Inflation Risks Diminishing?

Good day… Well… We broke out of the very tight range for currencies yesterday, but still remain in the broad range. Just when you thought Big Ben Bernanke would go to the “Hill” for his update on the economy, which used to be called the Humphrey-Hawkins testimony, and just repeat the same old, same old lines… We got a golden nugget!

About 9 AM Central Time yesterday morning, a note flashed across my screen from a trader friend that was very closely following the Bernanke economic update… He said… “Bernanke says inflation risks diminish”… I was shocked! I quickly looked over to the currency trading screens, and the euro was taking off for a flight over 1.31! It had already booked a 1/2-cent gain on the disappointing Retail Sales number, but that move had nothing on this jump over the 1.31 fence!

So… Big Ben thinks inflation risks have diminished, or are diminishing… GIVE ME A BREAK! Is there a new report that the markets are privy to that Big Ben perused before giving his testimony? Are tea leaves involved? How about tarot cards? ( I think that’s what they are called) Anyway, you get the picture… So, now we have a Fed Chairman that just makes stuff up? GREAT! NOT! Big Ben went on to say some other stuff… But nothing that moved the markets like a “inflation risks diminish” statement!

He’s fallen into a trap… The oil / energy trap… His counterpart over at the European Central Bank (ECB) hasn’t fallen into this trap, he fully recognizes that the price of oil was temporarily weaker… He also, like me, recognize the “powder keg” in the Middle East that could set off oil prices going to $100 at any time…

Oh well… I think Big Ben was simply setting us up for a rate cut this summer if not before… It’s my opinion that the Fed isn’t anywhere near to being “out of the woods” with regards to inflation… But, then I don’t use tea leaves or tarot cards!

OK… So euro owners thank you Mr. Bernanke…

Overnight, Japan posted a much better than expected 4.8% GDP for the 4th QTR… OK… I’m not going to sit here and say “I told you so”, no wait, I just did! I told you that Japan’s economy was kicking tail and taking names later, and the Bank of Japan should have raised rates at either of the last two meetings. That 4.8% growth rate is the fastest quarter of growth in over 3 years! This isn’t Australia… This isn’t Germany… This is the 2nd largest economy in the world, growing at 4.8%! Yes, Virginia, there is global growth… And all the other Central Banks around the world have done what they needed to do to keep inflation from entering into the picture, except… The Bank of Japan!

In Sweden, the Riksbank (Central Bank) did raise rates as I said they would earlier this week… This was the 7th rate hike in the past 13 months, and moves their internal rate to 3.25%… While this move should have helped the krona add to its move higher VS the dollar, it has not… And the reason? Ahhh grasshopper… Sit, and listen… The Riksbank had been very hawkish with their statements following rate hikes… But this morning, they did a “no-no”… They said that they would only increase rates one more time this year. Uh-Oh!

OK… I’ve got to step back here… Ok, I’m back now, Sweden has been one of my faves, the past year and one-half, and this mistake by the Riksbank isn’t going to change my thoughts about the krona… I would say, you’ve got to think that the Riksbank will attempt to keep rates in line with the ECB, and I believe the Eurozone rates are going to 4% this year… So, maybe the Riksbank comes back and says, they made a mistake and rates need to go higher than previously thought… If that happens, these current levels for the krona are going to look very cheap!

In the U.K. this morning, Retail Sales took on some water in January falling 1.8%… That’s a BIG drop! Obviously, previous rate hikes are putting the clamps on the economy and inflation… And Like I said yesterday… Getting your arms around inflation used to be a “good thing” for not only an economy by their currency as well! Sterling is cheaper this morning on this news…

Alrighty then, how about that Butler Household Index (BHI) forecasting the Retail Sales number! I said the BHI had indicated to me that Retail Sales would be disappointing… And that’s exactly what happened! U.S. Retail Sales for January failed to meet the expectations of a .3% gain, coming in with a big goose egg…

Today, we will see the color of the December TIC Flows, which I explained to you yesterday. Like I said yesterday, these flows have been trending downward, and right now, barely are enough to finance the Current Account Deficit. I think we’ll see December’s flows come in below the $75 Billion needed on a monthly basis to finance the Deficit… That should be very unfriendly to the dollar.

We’ll also see one of my faves, Capacity Utilization, along with Industrial Production, which I don’t see as giving the dollar bulls any reason to smile today.

In the South Pacific… Kiwi continues to be supported by high yields, which are fueling purchasing on the “buy side” of the carry trade… Last night, New Zealand reported that their Retail Sales for December rose .7%… This report is just another in the line of reports that indicate the New Zealand economy is strong, and in need of a rate hike from the Reserve Bank of New Zealand (RBNZ)…. NOW! But don’t expect anything until the RBNZ meets in March.

Currencies today: A$ .7865, kiwi .6940, C$ .8580, euro 1.3140, sterling 1.9590, Swiss .8080, ISK 67.24, rand 7.1650, krone 6.1525, SEK 7.0150, forint 192.20, zloty 2.9720, koruna 21.54, yen 120, baht 33.30, sing 1.5350, HKD 7.8090, INR 44.09, China 7.7560, pesos 10.9250, dollar index 84.17, Silver $14.02, and Gold… $668.71

That’s it for today… I hope your Valentine’s Day was grand… The best thing about yesterday was the reporting of pitchers and catchers to spring training! And then seeing the sports reports on TV last night! This weekend is our BIG Mardi Gras celebration in St. Louis… Our celebration of Mardi Gras is second only to New Orleans! I need for March to get here so that I can head south to warmer weather! 2 trips to Spring Training, and one trip to Orlando for a company function, I might as well take up residence in Florida during March! Have a great Thursday!

Chuck Butler — February 13, 2007

The Daily Reckoning