China Prints Stronger Than Expected GDP!

And now… today’s Pfenning for your thoughts…

Good day, and a marvelous Monday to you!

I turned on the currency screen this morning, and noticed something very strange. It was as if currency traders were waiting for something, some news, or other thing that might get them to get off their duffs and get to trading, for the currencies, except for Aussie dollars (A$) are for the most part, flat this morning.

For what’s up with the A$, we’ll have to first visit the Big News from overnight that came from China, so when you’re ready for that, let me know, and I’ll start. HA!

China printed some interesting data overnight, with the highlight being their 3rd QTR GDP, which rose 6.9%, beating the so-called experts forecast for a 6.8% number. What was interesting about this print, that was the slowest quarterly print of GDP for China since the first 3 months of 2009, was that the difference in the strength of the number was consumption outpaced exports.

Whoa there partner! Did you just say that the great switcheroo that China has been working to take place where domestic demand would pick up the slack of exports has happened?  Well, I don’t live there, but given the data, I would say so!

The growth in the services sector rose 8.4%, while the secondary industry, which includes manufacturing weakened to 6%…  And here’s further proof. Industrial output rose 5.7% in September from a year earlier, while Retail Sales rose 10.9% vs. the same period.  Now, the 10.9% rise in Retail Sales has definitely come off a multi-year low, and looks impressive, but is still 1/2 of the lofty number (22%) for this data set in 2009.

So, according to the data, there’s been the BIG Rebalancing of growth in China, which is a very good thing in my humble opinion. A large economy like China needs to be diversified, and they just had to get away from having their growth be solely at the mercy of manufacturing and exports. And all that news is what has the A$ the sole currency with a breakout move this morning.

Diversification is the key folks, for just about everything. For instance I’m reminded of 20 years ago, when I was an elected Alderman of my little river town. The first thing I did was dive into the finances of the city, which was the shining light of the county, because they had a treasure chest of reserves, paid for trash pickup, sewer and water bills for all residents, and had the best streets around. I noticed that nearly 90% of our city’s income came from the Chrysler plant that was located within the city’s borders.

I pitched a fit at the meetings, that we as a city needed to diversify our income, not that I foresaw what was about to happen years later, to the Chrysler plant, but just for general purposes.  So, eventually the city did diversify, and we built some very cool shopping centers, recreation center, and stopped spending so much on the residents. Skip ahead 10 years, and the Chrysler Plant is gone, and I mean gone, leveled, and is now just a big empty lot, but the city is doing fine, because they diversified their income stream long before the financial meltdown which counted Chrysler one of its fallen pieces of collateral damage.

So, when China decided a few years ago, that they were no longer going to be held hostage to the rest of the world’s import demands, and diversify their income/growth, I applauded them. And this switcheroo hasn’t been an easy thing for China to do. And it’s taken them a long time to even see small results like in the 3rd QTR, but remember, China is tied for the #1 economy in the world with the U.S., size wise, so, it was difficult turning this big ship at such an angle!

With the currencies, for the most part, flat this morning it gives me an opportunity to spend a little more time with China than I usually have time or space for, so let’s just stay here or sort of here, with the thought that China is unloading Treasuries. Now they might not be outright selling their Treasuries, instead just failing to show up at the Treasury auction with trunks full of cash.

So, when I saw this article on Bloomberg that was titled, “China’s Selling Tons of U.S. Debt, & Americans Couldn’t Care Less” You know I just had to dive into that and see what’s going on. And here’s the skinny:

I grew bored with the Football games yesterday, and Cubs and Mets just don’t seem to do much for me. So, I started sniffing around the Bloomberg to see what’s out there for the Pfennig this morning, and brother did I ever find something!

Remember a few weeks ago, when I posed the question, of “I wonder who’s buying Treasuries at these negative real yields?” Well,  this article on Bloomberg sure told me what I needed to know, and that is that U.S. Mutual Funds, and retail investors are lining up to take on the Treasuries that China has been unloading.  Interesting, eh?

This tells me that Mutual Funds and investors have taken to the thought boldly, I might add, that the U.S. economy just isn’t strong enough for rate hikes.  The U.S. economy according to Bloomberg, and I would concur, because I’ve said this all along, so it’s nice that they’ve come around to my way of thinking, well the U.S. economy is plagued by “lackluster wage growth and almost no inflation”.  And therefore the economy isn’t strong enough for a rate hike.

Now. I’ve been pretty bold and pounding my chest about this no rate hikes thing, and so far I’ve been as right as rain.  But what happens to all those accounts in those Mutual Funds, and investors if the Fed decides, to hell with Chuck, let’s hike rates?  It won’t be pretty, but then hey, the owners of the Treasuries will get to hold them until maturity, at negative real yields, and in the end get paid back in dollars that  will most likely be worth far less in purchasing power than what they started out with.

