Good Bond Auctions in Spain and France

The risk assets’ rally that was going on yesterday morning continued throughout the day, and overnight and European sessions. This morning, the currencies have received a boost from a couple of fairly good bond auctions in France and Spain. In Spain, the demand outstripped the supply, but the yields rose to above 6%. So the euro (EUR) is pushing toward 1.26 this morning. You may recall that a week ago, the single unit hit 1.2365. So the next five days of trading have been kind to the single unit.

Yesterday, I talked of hope for a resolution in the eurozone, and then some of that hope came to realization when it was announced that a deal is in the works that would allow Spain to recapitalize its weak banks with aid from its eurozone partners but avoid the embarrassment of having to adopt new economic reforms imposed from the outside. Apparently, Spain just needs to put in a formal aid request.

The Australian dollar (AUD) continues its attempt to get back to parity. Yesterday, I told you about the stronger than expected first-quarter GDP and the upward revision to the fourth quarter 2011 to GDP, and how those reports had fueled an A$ rally.

Last night, the Aussies printed a very strong employment report, with job creation reaching 38,900 for May, and the unemployment rate falling from 5.1% to 5%. Put the stronger-than-expected GDP reports with what now makes two consecutive months of strong jobs gains, and once again, I say to the Reserve Bank of Australia (RBA), “and you cut rates 75 basis points in the past six months?” Really?

Oh, well, and what a doltlike faux pas for me yesterday, saying that the European Central Bank (ECB) would meet today. All I had to do was check the calendar of economic events, and I would have seen that the ECB changed their meeting date to Wednesday, instead of the usual Thursday meeting day, which they’ve had for a long time! But NOOOOOOOO! I just assumed all the talk about the ECB meeting was referring to a Thursday meeting — WRONG!

I also thought the ECB would cut rates, not that I want them to, but that they would. But ECB President Mario Draghi did say that the ECB stands ready to act if the increased risks to growth materialize. He then said something that plays well with my thought that rates should not be cut to deal with the eurozone problems. Draghi said that “at this juncture, neither a rate cut nor a three-year tender would have a significant impact or solve the underlying problems.” Good call, Mr. Draghi!

OK, remember a month or two ago, when a Chinese official said that they were going to stop investing in the eurozone, and I said, at that time, I doubted that would happen. The main reason was that the eurozone is China’s largest customer for its goods. China can’t even think about having their largest customer collapsing. I said then that I thought China would still invest, but not make a big deal out of it.

A private group that tracks stuff like that says that China’s direct investment into the eurozone tripled in 2011, to $10 billion. So maybe the Chinese are going to back off of $10 billion, but as I said, they can’t even think about their largest customer collapsing.

I see China finally bit the bullet and cut rates this morning. They had been attempting to replicate rate cuts with reserve requirement reductions, but the rate cut will go a lot further.

What do we have here? Fed Vice Chair Janet Yellen — who, I’m told, has the ear of Big Ben Bernanke — was talking very much like someone that wants to see additional easing here in the U.S. Let’s listen in: “There are a number of significant downside risks to the economic outlook, and hence, it may well be appropriate to insure against adverse shocks that could push the economy into territory where a self-reinforcing downward spiral of economic weakness would be difficult to arrest.”

Yes, she really beats around the bush there, but in essence, what she’s saying is that if the Fed is going to do something, they need to do it before it gets too late! But I would argue that the country never really left that “downward spiral of economic weakness.” I’ve said this for a long time now, and that is that our economy has become addicted to stimulus and cannot grow without it. So warm up the printing presses, because the economy is aching for it once again.

It looks as if the moves the currencies made yesterday, and into last night, are taking a breather, because even though a couple of good things have happened this morning for the risk assets, I’m just not seeing any additional moves higher.

Gold has slipped into the red this morning. Yesterday, after climbing up $20, the shiny metal gave back those gains. So the price manipulators must have been at it again. These price manipulators will get theirs one day. I sure hope I’m still banging away at the keyboard when they do, for I will be jumping with joy. No wait, I can’t jump anymore. Oh, well, I’ll be a happy camper for sure!

