Get the Board Games Out - It's a Fed Game Day

And now… today’s Pfennig for your thoughts…

Good Day. And a Tom Terrific Tuesday to you! 

Well, get the board games out, it’s time to have a fed game day!  Remember when I used to talk about how I could hear one Fed member tell another Fed member, “by Joe, you’ve sunk my battleship”?  Well, I think the Fed members have moved on from Battleship, and now prefer the “new Monopoly”. Have you heard of this game?  The “monopoly money” has been removed, and credit is used to navigate, buy real estate, etc. and build your “monopoly”. I would think the Fed members balked at the removal of the “monopoly money”, wink, wink.

But seriously, the Fed begins their two-day FOMC meeting today, but nothing will come of it until they adjourn tomorrow afternoon, right after lunch. And that’s when the markets will learn a lesson. And that lesson is, “don’t believe everything you hear”.  

Three months ago, the markets heard the Fed loud and clear, that they were going to hike rates four times in 2016, and so the markets, naturally, believed that the Fed would begin that journey down the four rate hike road in 2016, at their March meeting. And for the longest time (up until yesterday), I thought like the markets did, that we should take the Fed at their word and that rates would get hiked in March. (Yes, I know the Fed never said, “we will hike rates in March”, but they may have well done so, given all their talk).

So, what you’re telling us Chuck is that you’re doing something you always tell us not to do, and that is changing horses in the middle of the stream? Yes, that’s what I’m saying, as I just can’t keep saying something when all the facts point to the opposite thought. But, I’m going to keep my initial thought in my back pocket to pull out should the Fed pull a rabbit out of their hat, and hike rates to add arrows to their quiver. But for now, that thought has to be put in my back pocket, because the Fed Funds Futures say no rate hike.

Currency traders are still buying dollars though, and this is the thing that finally got me to see the light about the rate hike. I read not one, not two, but three or four articles yesterday, after returning home from the ballpark, about how traders were now looking for the Fed to continue to “talk aggressive” about rate hikes, but not looking for a rate hike now. I said to myself, ” So this is what this has come down to? It’s all about the ‘the talk’ and not the ‘the walk’? The markets are telling the Fed, “come on, talk aggressive to me”.

The price of oil has dropped over $2 since Friday, and this morning, the Petrol Currencies are getting whacked, all of them, and whacked badly. The Russian ruble is the worst performer overnight, and followed closely by the Norwegian krone, Mexican pesos, Canadian dollar/loonie, and Brazilian real. The S. African rand is also a Big loser this morning, as rate hike thoughts disappear in S. Africa, causing a mass exodus from the currency.

The euro is down vs. the dollar, but not by much, as it was reported this morning that Eurozone Industrial Production (IP) had a very nice January print, rising 2.1% vs. the previous month, and that has underpinned the euro. And the fact that the euro isn’t a Petrol Currency, sure helps this morning!

The Bank of Japan (BOJ) met last night and kept rates unchanged and didn’t add to stimulus, but what they did do is talk about their three dimensions, and I think as we go along the situation in Japan is going to lead to more yen weakness. But this morning, yen is one of the few currencies with a gain vs. the dollar on the non-action by the BOJ last night.

Let me see if I can explain this three dimensions thing correctly (I can do it in my head, but can I explain it correctly is the question!). Recall how in January, when the BOJ announced negative rates on new deposits, they mentioned how negative rates were now their main policy tool? Well, last night they dropped that statement, and replaced it with a discussion of how they were going to maintain the option of “easing in three dimensions”  Those three dimensions would be quantity and quality of assets purchased and rates.

Whew! I’m worn out after that! Well, what’s new on the BREXIT front? For those of you new to class, BREXIT stands for British exit from the European Union, which will be put to a public referendum in June, and I’ve gone on record saying that I believe the referendum will go to the BREXIT voters.

The British pound sterling (pound) was getting clobbered daily when this was the talk of the town last month, but a month later, that the pound is firmly back above 1.40, so what gives? Did the BREXIT talk fade? Well, the “talk” in general faded, until a poll was taken and made public showing that the BREXIT vote had the majority. But it was closer than I would have thought. So, there you go. Keeping you abreast of the news, that’s my goal (I hope you know that I say that in jest. My main goal is to get you to think and then to take action, in response to thinking!).