Ooh, that sounds GREAT! Sign Me Up! NOT!

So, there you go! The answer to one of our mysteries. and all this time I thought it was the Fed that was buying the differences, given their monetary balance sheet is larger now than it was when they stopped buying Treasuries and mortgage backed bonds through Quantitative Easing/QE. I would have to think that there’s still some buying from the Fed going on, but that’s just me, and my opinion which could be wrong.

The euro is flat this morning but overnight was up about 1/4-of a cent, on some words by an ECB member. Let’s go check this out! Recall last week when I told you that European Central Bank (ECB) member Nowotny, had deep sixed the euro by saying that the ECB had “clearly missed their targets” which the markets took to mean that he was suggesting that more stimulus was needed?

Well, I guess he got the memo from ECB President, Draghi, because last night, Nowotny said in an interview when asked about additional stimulus, that, “This is something that we will have to discuss when the time comes. In my personal view “it’s too early to talk about this” because we still have to wait to almost a year till September next year.”  So. apparently, he got the memo, eh?

The ECB will meet this Thursday. So, I guess what happened was Draghi lets Nowotny know that he intends to keep everything unchanged at the meeting on Thursday, so it would behoove Nowotny to go out and do some damage control on his words from earlier in the week. And now that I’ve been researching and writing for an hour, the euro has dropped about 1/3rd of a cent in early morning trading. Hmmm…

This will be an important week for Canada, as they first hold an election today, and then have some key data prints to round out the week. Stuff like: The Bank of Canada’s (BOC) Monetary Policy Review on Wednesday. I expect that the BOC will hold rates steady Eddie. and sound a little for optimistic about Canada’s economy, and then finish the week with their latest CPI (consumer inflation) report on Friday.

In the election today, the polls still have the Liberal Party in the lead, which I told you last week, historically helps the stock market in Canada, and if that happens the Canadian dollar/loonie will react favorable too. Well, at least that’s what’s happened before.

Goldman Sachs says that the pound sterling should rally, because the markets are too dovish on the rate forecasts in the U.K.  Apparently, that’s all the pound needed to get moving higher again. Because when Goldman says something is to be, it will be. I guess, Goldman didn’t get my memo on who is running the Bank of England (BOE) and making those interest rate decisions. Longtime readers know how I feel about BOE Gov. Mark Carney, and his bag-o-promises. So, I guess we’ll see who’s right here, eh?

Gold is down $5 and nearly $6 this morning. A couple of weeks ago, gold’s trading pattern was up by night, down by day. Last week, it changed from down by night, up by day. The games people play now, every night and every day now, never saying what they mean, never meaning what they say.

Oh, I shared with our metals guru, Tim Smith, a link to a piece on the internet where the writer says he has the proof that gold & silver have seen price manipulation. Now this proof, doesn’t tell us who’s responsible for the price suppression, that’s left to our imaginations. But the numbers are what they are. So, I’ll give the link to the article to you, but you have to promise me, that this article is all you look at. You see, sometimes I give you links to articles on websites that then the website has “other stuff” and that’s all I’ll say about that, I’ll just assume you get my drift there..

But I digress… you can find the link here. Have at it. it’s very interesting I must say! Are you ready? Yes I’m ready.

The U.S. Data Cupboard is basically empty today, with only the NAHB Housing Index to print, which is expected to print flat to the previous month. Friday’sData Cupboard had two of my fave prints: Industrial Production (IP) and Capacity Utilization (CAPU), and both were disappointing as I told you ahead of time I thought they would be.

IP printed negative at -0.2%, and CAPU fell to 77.5% from 77.8% the previous month. So, no expansions of Companies here in the U.S. and that doesn’t bode well for the future of the economy.  We also had the U. of Michigan Consumer Sentiment report which surprised me, and the markets by climbing higher than expected. The Index was expected to print at 89, but printed at 92.1 instead.

So, what are all these surveyed people confident about?  Tell me, tell me true. For inquiring minds need to know! For don’t they know, or haven’t they figured out that here in the U.S. we are having a very difficult time solving this economic mess we’re in, we have political dysfunction, and murder rates around the country that keep going higher and higher. And that’s just the start of what I would be talking about if they called me on a survey!

I wanted to point out that consumers are finally figuring out that the packages of food and the size of sandwiches bought, and so on are shrinking, but cost the same. I first talked about this a few years ago, and told you it was hidden inflation.

A dear reader sent me a picture of a box of cookies, that used to have three rows of cookies in the box, but now only has two rows, but costs the same as before. But yet, CPI isn’t going to catch that, and therefore we have hidden inflation. Jars of Peanut Butter, containers of butter, and I could go on and on with these examples. But, for you and me, we know what’s going on. It’s the rest of the country that can’t figure out why their groceries don’t go as far or last as long as they did before.

That’s it for today. I hope you have a marvelous Monday!


Chuck Butler
for The Daily Reckoning

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