En Garde! Dueling Fed Members

Today’s Pfennigfor your thoughts…

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

Front and center this morning: we had two dueling Fed members speaking yesterday, both with differing opinions on rate hikes.

I read what Chris had to write yesterday, regarding how it’s going to be some interesting trading heading into the September FOMC rate decision meeting.

Well, then these two Fed members decided to speak their minds and now things are even more interesting!

First, Fed member, Lockhart, Atlanta Fed President, had this hawkish statement:

The bar is high for not acting in September and that it will take a significant deterioration in the economic picture to not hike rates this year.

OK, so the markets heard that and reacted accordingly with the dollar receiving some love.

But then along came Jones, Tall thin Jones, Slow walking Jones, slow talking Jones, Along came long, lean, lanky Jones.

Well, not really, I don’t think for one minute that Fed member Jay Powell, resembles “Jones”, it was just a play on the lyrics, so please don’t accuse me of calling a Fed Member “slow talking”!

But Fed Member Powell came out and defused the Lockhart statement by saying that “it is appropriate to wait and see data before deciding, in September, and if a rate hike is warranted, the path of rate hikes is likely to be gradual.”

So, dueling Fed members! I love it! Nothing like confusion for the markets, when the Central Bank members don’t all sing from the same song sheet.  UGH!

Oh well, the markets don’t seem to care and they just kept buying dollars. And the currencies this morning are, for the most part, sitting with losses.

You know, yesterday should have been a wake-up call for the people that make the calls on the economy. The U.S. Trade Deficit blew out the forecasts by widening to $43.84 billion, from $40.94 in May, and a forecast of $43 billion.

So, you may be asking, why is this significant?

Well, you see the U.S. Trade Deficit weighs on the economy — I don’t care what anyone says that’s contrary, it does in my mind. And why is it widening by so much these past few months?

Well, that would be the stronger dollar.

It won’t be long now and the boys and girls over at the “Trade Side” of the government, will be claiming that the government must do something about the stronger dollar, or else “trade” is going to come to a standstill.

I remember the last time the dollar was stronger for more than a year, as it is now, and I even wrote about the trade side pounding their fists on the podium and asking for help. So it won’t be long now, folks.

The Aussie dollar (A$) is down 1/3 of a cent this morning, but was down a full cent in the overnight trading sessions.

You see, Australia printed their labor report last night, and although it had a surprise number for the unemployment rate, the overall report was quite good.

So, it must have been a bout of profit taking after the huge move we saw in the A$ earlier in the week, because this labor report was just fine!

The unemployment rate, as I said, surprised on the upside moving to 6.3% from 6.1% — which was the bad part — but other than that, monthly employment rose 38,500, and there was a very nice rise in the labor participation rate, which is opposite of what we see here each month!

Across the Tasman, the New Zealand dollar/kiwi is the opposite of what’s going on in Australia with the A$… and kiwi is one of the few currencies carving out gains vs. the U.S. dollar this morning

It’s not because of any strong data. I think it looks like investors switching from A$’s to kiwi, and we’ve seen this before, and it usually don’t last too long. So, let the Big Boys have their fun, and let’s sit this one out.

In Germany this morning, German factory orders rose 2% in June. This beat the forecast for a 0.3% rise, and this marks the 3rd consecutive month that the actual beat the forecasts.

And there was good news from the Eurozone. As a whole, the Eurozone July Market PMI (manufacturing index) printed at a much better 54.2 vs. the previous month’s print of 50.4.

Things are looking up here folks. Is the recession a thing of the past now? I do believe so. But there are still worries about overall debt for the Eurozone, and until those worries dissipate, the euro will remain subject to bouts of weakness.

Mom! He’s doing it again! HAHA! The “he” here would be Bank of England (BOE) Gov. Carney, and the “doing it again” is his insistence on continuing to talk about a rate hike, when there isn’t one, in reality.

The pound sterling has seen some good performances lately and they are all tied to the talk of a rate hike by the BOE. But get this — the BOE already met today, and they voted 8-1 to keep rates unchanged.

Now does that look like a Central Bank that’s on the edge of voting for a rate hike?

I could go back to the days of Carney as the Gov. of the Bank of Canada (BOC) and he did the same thing there. And then last summer, when the pound began to rally, and it was all because of the rate hike talk by Carney.

But a year has passed, and we haven’t seen a rate hike have we? And we aren’t going to see one either!

That’s my opinion of course, and I could be wrong. But was I wrong when I realized what he was doing at the BOC and exposed his bag of promises? Was I wrong last fall when I told you that the pound’s rally would soon stop once the markets figured out that Carney was not going to hike rates soon?