The Reserve Bank of Australia’s (RBA) meeting minutes printed last night. This is from the last meeting of two weeks ago, when the RBA left rates unchanged. The minutes didn’t add anything to what RBA Gov. Stevens had told them two weeks ago. And that is the RBA will keep their easing bias as needed. So, as usual, we need to watch the data in Australia, for it will tell us what to expect from the RBA going forward.  The Aussie dollar (A$) continues to see an unwinding of the strong risk sentiment that persisted a week ago, but has since faded.

The same can be said for the New Zealand dollar/kiwi. However, kiwi had a spanner thrown in its rally works, by the Reserve Bank of New Zealand (RBNZ) who cut rates last week. New Zealand will print their latest Trade Balance tonight. This is where New Zealand gets into trouble with the markets, as their Trade deficit has remained stuck around 3.3% of GDP. Not the worst in the world, but certainly not the best either, and with an economy as small as New Zealand’s (compared to the Big Boys) this really begins to stick out like a sore thumb!

Gold took a shot to the mid-section yesterday. At the end of the day, gold was down $15 from the previous day. And the other precious metals, silver, platinum and palladium are all following gold lower. Gold is flat this morning but has been down a couple of bucks or so, as I’ve been writing.

I was reading Ed Steer’s letter, and thought he nailed silver’s recent moves, as he was not happy that a certain entity (I won’t give them credit here) had been on the sidelines recently as silver rose in price and attempted to narrow that ratio percentage with gold. But he believes he saw this certain entity back in the silver markets with 3,000 new short contracts in silver. He also believes, as do I, that if those 3,000 short contracts in silver hadn’t shown up that silver was about to explode in price upward. Oh, well, we live to fight another day, another battle, right?

The U.S. Data Cupboard finally gets restocked today! And February Retail Sales will print. The BHI indicates to me that the report will be disappointing at best. Uh-oh! But don’t be discouraged there will be plenty of other data prints this week. But I wouldn’t get my hopes up too much that they will be strong and show the U.S. economy growing at a better than 2% clip, which is what we’ve been stuck at since 2008.

The data cupboard will also have PPI for February, the Empire Manufacturing Index (NY region) for March (so far), and the old Total net TIC Flows, which used to be important, but not any longer. Sort of like the late great Yogi Berra’s quote about a popular restaurant, “nobody goes there anymore, it’s too crowded”. HA!

Thanks to dear reader Bob, for alerting me to this report from the BIS (Bank for International Settlements) that highlights what they think is going on between the markets and Central Banks. Something that I’ve talked about for a few months now, and that is simply that in the markets’ eyes, Central Banks have lost credibility. Let’s check out some of the stuff the BIS put in their recent report titled: “Uneasy Calm Gives Way To Turbulence” and can be found in its entirety here.

But I have some highlights that I circled while reading the report, even a guy like me that has said this over and over, I got chills reading it, because, now it’s coming from someone, or some entity that’s much larger than Chuck Butler. Let’s lend an ear here:

In late January, the Bank of Japan (BOJ) surprised markets with the introduction of negative interest rates, after the ECB had announced a possible review of its monetary policy stance and the Federal Reserve issued stress test guidance allowing for negative interest rates. On the back of poor bank earnings results, banks’ equity prices fell well below the broader market, especially in Japan and the euro area. Credit spreads widened to a point where markets fretted about a first-time cancellation of coupon payments on contingent convertible bonds at major global banks.

Underlying some of the turbulence was market participants’ growing concern over the dwindling options for policy support in the face of the weakening growth outlook. With fiscal space tight and structural policies largely dormant, central bank measures were seen to be approaching their limits, and running out of effective policy options.

Chuck again. So, basically in the end the BIS report refuses to blame Central Banks for condition of the world economy, and I find that distasteful. The massive debt overhang, and the stock markets binge, and the global economy is all directly attributable to the zero interest rate policies, and bond buying schemes that led to cheap money, should be at the top of anyone’s list for the problems today around the globe, and then add to it the bad timing of a Chinese slowdown and a plunge in the price of oil, and you’ve got the perfect storm brewing for another financial crisis. That could have been averted, but those that make the rules didn’t seem to think it was necessary to put an end to the party by removing the punch bowl.

That’s just my two-cents plain.. my humble opinion of which could be wrong!

And on that note, I’ll get out of your hair for today, and hope you have a Tom Terrific Tuesday!  And remember, Be Good To Yourself!

Regards,

Chuck Butler
for The Daily Pfennig

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