Fed Decides No Rate Hike For You!

Today’s Penning for your thoughts…

Good day, and a happy Friday to one and all! I bet a lot of you were thinking that I would start today’s letter, with a HUGE pat on my back, and rubbing the fact that the Fed left rates unchanged in the faces of those that said otherwise. But, I wouldn’t do that!  Because that wouldn’t be very nice. And I’m a very nice person, right? HA!

No worries, we’ll get to the Fed no rate hike decision in a minute, and I’ll be patting myself on the back, you can bet your sweet bippie!

But first, the important stuff! Like how I’m writing from home today, and probably most of next week. So bear with me, as there could be some technical difficulties causing delayed distribution, and other stuff. Maybe it will all work like it’s supposed to, and all will be right on the night. We’ll see.

Well, I’m sure you know by now that the Fed’s FOMC Meeting ended with a surprise. And that surprise was the FOMC leaving interest rates unchanged here in the U.S. I was taking a nap and my phone began to light up with messages, so I got up came over to my desk at home, where my laptop was sitting, and saw the news.  And here was my initial reaction to the news.

Look who was ri-ght, look who was ri-ght! For all those that thought I was wrong. I say. neener, neener, neener!

The Fed not only left rates unchanged, but the number of members thinking that the Fed would still raise rates this year, dropped, from 15 of 17 to 13 of 17. Next meeting it will be even more dropping, I’ll bet my good Mizzou baseball cap on that! If the surgeon hadn’t left me dependent on a cane 8 years ago, I would be dancing in the street right now. Not because the economy is deemed to be so weak, but because I not only said they wouldn’t hike rates, I said it a year ago!

So, recall yesterday I gave you the 4 options the Fed had to choose from, and then said that I thought it was narrowed down to 2.  Leave rates unchanged but still talk about rate hikes was the one I thought the Fed would choose, and said that it would leave the markets confused. Well, for that matter so too would have left them confused if the Fed opted for hike rates and talk dovish.

So, Fed Chair, Janet Yellen, said that she still sees a rate hike this year. But, “The Fed wants a little bit more time to make sure the U.S. economic outlook hasn’t fundamentally shifted. The Fed wants more evidence inflation will rise to the central bank’s 2% target.”

The Fed Chair said that the goings on in China, the market gyrations, the lack of inflation are their concerns. But there’s something there that she didn’t say, and I keep going back and I swear I can read it between the lines, and that is, that the Fed members are concerned with the unevenness of the economy, and therefore they do not yet feel that the economy is prepared for the first rate hike in nearly a decade. That’s my story and I’m sticking to it!

So, another FOMC meeting goes by. and no rate hike. Imagine that! Well, the currencies decided to finally cut some fat from the U.S. dollar. I told you that no rate hike would probably lead to a currency rally, which would not be based on the currencies’ starling fundamentals, but strictly an unwinding of all the dollar buying that was based on a rate hike scenario.

After getting to my laptop, and jotting down some notes to what I wanted to talk about today regarding the decision, I then flipped over to the currency screens, and saw the dollar getting sold, just like I had thought it would.

So, the euro is above 1.14 this morning, and not adding to its gains yesterday, right now. The big movers overnight are the Antipodean currencies. The Aussie dollar (A$) is up nearly 1-cent to .7265, and the New Zealand dollar/kiwi is following in the A$’s footsteps with nearly a 1-cent gain of its own to .6440. I always chuckle when I read stuff that calls these two currency “high yielders”.

Well, I guess in reality, they do have higher yields that most of the other Industrialized countries, but to call the “high yielders” these days, is stretching it a bit, eh?

In addition on the A$… Reserve Bank of Australia (RBA) Gov. Stevens gave his semi-annual testimony on the economy last night, and I have to say, I was impressed.  Stevens’ testimony, in my opinion, was generally upbeat, and he downplayed the global risk going on right now. He gave me the impression that the current monetary policy was in a good place right now.

And when a Central Banker sounds like this, folks, the currency usually reacts favorably, and that’s what’s behind the A$’s strong move overnight, after yesterday’s initial move higher.

The Canadian dollar/loonie isn’t taking a backseat to any currency today, and has moved above the 76-cent figure and is well on its way to 77-cents. All the currencies took part in the action vs. the dollar yesterday after the rate decision. But this morning there are some stragglers: the Norwegian krone, Swedish krona, and Russian ruble had good days yesterday, but today are struggling to keep their collective heads above water, and not doing a very good job of that, as all are taking on water today.

The Chinese renminbi appreciated for a 2nd consecutive day, thus breaking the pattern of one day up the next day down that had held the renminbi hostage for about a week. I guess the Chinese thought, hey! If all the other currencies are going to rally because the fed left rates unchanged we might as well allow the renminbi to rally too!

Sometimes, it’s that simple folks. I know it’s difficult to believe, but, sometimes it is that simple.

The price of oil remained in the $46 handle overnight. And the U.S. Treasuries got a HUGE move out of the 2-year and the 10-year issues. The 10-year, the one I track, because it is used in the pricing of loans, mortgages, etc.  dropped 12 Basis Points to 2.15%… which is a HUGE move in bonds folks.

I was reading some stuff yesterday about Treasuries, and in the article, they talked about how China was unloading Treasuries, which I’ve chronicled here in the Pfennig for you  dear readers previously.

But the question that always comes back to me when I talk about China unloading Treasuries, is, “So, who’s buying the bonds?” And I always hem and haw, beat around the bush and try not to say what I really feel is going on, but simply point everyone to the Pfennig where I highlighted the growth in the Fed’s Monetary Balance Sheet in the past year since they stopped buying bonds through QE.