Remember last month when I reported that the Swiss National Bank’s (SNB) reserve balances didn’t show that they had intervened in April, but I said wait until May’s report prints? May’s report printed yesterday and showed exactly what I thought it would. That the SNB had intervened by large amounts to defend the floor they put in last September on the cross to the euro, which is 1.20. The SNB saw the third-largest monthly rise in reserves since they began keeping track of this stuff.

So the SNB is actively defending the 1.20 floor. That’s no surprise to us, right? I am surprised that the markets haven’t tested the SNB’s resolve even more, but then maybe they have, given the size of the jump in SNB reserves last month!

Amazing in itself, Brazilian inflation has fallen to 5%, according to the government. I would have to think that having this news on inflation, the Brazilian government and central bank will probably cut rates further. I’m not sure the real (BRL) can continue to deal with all the damage the central bank and government have done to the real’s value.

Big Ben goes to Congress today. I thought he would make day one yesterday, but it’s today. The Fed’s Beige Book printed yesterday, and although at that time (a month ago) the Fed heads saw downside risks, they also said the economy was growing moderately. What a crock! Less than a month later, we’ve had two consecutive months of poor labor reports, even with the hundreds of thousands ghosts jobs the BLS added, and most of the economic data reports have been weak.

I mentioned yesterday the slide in the 10-year Treasury yield. It slid further yesterday, and now has lost 20 basis points since hitting 1.45% a week ago. I think this illustrates the removal of the fear factor and the healing we’ve seen in the risk assets.

Then There Was This: Last month, I participated on a panel at the Casey Reality Recovery Check Summit in Florida, with James Rickards, author of the great book Currency Wars. I took a couple of paragraphs from an interview with James Rickards at that conference from the Casey Research site. So here’s James Rickards on the dollar:

“I think the dollar’s strength is something that has happened in spite of — not because of — government policy. It’s very clear that the Fed and the Treasury and the White House want a weaker dollar. But what’s interesting is they’re not getting it. They’re trying as hard as they can to get a weaker dollar, but it’s not actually playing out that way. I think it will in time, but in the short run, you’re right, the dollar has held up pretty well.

“The president made this explicit — President Obama, in January 2010, in his State of the Union address. He said that it is the policy of the United States to double exports in five years. That’s a worthy goal — it would help the economy, it would help jobs — but how are you going to do that? How are you going to double exports in five years? We’re not going to get twice as productive, there aren’t going to be twice as many of us. The only way you can do that is to cheapen the currency, so that was really a very explicit way of saying that it is public policy of the United States to cheapen the dollar — not by 5% or 10%, but maybe by 20%.

“But what’s interesting is that it hasn’t actually happened, despite QE and QE2 and massive borrowing and large fiscal deficits and a lot of the things that would normally cause people to lose confidence in the dollar. The fact is because of a flight to quality, because of fears in Europe, because of other concerns, the dollar has held up pretty well. What this tells me is that they’re going to try harder, that you’ll see more quantitative easing down the road and other measures designed to get the dollar lower.”

I have two slides in a presentation that I do that talk about the president’s call for doubling exports. I show the manufacturing index and then the dollar index. It illustrates how if the dollar is weak, manufacturing gains, and vice versa.

And then there are always the unintended consequences of a weaker dollar. There’s the loss of purchasing power by holders of dollars, and there’s the importing of other countries’ inflation. So as I’ve always said to the government, be careful what you wish for. And wouldn’t it be easier to stop the deficit spending than to debase the dollar?

To recap: The risk assets had a strong performance yesterday that held through night, but so far this morning, Chuck is now seeing some slippage as we head to the Big Finish. Both France and Spain had relatively good bond auctions this morning. Australian employment was stronger than expected. And the ECB met yesterday and left rates unchanged.

Chuck Butler
for The Daily Reckoning

The Daily Reckoning