Oh. and the pound is getting whacked this morning on the news that it was an 8-1 vote in favor of remaining on hold.

Well, there’s been a lot written about China in the past couple of weeks. But not much has changed. We still have the “believers and the non-believers” of China’s economy, currency, and the moves that China’s making to secure their place among the reserve currencies of the world.

You all know what side of the fence I’m on. In fact, China should be using my mug as their poster child of progress, for I’ve been on their bandwagon since 2008, when I first recognized what they were doing with their currency swap agreements.

The renminbi/yuan was allowed to appreciate a bit last night, but when will it be allowed to float? Well, that won’t be long now, I don’t believe, but even when it does float, it won’t be a “free float”, and it will be the dirtiest of the dirt floats.

A dirty float is what we have with most currencies, in that they are subject to central bank intervention, where a central bank either buys or sells the currency, thus taking the “true market value” out of the currency and away from the markets.

In Russia yesterday, Russian inflation for July rose 0.8%  vs. June and 15.6% year on year. This was pretty much in line with the forecasts, but in my mind it has to be a reminder to the CBR (Central Bank of Russia) that they need to be careful with their rate cuts, as the inflation wolf is always at the door.

The ruble has really lost some ground while I was gone, and is now back in the 62 range, which is quite a bit weaker than the 56 range the ruble was in not that long ago!

The price of oil continuing to drop is not helping the ruble one iota.

On a sidebar — I filled up the gas tank in my car before I left S. Florida earlier this week, and the price for a gallon of premium gas was $3.42. Then I filled up my gas tank here in St. Louis yesterday, and a gallon of premium gas was $2.69.   Now, I know the price of gas has been dropping lately, but come on Florida!  That’s ridiculous!

Well, the U.S. data cupboard is not very full of data today for us to view. The usual weekly initial Jobless Claims will print, and the markets will begin to get ready for the Jobs Jamboree tomorrow.

By the way, the ADP Employment Change report that printed yesterday, and is supposed to be a good indicator to what the BLS will have for us tomorrow, and it showed a drop in jobs added in July from 229,000 to 185,000.

That’s not a good sign, but remember, the BLS plays games with the Jobs report, and I’ve become so disillusioned about the BLS report that I would like to just forget about it going forward. But the markets won’t forget about it, so I have to pay attention to it, even though I don’t want to!

I feel like a little kid at night. But I don’t want to go to bed!…  But I don’t want to talk about the BLS jobs report!

And gold. UGH. Well, at least the shiny metal isn’t trading with red numbers this morning (losses). But the green numbers are very small.

I saw where guitar playing friend, and investment guru, Dr. Steve Sjuggerud said in his most recent letter, that “gold sentiment is lower that it was in February 2001, when gold was around $260 an ounce.”

But for all of that know Steve and his trading preferences, this is like manna from heaven for him. Steve has always looked for things that people hate the most, like real estate a few years ago, and then he buys them cheap.

Well, I’ll be waiting to hear when the good doctor decides that enough investors hate gold.

Well, this news almost slipped right by me. And it’s not good news, as far as I’m concerned, for my view on what’s going to happen to all this dollar strength.  But it is what it is, and there’s nothing I can do to change that.

I saw this in the 5 Minute Forecast yesterday and Chris’ comments. and about had a heart attack, for I had not seen nor heard of anything near to this. I’m so depressed right now. Here you go:

The International Monetary Fund issued a report yesterday saying the Chinese renminbi still isn’t ready for inclusion on the IMF’s “super currency,” formally known as the special drawing right (SDR). At present, the SDR comprises the dollar, the euro, the British pound and the Japanese yen.

“China wants to do what the U.S. has done,” our Jim Rickards explained in this space last May, “which is to remain on a paper currency standard but make that currency important enough in world finance and trade to give China leverage over the behavior of other countries.”

China will get there — but apparently not this fall, when the IMF is set to formally decide whether to rejigger the SDR. Still, the report left the door open for revisiting the issue next year instead of waiting until the next review in 2020.

Chuck again. Well, I want to thank my friend, Dave Gonigam, for his keeping his readers up to date on this.

Like I said, I missed it completely, but then I was on vacation!

I have to wonder what I’ll do now, given all that I’ve put into the thought that this was going to happen this fall, and that would be the end of the dollar strength. Back to the drawing board, and square one.

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

Regards,

Chuck Butler
for The Daily Reckoning

P.S. The Daily Pfennig is first published everyday, right here.

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