But James Rickards believes that the buyers are the U.S. Banks. At the strong-armed request of the Fed.  I find that to be believable, and probably plays out better than my suggestion. But, I still think there’s some monkey business going on with the Fed’s Balance sheet growing like it has.

Gold also shot higher yesterday, and for once it is being allowed to add to its gains yesterday, with an upward move this morning, and silver is having a good day too. Platinum and palladium though are not having a good day right now, as both are in the red this morning. Earlier this week I gave you some news about the physical demand, and the record amounts of American Eagle coins, gold & silver, being sold from the U.S. Mint.

I read a piece on www.bullionstar.com from gold researcher guru, Koos Jansen last night, and came away thinking that something has to give with the gold price, very soon, I might add.

You see, Koos Jansen believes that gold is in backwardation in both New York and London.  Now we’ve come across this term, backwardation, before, but for all those new to class, backwardation is what happens when the futures price falls below the current spot price. A backwardation starts when the difference between the forward price and the spot price is less than the cost of carry, or when there can be no delivery arbitrage because the asset is not currently available for purchase.

That’s HUGE folks!  And should be a good opportunity for gold to move forward, as there has to be a price adjustment, when there is no gold available for purchase. That’s my story and I’m sticking to it!

See, we learn new things all the time in the Pfennig, don’t we!  I love using trading terms from time to time, as it gets my juices flowing, and makes me think about when I was a trader.. I began trading in 1982, after 9 years in the back office, and I traded short-term instruments, like T-Bills, Commercial Paper, and Bankers Acceptances (BA’s).

Then back to back office for a number of years, before my good friend, Frank Trotter, rescued me, and brought out to trade Foreign Bonds, from there it was onto currencies too.  And I have no idea, why we went down this road together. UGH!

Well, let the new calls for a rate hike in December begin. and they already have! UGH! I would have to go back and look at the history of when rate hikes were made on the calendar. But I suspect that a December rate hike would be a rare occurrence if one existed at all! But don’t let that get in the way of the rate hike campers calling for a December rate hike.

The Bond folks at PIMCO (the world’s largest bond fund) think that the Fed won’t hike rates until 2016. So, the going back and forth, with all the Fed members out singing their own songs about rate hikes, is what we have to look forward to for the next 3 months. You all know where I stand on this. I told you in 2014, that there would be no rate hikes in 2015, and I certainly am not going to begin changing horses in the middle of the stream now!

Quite frankly, I don’t know how the Fed has maintained their credibility, given their forecasts last year, said that inflation was going to be 2%, that economic growth would be strong, and there would be at least 2 rate hikes in 2015.  None of that has taken place. And so you see why I have a problem with the markets going along with whatever the Fed says.

I don’t mean to give the Fed the business, as Eddie Haskell used to say, but the facts are facts. I just think they need new economists.. Or read the Pfennig. yeah, that’s the ticket. And my first wife was a young Elizabeth Taylor! HA!

The U.S. Data Cupboard was a busy beaver yesterday, with Housing Starts declining in August. Hmmm, maybe they petered out from all the starts in the previous months as they tried to beat the Fed rate hike. Building Permits were stronger though, so much for that previous thought, Chuck!

The Bloomberg Consumer Comfort Index fell from 41.4 to 40.2. And finally, the 2nd QTR Current Account Balance printed a deficit (no surprise there) but it was lower than expected (big surprise there!) But let’s not get all lathered up about this lower number, given that the previous QTR was revised higher by $5 billion. And the lower number in the 2nd QTR was less than $2 billion below expectations.  So, there’s another $110 billion for our national debt.

And the hits just keep coming, eh?

The U.S. Data Cupboard only has the August leading Index data, which in July printed negative.  We’ll also see the Household Change of New Worth for the 2nd QTR. Not that this data does anything to move the markets, it’s just a good marker to keep track of how we are doing.

Well, I first saw this in a GATA release, and that led me to the full article on Bloomberg.  I’ll let you decide where this all leads. Here is the link to the story on Bloomberg, and here are the snippets:

“The same analytical technique that uncovered cheating in currency markets and the Libor rates benchmark – resulting in about $20 billion of fines – suggests the dealers who control the U.S. Treasury market rigged bond auctions for years, according to a lawsuit.

The analysis was part of a 115-page lawsuit filed in Manhattan federal court on Aug. 26 by Quinn Emmanuel Urquhart & Sullivan LLP and other law firms. The plaintiffs built their case against the 22 primary dealers who serve as the backbone of Treasury trading – including Goldman Sachs Group Inc., JPMorgan Chase & Co. and Morgan Stanley – using data from Rosa Abrantes-Metz, an adjunct associate professor at New York University who has provided expert testimony in rigging cases.

Her conclusion: More than two-thirds of a certain type of Treasury auction appear to have been rigged. She found issues with other auctions, too.

“The only plausible explanation is that Defendants coordinated artificially to influence the results of the auctions in the primary market,” according to the complaint filed by the Cleveland Bakers and Teamsters Pension Fund and other investors.”

Chuck again. Yes, everyone scoffed and laughed when the first lawsuit was filed on the LIBOR rigging, but looked what happened? And then the same came true with the currencies, and now this. But I still think the real bananas can be found if someone would actually look into the gold & silver price manipulations, and not just say they did, but didn’t!

That’s if for today. I hope you can makes this a fantastico Friday!

Regards,

Chuck Butler
for The Daily Reckoning

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