Fed Keeps Rates Unchanged…Again!

Good day… And welcome to February! And a Happy Thursday to one and all! OK… I won’t be here tomorrow, so I thought I would bring my Friday greeting to you today! There was some upward movement in the currencies yesterday albeit contained. But at least the currencies held the hammer for a day, eh?

The Fed did keep rates unchanged at yesterday’s meeting, and the statement afterward was taken by the markets as “dovish”. I’m not sure the Fed was exactly “dovish” because they acknowledged that core inflation measures “have improved modestly”, but they still gave us the obligatory “inflation risks remain” and they maintained their tightening bias. But if the markets want to take that as “dovish”, and push the dollar down, then so be it!

The item that really got the currencies stirred up yesterday came from U.S. Treasury Secretary Paulson. The Treasury Secretary was reported to have said, “[IT] WOULD BE VERY HELPFUL FOR CHINA TO DIVERSIFY INVESTMENT POLICY AS [IT] RELATES TO RESERVES.” He said that? WOW! Now get this… I’ve talked about how the Treasury Secretary no matter who it is (O’Neil, Paulson) they all talk about a “strong dollar policy” and then speak out of the other side of their mouths and talk about how China needs to make their currency more flexible, which is double speak for “the renminbi needs to be stronger versus the dollar.”

Now… Paulson has taken another shot at the dollar, by endorsing the rumors that China is thinking about diversifying their trillion dollars of reserves. Folks… That simply means that the Chinese would sell dollars, thus making it weaker. No two ways about it dear reader, this is your Treasury Secretary pushing the dollar out in front of a bus!

And then, the coddling of Japan continued, with Paulson saying, “Economic fundamentals are driving yen’s value”. HOGWASH! Japan’s economic growth continues to impress, and yet, the yen gets love, only selling. And Paulson is “OK” with that weakness, but not OK with China’s currency weakness. Hmmm… This situation is not going to turn out pretty… I fear this will lead to a huge political faux pas.

Well… The Chinese renminbi had its best performance versus the dollar in two weeks last night, moving to the 7.7551 level. You know, it just makes so much sense for the Chinese to continue to allow the currency to move in 5% increments versus the dollar each year. I know that’s not exciting, and it doesn’t really do anything to correct the global imbalances. But as I said, it makes sense for the Chinese.

Yesterday’s data cupboard gave us a mixed Bag O’ Nuts. First of all, fourth quarter GDP printed at 3.5%, which at first glance is impressive, don’t you think? I mean, look at that! While people like George Soros said we (the United States) would experience a recession beginning in 2007, that fourth quarter GDP didn’t show any signs of a recession on the horizon.

However, just like I tell audiences all the time, you have to look at what makes up the GDP number. If it is dominated by government spending, then it’s a worthless number. And guess what? The fourth quarter GDP, while showing a strong consumer spending portion, also showed a ramp up of defense spending. Defense spending had taken a hiatus for a year or so, but now has really ramped up again, and has contributed greatly to the overall GDP.

The GDP was also negatively influenced by more bloodletting in the housing component. So all those talking about how the housing struggles are over had better take a second look!

So… consumer spending continues to fuel the economy. You know, yesterday I chastised the Fed for not raising interest rates with “real” inflation out of control… But I forgot to also chastise them for creating so much money. Money supply is crazy right now, and the easy credit continues. So, why wouldn’t consumers continue to spend? There’s no end in sight for the money creation! Money supply, as I’ve said here more than a few times over the years, is inflation. And interest rate hikes, without cutting money supply, just don’t cut it!

OK… What about the other data that printed yesterday? Ahhh, grasshopper I thought you would never ask! The Chicago purchasing managers report surprised on the downside, coming in with an index number below the 50 contraction/expansion line drawn in the sand. The index number was 48, and represents the lowest level since April of 2003. It will be interesting to see how this plays out in the National Manufacturing Index.

We also saw U.S. construction spending fell by 0.4% in December. Residential spending contracted 1.6% on the month, which is interesting given the strong housing starts report. On a year-over-year basis, residential spending posted a 12.3% decline. OUCH! Now that’s going to leave a mark on somebody!

Today, we’ll see two of my faves: Personal income and spending, which I’m sure given the GDP report that showed strong consumer spending, will continue to show that we spend more than we make. We’ll also see the National Manufacturing Index, which is measured by the ISM report. Manufacturing is oh-so-close to falling below the 50 level, as it sits precariously at 51.7.

Tomorrow is a Jobs Jamboree Friday, so we’ve got that going for us!

Before I head to the Big Finish… Japanese yen did gain one whole yen yesterday, but really, we’ve seen this over and over again. Now, if I wake up one morning and see that yen has rallied three whole yen or something like that, then we’ve got something!

Oh, and nothing like a cold snap across the nation… The president wanting to double the oil reserves, and an OPEC cut in oil production, got the price of oil going higher again! Yes, Jed’s bubbling crude, oil that is, black gold, Texas Tea, has continued its super ball bounce off the $50 level, and is trading this morning at $58.33.

Uh-oh… All those claims that inflation has been beaten down better go sharpen their pencils and redo the math on those thoughts!

Currencies today: A$ .7765, kiwi .6870, C$ .8490, euro 1.3020, sterling 1.9690, Swiss .8040, ISK 68.35, rand 7.19, krone 6.24, SEK 6.9450, forint 196, zloty 3, koruna 21.59, yen 102.42, baht 34.90, sing 1.5330, HKD 7.8020, INR 44.11, (the rupee continues to gain VS the dollar, albeit small moves!) China 7.7580, pesos 10.98, dollar index 84.61, Silver $13.63, and Gold… $655

That’s it for today… I know that many of you have been waiting patiently to hear word about our latest MarketSafe CD. Well, we still haven’t been able make any of the ideas we’ve had work. So, I’m thinking that with all the demand for the gold CD that we’ve received, that we’ll go ahead and bring it back! Now, the marketing people, and the products people, and the Web people, are all going to be mad at me for telling the Pfennig readers first! I’m out the door tomorrow to Oklahoma City to see a good friend of mine and attend a Pro Basketball game for the first time since I was young, and got to see the St. Louis Hawks! ( I don’t count the ABA St. Louis Spirits, that was more like minor league basketball). So… Have a great Thursday and weekend!

Chuck Butler — February 01, 2008

The Daily Reckoning