Inflation Abating? NOT!

Good day… Here we go! Here I am, in Las Vegas. One could quickly get addicted to people watching here! Anyway… Let’s hope this goes well!

We just didn’t see any traction in the currencies yesterday… The markets were waiting for U.S. CPI to print this morning. Me? I really don’t give a rat’s tail about CPI, because it is so trumped up, messaged and cooked to make us all “feel good” that I find it just doesn’t have relevance any longer. But… The markets do, so here you go!

April CPI printed this morning slightly less than the experts forecast at 0.4%. To some, this represents what they feel is an indication of inflation abating. However, let’s think about this for a minute: 0.4% in a month puts annual inflation at 4.80%. OUCH! But as long as they keep quoting it in small monthly numbers, they disguise the overall crunch on us!

The media will shout about the “core” number, which excludes food and energy, as if we don’t use those items each and every day! The core advanced only 0.2% in April, putting the annual inflation for those that don’t use food and energy at 2.4%.

I don’t think the Fed Heads, even in their wildest dreams, would fall for this trick the media likes to play with CPI.

Over in the Eurozone, the strength of the economy has come shining through. Many a naysayer had the Eurozone economy going into the dumpster with the VAT tax and the slowing down of the U.S. economy, but the resiliency of this economy has taken on those two potential problems and posted a 0.6% growth in the fourth quarter. This beat the experts’ forecast of 0.5%, which I’m sure gives the European Central Bank (ECB) a proud papa smile!

Strong domestic growth is fueling the GDP, and the ECB will use this as their reasoning for having inflation fears. Even though inflation is below the ECB’s target of 2% (at 1.8%), money supply is still strong at +10%. So… Expect a rate hike in June to further underpin the euro (EUR).

It’s not all good news from across the pond this morning. In the United Kingdom, pound sterling (GBP) lost some ground this morning after it was reported that inflation had come down from last month’s annual number of 3.1% to 2.8%. But, come on traders… Do you really think this move down in inflation is going to stop the Bank of England (BOE) from raising rates back to back in June? Not a Chance! But go ahead… Create some great buying opportunities for sterling!

Besides, isn’t this the result we want to see after raising rates? The thing to keep in your thoughts here is that this marks 12 consecutive months that inflation has exceeded the BOE’s inflation target of 2%. As long as that remains the case, the BOE can not, and will not pull away from the interest hike table, and that should be a great underpinning to pound sterling!

Still waiting for the TIC net flows data to print this morning. This is the real problem for the dollar going forward, in my opinion – the problem of funding the deficit. Yes, the stock market is soaring higher, every day, and that should help attract foreign investment. But what happens when that rally is over? Yields on bonds are not particularly attractive. Uh-Oh.

I see that the Chinese imports keep rising. That should be good news for the base metals, like copper. And it should also be good news for the currencies of the countries that send those base metals to China. That would be Australia and Canada at the front of the class! And a quick look at the currency round up shows that those two have performed nicely in recent trading days.

Oh, and for those of you keeping score at home… Chinese imports rose 61% in the first four months of this year! Oh, and China’s economy is going to slow down, right? NOT!

Just when I was about to head to the Big Finish, the TIC data printed. Here’s the skinny: Net long-term portfolio inflows into the United States only amounted to $67.6 billion in March from the $58.1 billion in February. Capital inflows once again fell short of the $80 billion mark, which is needed to attract each month to cover the current account deficit and FDI outflows (based on the outcome in the fourth quarter). And even though March’s number was better than February’s number, the trend continues to come down each month. That’s going to present a BIG FAT PROBLEM!

Currencies today: A$ .8315, kiwi .7365, C$ .9070, euro 1.3545, sterling 1.9775, Swiss .8205, ISK 63.40, rand 6.9560, krone 6.05, SEK 6.7925, forint 183.76, zloty 2.79, koruna 20.88, yen 120.40, baht 33.20, sing 1.5180, HKD 7.8145, China 7.6870, pesos 10.82, Silver $13.14, and Gold… $667.60

That’s it for today… This Mandalay Bay Hotel is HUGE! Long walks from here to there, are not good for the old Pfennig writer’s recovering hip! But I carry on… Chris beat me in our gin card game on the plane again yesterday, that’s two in a row for him! My first presentation takes place this morning, sure hope it goes well. Have a great Tuesday!

Chuck Butler — May 15, 2007

The Daily Reckoning