japanese yen has really taken some huge losses since the Bank of Japan removed the zero interest rate policy. Chris told you on Friday that there is a clear distinction between a currency’s knee jerk reaction and the long-term consequences for the currency. Yen is going to be the currency that is now shown whenever someone looks up that thought! I really think that the yen is cheap, cheap, fun, fun.

Tomorrow, I’ll bring you the news of a brand-spanking-new MarketSafe CD. It has a little of something for everyone! Oh, and speaking of new CD’s, I’ve created two new index CD’s that I think should be at the top of everyone’s hit parade.

First, the Euro Trax: Norway, Sweden, euro, and Switzerland. Not a lot of interest to pay, but all countries with good balance of payments, and rising interest rates.

Second, the Orient Opportunity: Japan, Singapore, Thailand, and Hong Kong.  This one should replace the Asian Advantage, which had New Zealand as a large part of it.

These two CD’s will show up on our Web site later this week, so if you need the details on them, just call the desk 1-800-926-4922.

Currencies today: A$ .7490, kiwi .6210, C$ .8840, euro 1.2550, sterling 1.8220, Swiss .8040, ISK 75.50, rand 7.26, krone 6.30, SEK 7.36, forint 223.60, zloty 3.22, koruna 22.67, yen 116.80, baht 38.20, sing 1.5950, INR 46.76, China 7.9970, pesos 11, Dollar Index 86.84, silver $11.57, and gold $665.50

That’s it for today. The July 24th, 2006 issue of Forbes Magazine has a nice feature on Everbank’s World Currency CD’s. It highlights some of the currencies that I thought people should be looking to buy other than euro and yen, which are givens. The article was written by Matt Swibel. A lot of the work that Matt and I did for the story got left on the editor’s floor, but that’s OK! It’s really scorching hot here in St. Louis, but that’s OK, too. Have a great Monday, and week!

Chuck Butler
July 17, 2006

The Daily Reckoning