China Posts Strong Manufacturing Data

When I left a couple of weeks ago, it appeared as though the bond rally that began in the early ’80s was about to finally break. But as I return, I see that the yield on the 10-year has regained some vigor, and rallied from the 2.38% when I left to 2.22%. (Remember, when the yield on a bond falls, the price goes up.)

One of the pleasures that I find when traveling is picking up the latest Economist magazine. Sure, they are pretty opinionated and usually on the wrong side of me, but it makes me think. Well, yesterday, it just so happens that the latest Economist had a great piece on Treasury yields. They pointed out that the current bond rally is very similar to the previous trends — going back, we’ve seen a 29-year downtrend, followed by a 32-year uptrend, followed by a 31-year downtrend lasting to the present. We’re talking yields here. And while we could see signs of bond rallies from here on out, especially if the Fed does another round of quantitative easing, the current downtrend for yields is about over.

Interesting, don’t you think? Of course, if the Fed does more bond buying, they are simply giving Treasury yields a stay of execution. Given the scenario, one might think that this would not be good for the dollar, to have people bailing out of Treasuries, and that could be true, but in reality, in the other bear markets for Treasuries, the beneficiary was the stock market. And I remember clearly what happened to the dollar when we had the stock market bubble going on — it was strong! Have we learned our lesson? Will there be another stock market bubble? Well, if you look at some of the latest stock moves, it’s scary.

But for now, the markets are still trying to sift through the wreckage of the eurozone. You all might recall that as we began the year, I told you that I truly believed that the center would hold in the eurozone, and we would begin to see the Chicken Littles for the euro (EUR) and eurozone fade away, and the focus could shift back to the US and its own debt problems. And that won’t be good for the dollar.

So as you see, we’re still stuck in the mud, with no clear direction for the currencies and precious metals. But ever since the “takedown” of gold early in March, the shiny metal has tried to mount a recovery. It will be difficult, I do believe, for gold to put together much of a lasting recovery right now, as long as stocks are the belle of the ball.

And don’t forget that just last week, Fed Chairman Big Ben Bernanke said, “the central bank will consider further stimulus.” And what has been one of the big reasons the Fed has undertaken two previous rounds of quantitative easing (QE)? Well, let’s go to St. Louis Fed President James Bullard for the answer to that. When asked if QE had been successful, Bullard responded with two items that I found to be interesting: Asset prices had recovered, and the dollar had depreciated. So QE was targeting strong stock prices and a weaker dollar.

OK, enough of all that! This past weekend, China reported that their version of the PMI (Purchasing Managers Index), which measures the pulse of manufacturing, had risen to its highest level in a year (in March), which had a number of 53.1. You may recall that recently, China’s PMI has fallen through the line in the sand at 50, so this report was very favorable to the global growth crowd.

And as always, the proxy for global growth, the Australian dollar (AUD), responded favorably. I did read this past week that the Reserve Bank of Australia (RBA) will meet tonight (tomorrow for them) and keep rates unchanged, although most observers feel that the RBA has two more rate cuts to make before the end of July. I don’t see it that way, but I’m just the lone wolf here. The markets observers will push the envelope and pressure the RBA to cut rates. The RBA will eventually respond.

But for now, the A$ gets to have some life from the Chinese number and forget about the rate cuts on the horizon.

I see where Mexico’s and Canada’s leaders will meet with the U.S. president. I can hear all the clamoring starting again about the Amero, which is at the top of the list of strange stories that we hear, the other one being the so-called “revaluation” of the Iraqi dinar. We’ve heard from people for years now that “this is the week it will get revalued,” and that week goes by without a word.

I know that last paragraph will stir up a hornet’s nest with the folks that believe in those two stories, but don’t shoot the messenger.

One of the reasons the euro has been boosted in price a bit lately is the news that the finance ministers from the 17-member monetary union had put together a package that included 500 billion euros, in addition to the already 300 billion euros already in the fund, which will be used as a stabilization fund.

There are questions about how much further the German constitution can be pushed with regard to becoming more “European.” But Franz Mayer of Bielefeld University says that Germany’s Basic Law is “stretchier than many think.” We’ll have to wait until May to find out for sure if Germany can continue down this road to an equal partner in a united Europe, when the Bundestag meets to discuss the matter.

The BRICS (Brazil, Russia, India, China, South Africa) have really been stirring the pot with their comments and actions lately. All five rallied after they announced that they would form their own form of a “World Bank.” But they are going to have to come up with announcements each week to support their currencies because the effects of that announcement last week have already faded.

The price of oil sure has hit the skids, falling to $102. But it’s still over $100, folks. That’s not real help for the economy, but does underpin the petrol currencies.

And speaking of a petrol currency. The British pound sterling has really been a move to higher ground lately. But I think this is premature. There’s nothing exciting going on in England, and their latest budget is questionable, at best. So be careful here.

Then there was this — this is more of a public service announcement today — from The Wall Street Journal: “Global Payments Inc., which processes credit cards and debit cards for banks and merchants, has been hit by a security breach that has put some 50,000 cardholders at risk, according to people with knowledge of the situation.” That includes MasterCard and Visa cards, folks, so be prepared to get that call from your card issuer, informing you that your card has been compromised. If no call is received, then consider yourself lucky!

To recap: Chuck’s back, and it’s April! The currencies and metals are still looking for some clear direction to take, but volatility remains. The bond rally that began in the early ’80s might be coming to an end, but it won’t die easily, as the Fed prepares for another round of bond buying, thus supporting the price of the bonds. China posted a very strong manufacturing index number, which was a kick-start for the global growth currencies led by Aussie dollars.

Chuck Butler
for The Daily Reckoning

The Daily Reckoning