Inflation Is A Predominant Concern?

Good day… Well… A stronger than expected ISM manufacturing report yesterday put some strong wind in the dollar’s sails. Yesterday’s move gave the dollar its biggest two-day move versus the euro since last summer. The minutes of the Fed’s last meeting were also printed, and in them, the Fed states that “inflation was the predominate concern.” This gave additional wind to the dollar… But I have to ask a question to those that think these words are so important: If inflation is a predominate concern, why have they left interest rates unchanged for the past four meetings?

People are buying dollars because they believe the economy is stronger than previously thought, and that the Fed will continue to raise rates to combat inflation. Geez, Louise… I can only wish that’s the case! Hey! I live here! I buy my gas, groceries and giggles here. So… A strong economy to me is ideal! However, I don’t see it… I think investors are getting wild eyed because of the stock market performance… They say… “Stocks are up… Everything must be great!”

Hmmm… Interesting, don’t you think? Oh well… I can’t let myself get all caught up in that… I have to keep my head about me, and keep to the task at hand… Which is… Reminding people that with the current fundamentals, the U.S. dollar should be weaker, and gold should be higher, along with the currencies.

Speaking of gold… Yesterday there was a report that printed and talked about how investors were going into stocks and not gold… So… gold lost ground… I just can’t help but think that’s silly.

OK… Going along with the dollar’s strength, the Eurozone received CPI data this morning that showed inflation remaining below the European Central Bank’s (ECB) target of 2%. December CPI printed at 1.9%… So… Those “not in the know” see this and sell euros because they believe the ECB won’t need to keep raising interest rates… But, as I’ve discussed before, the ECB fully understands that this dip in inflation comes from the strength of the euro, and falling oil prices. They also understand that oil prices sit on a teeter-totter, waiting for something on the other end to cause it to go back up in the air.

And, as I’ve discussed several times in the past, the ECB doesn’t just use inflation to target interest rates… They also use money supply (imagine if the Fed did that!), which continues to be strong… So… I’m not one, at this point anyway, to believe the ECB is anywhere near ending their rate hike cycle.

Let us not forget the fact I reported yesterday that unemployment in Germany is falling… Over the last two months of 2006, German unemployment fell 200K!

Yesterday in the United States, the ADP employment report printed, and showed that the United States generated negative job creation in December. OK… Let me say that this report is very volatile, and doesn’t exactly feed right into the report the Bureau of Lies and Massaged Numbers. Ooops, did I say that out loud? I mean, the Bureau of Labor Statistics will print tomorrow… So… We still have to wait for tomorrow’s Jobs Jamboree… But it is food for thought, eh?

The U.S. ISM Manufacturing Index surprised on the upside yesterday posting an index number of 51.4 from the previous reading of 49.5. I wish the markets were under my direction, as I would tell them to not get carried away with this up-tick. Having manufacturing edge back above 50.0 should provide some small comfort, but not a reason to buy dollars. Just as the move last month (to 49.5) was overblown, so too should we take today’s bounce with a grain of salt. Manufacturing remains weak, and the outlook for durable goods (particularly autos) remains clouded.

Enough of that! Onto Asia! Well… The door has been shut on the Thai baht… But there’s another floating Asian currency that’s worth looking at… The Singapore dollar. Yesterday, before the ISM printing, the Sing dollar traded at a new nine-year high versus the greenback. With GDP running close to 6%, and inflation virtually unheard of…  things are looking so bright in Singapore they have to wear shades!

OK… Back to North America… Yes, I’m winded… But I carry on! Things in Canada just haven’t looked bright since the government decided to stick its hands in the Income Trusts cookie jar. To make things worse for the loonie, the Bank of Canada decided to stop raising interest rates. The loonie was resilient at first… But has faded since those first couple of weeks following the Government’s taxation announcement… So… With just a positive balance of payments in its pocket, the loonie will have a rough row to hoe going forward… $70 oil and $700 gold would certainly pump life back into the loonie… But for now, that’s not happening.

I see where Robert Rubin is making his way back into politics, as the Democrats take over. You may recall Rubin as the guy who spearheaded the old “strong dollar policy” during his days as Treasury Secretary for President Clinton. He was also the guy who spearheaded free trade with Mexico… That worked out well for us, didn’t it! I still think of Ross Perot when free trade with Mexico is talked about, and his famous line…. “Do you hear that sucking sound?”

Rubin was introduced yesterday at a meeting of Democrats… And one guy actually said this… “Robert Rubin walks on water for many Democrats because of the economy’s performance during the Clinton years.” Walks on water?

Currencies today: A$ .7845, kiwi .6985, C$ .8525, euro 1.3112, sterling 1.9460, Swiss .8130, ISK 70.18, rand 7.04, krone 6.30, SEK 6.9025, forint 192.71, zloty 2.94, koruna 21.07, yen 119.10, baht 35.58, sing 1.5350, HKD 7.7880, INR 44.27, China 7.8090, pesos 10.8450, dollar index 84.26, Silver $12.63, and Gold… $628.60

That’s it for today… What’s with these bowl games going on at night during the work week? I wanted to watch the LSU – Notre Dame game but was only able to see the first half… Bedtime for me is something I don’t mess with! Jan 4… Always a melancholy day for me, as this was my father’s birthday… We had a celebration for our little Christine yesterday, as she is getting ready to leave us to deliver that baby! Have a great Thursday!

Chuck Butler, January 04, 2007

The Daily Reckoning