FOMC Rate Hike Unlikely

Today marks 1-week since I’ve been back writing the Pfennig… I simply love writing the Pfennig each day, and boy did I miss it when I was unable to write. Vacation is one thing, those are well-deserved breaks, but to not be able to write is another. So… I’m thankful that I’m able to write again…

Well… The euro (EUR) went into a tailspin yesterday, and for once it wasn’t Greece so much… This time it was a little Greece, and a lot Portugal. The ratings agencies downgraded Greek debt to junk… And they downgraded Portugal’s debt from A- to A-2, with a negative outlook. The fear that Greek’s debt problems would spread, is coming to fruition… The euro fell to a 1-year low during the day, and the selling didn’t stop in the US!

All the non-dollar currencies, except yen (JPY) again, saw selling, as the risk assets of currencies and stocks got sold across the board. US stocks fell below 11,000… The one risk asset that was pushing higher, as one would think it would, given the problems in the world today, was gold. The shiny metal reached a high of $1,169 during the day… I’m told that $1,170 is a key level of resistance.

Let me remind you that gold’s all-time high is $1,226… Stealth-like moves higher day in, day out by gold, eh?

It’s really a good story on gold, and one that makes sense, right? I mean does selling the euro make sense when there are debt problems in states of less than 14% of the total GDP in the Eurozone? Maybe… But to buy dollars, when the debt problems of the states in trouble represent more than 29%, doesn’t make one iota of sense.

Maybe… Just maybe, gold will begin to trade inversely to risk assets, which would be a HUGE change… And maybe it will get gold going in a new light…

With all these debt problems in the world, one would think that gold would be going higher… The question that most will be asking now is “when does the PPT step in?”

Oh I know they chuckled at me, and made fun of me on CNBC last spring when I tried to tell them about the PPT… They told me I should take the story to Hollywood… But then last fall, and earlier this year, there was all that proof that someone outside the markets were playing games…

OK… Let’s get back to the currencies… With the dollar swinging its hammer once again, you have to be sitting there asking yourself, should I bail? Or… Should I look for opportunities to buy more, for… When the dollar is strong, you certainly get to buy more currency, eh?

Today… German officials meet with Chancellor Merkel, and the IMF… Any hint of smoothing over the comments of the Finance Minister the other day, would go a long way toward stopping this tailspin for the euro. I’ll keep an eye out for any news here as we go through the day… But if you should see the euro begin to gain, and thus drag the other non-dollar currencies higher versus the dollar, you can bet your sweet bippie that some smoothing over has occurred!

OK… So the much-anticipated CPI (consumer inflation) data in Australia finally printed overnight… Headline CPI rose by 0.9% (forecast was +0.8%)… Yesterday, after I hit the “send button” on the Pfennig, a Reserve Bank of Australia (RBA) official made a statement about the forecast, which put the statement by the RBA Governor in a different light. The new statement said something to the order of: “If CPI is 0.8% or higher, the RBA will raise rates at the next meeting.” Hmmm… Well, CPI was greater than 0.8%, so I guess we can all continue to lean towards another 25 BPS hike next week!

Australia’s kissin’ cousin across the Tasman, New Zealand, will see their central bank, the Reserve Bank of New Zealand (RBNZ) meet tonight… While I don’t expect the RBNZ to move rates higher tonight, sooner or later, they are going to feel the pressure to “keep up with the Joneses”… (Australia, that is). That and the fact that economic data is stronger all the time, like the recent RBNZ Business Sentiment Index, which printed very strong going from 42.5 to 49.5… WOW!

The question for the RBNZ will be just when they take the governor off interest rates. I suspect it will be next month.

In the US today… The Fed, which began their FOMC meeting yesterday, will end it today, with a statement… I do not expect any rate movement, and I fully expect these knuckleheads to maintain their statement about low interest rates remaining in place for an “extended period”.

I don’t know about you, but to me, any statement like that from the Fed today, should deep-six the dollar… But… That’s just me…

Speaking of The Fed… Chief Cook & Bottle-Washing Fed Head, Big Ben, was speaking to the National Commission of Fiscal Responsibility and Reform yesterday, and had this little ditty to say… “In the absence of further policy actions, the federal budget appears set to remain on an unsustainable path.”  I guess he’s not so blind after all! But seriously… Did you see this quote on any major new media last night? Of course you didn’t! It wouldn’t be prudent for the media to report on our unsustainable path… Much better to tell you that everything is hunky dory.

I’m seeing a rise of the euro as I go along this morning, with the single unit climbing back above 1.32… Could be a sign of some smoothing going on, but I’m not seeing any reports just yet.

Yesterday’s data brought us the S&P Case-Shiller Home Price Index, which showed home prices falling… But then we put on a happy face and consumer confidence jumped higher… In fact consumer confidence is the highest it’s been since September 2008!

Hmmm… I guess the Consumer Confidence Board isn’t surveying the millions of citizens that are currently unemployed… My local newscast yesterday was interviewing some retailers here in St. Louis, and they all were confident that “things were getting better”… Hmmm… Again, I don’t see how that could be happening with the unemployment picture… But, I take things for what they are worth; I don’t embellish them to make people feel better…

The data cupboard is empty today… With just the FOMC announcement this afternoon on the docket…

And before I go any further… The Canadian dollar/loonie (CAD) has fallen through the 99-cent figure… It’s now a full cent and 1/2 lower than it was two days ago… You have to ask yourself… Is this a buying opportunity?

Then there was this…

The boys and girls at the big G-20 meeting last weekend expressed concern over the European Union (EU) and IMF aid package for Greece, that it would not be strong-enough. Hmmm… Gotta think ahead here, folks, and think about what G-20 might be saying about the US debt problems, if… They didn’t have their heads in the sand!

The issue of re-balancing global growth was also high on the agenda at the meeting in Washington.

The world’s emerging economic powers should play a tougher role in reforming the existing financial structure, says Brazilian journalist Pepe Escobar. You’ve just got to love this, if you are a BRIC holder… For this is very much what I would tell people would happen in the future… We’re talking about countries that have HUGE reserves, and a very large portion of the world’s population… Sooner or later, the world will have to take them seriously!

“We have Luxemburg, the Netherlands and Belgium that have more voting power than Brazil, China and India. This is completely absurd. So the BRICs have to start their pressure from the inside and that is – try to alter and ameliorate at least the Bretton Woods institutions and start to actually act as new emerging economic powers in the world.”

To recap… The euro went into a tailspin yesterday when not only Greece’s debt was downgraded to junk, but now Portugal’s debt was downgraded with a negative outlook. There are meetings today in Germany about the aid package; any soothing words would go a long way toward placing a tourniquet around the euro right now… Gold bucked the trend of going along with all the other risk assets yesterday, and gained ground on the day. And the FOMC meeting adjourns today with a statement from the Fed Heads… No rate move is expected.

Chuck Butler
for The Daily Reckoning