FOMC Wednesday

Good day…well, it’s wired Wednesday for not only us on the desk, but for the markets too, as it is FOMC Wednesday. I’ve beaten this one to death, but for those of you who are new to class or missed a previous assignment, I believe the Fed will leave rates unchanged for a third consecutive month today. However, I do not believe they are finished with their rate hike cycle, as inflation is stronger than the stupid CPI reports tell us.

But either way, the Fed is nearing the end of the rate hike cycle, and thus the removal of the second prop holding up the dollar. Whenever the markets will wake up and smell the coffee on this is beyond me. But they will…eventually, they always do!

Currencies trended up yesterday, albeit in a Tupperware-like range. This morning, the euro has been leading currencies higher, as German business confidence (as measured by the think tank IFO) has risen this month for the first time in the last four months. The Index climbed to 105.3, from 104.9 last month. The poor showings in previous months have been blamed on the rate hikes from the ECB, and the VAT (tax increase) that will go into place next year. Apparently, everyone has come to grips with those items, eh?

The latest inflation report from Germany shows an increase, even with the falling oil prices. How does this happen? Well…the VAT I talked about above is to blame. German companies went ahead and raised prices ahead of the VAT implementation. This would be like introducing the VAT now, so consumers get used to the higher prices…pretty ingenious, don’t you agree?

The euro has really been tied up in this trading range versus the dollar for five months now, and I’ve really grown tired of seeing it and talking about it; but it is what it is, and as long as it holds onto its gains versus the dollar this year, I think it is wise for us to keep our patience.

Speaking of patience, that’s what those who are waiting for the Reserve Bank of New Zealand (RBNZ) to raise rates again have had to own. However, I believe their long wait is about to come to an end. The RBNZ meets this week, and although last night’s inflation report was weaker than expected, I believe the gears were already put into motion for a rate hike, and that should keep the kiwi well bid.

Yesterday, our corporate FX guru, Ashish yelled to me from across the desk that the U.S. stock market had hit another new record level. On the way home last night I was thinking about the stock market run, and it hit me! The weakness in commodities, especially gold, can be blamed on a switch from commodities to stocks. That’s playing with fire, folks…well, in my opinion, it is!

Like I said from the San Francisco Money Show last week, people/investors are all walking around with those visions of sugarplums dancing in their collective heads. This is so similar to 1999, 2000, and 2001 – when these same investors only had the stock market on their minds. Those dollar signs are dancing in their eyes, and investors are blinded by the light, wrapped up and forgetting to look under the covers at the actual stocks they are buying. It’s crazy folks. People have forgotten the pain.

Did you see the news from Countrywide, the nation’s largest mortgage lender? Countrywide says they are going to cut 5% of their work force. Now…if that doesn’t tell you that the housing market is under some pressure, then nothing will!

And speaking of housing…today, we will see existing home sales for September, which are expected to fall 1.2 percent. This would make the sixth consecutive fall in existing home sales. That trend is NOT your friend!

OK…on to the Big Finish, as I’m out of things to talk about today!

Currencies today: A$ .7610, kiwi .6617, C$ .8870, euro 1.2585, sterling 1.8780, Swiss .7910, ISK 68.15, rand 7.67, krone 6.63, SEK 7.32, forint 208.90, zloty 3.09, koruna 22.55, yen 119.05, baht 37.08, sing 1.5710, HKD 7.7820, INR 45.36, China 7.9010, pesos 10.7950, dollar index 86.53, Silver $11.81, and Gold…$583.23

That’s it for today. What a great game last night! Chris Carpenter was masterful, and not one sign of “dirt” on his pitching hand! These games are tough on your Pfennig writer, as they end really late (for me), and cut into what little sleep time I do get! But I’d rather be staying up late to watch my Cardinals in the World Series than not…so…I’m looking forward to that big cup of coffee from Chris Gaffney this morning! Have a great Wednesday!

Chuck Butler
October 25, 2006

The Daily Reckoning