Kiwi Steals the Show

And now… today’s Pfennig for your thoughts…

Good day, and a Tub Thumpin’ Thursday to you! 

Front and center this morning, the Reserve Bank of New Zealand (RBNZ) surprised most market participants by leaving their OCR (official cash rate) unchanged, when, as I told you it was widely thought that the RBNZ would be cutting rates at this meeting. Kiwi soared overnight, and flew past 71-cents, gaining more than one full cent. 

Calmer heads have taken over from the initial run up in kiwi, and the currency has backed off a bit, falling back below 71-cents, but still they have stolen the show overnight. The RBNZ openly talked about the conflict they are dealing with right now, with the overheated housing market, in need of higher interest rates, but that pushes kiwi stronger, which they don’t need right now. I think they did the right thing here. They certainly don’t want a housing bubble bursting on them at this time.

There was one rate cut overnight though. It came from the S. Korean Central Bank and their 25 Basis Points (1/4%) cut brought their  internal rate to 1.25%. This was their first cut in a year (June 2015 was the last one), and is probably their last one for this year. We don’t follow the S. Korean won much, but I thought it was worth our time today to mention the S. Korean rate cut, as it plays along well with all the other rate cuts around the world.

Overnight the dollar was on the selling blocks, but as the overnight session turned to the European session, the dollar has fought back some, and the currencies are drifting as I write, with some of them doing well, like Brazilian reals, and Swiss francs, but most of them have seen some of their lofty gains pared this morning. There’s not much in the U.S. Data Cupboard today or tomorrow, so we could very well see a lot of this “drifting” of the currencies.

Speaking of the Swiss franc… Sometimes I amaze myself with how much of a dolt I can be at times! Yesterday, I had talked about Swiss francs, and my whole intention of talking about their referendums was to mention that in a recent referendum the Swiss people voted down “helicopter money”. Good for them! And probably had something to do with the franc outperforming the euro. But I still think that PEXIT money is flowing here. Recall that I made up the PEXIT word, meaning “pound exit. Oh, by the way, there was another BREXIT poll yesterday, and the “leave vote” continue to push against the “don’t leave vote”, and that doesn’t play well with pound sterling.

There was other BIG news overnight and this came from the Eurozone, where the European Central Bank (ECB) announced that they were buying corporate bonds from around the world, bringing their balance sheet to three trillion euros. YIKES! Well, I know I’ve been a little harsh on the U.S. Treasury yield falling once again, but that’s nothing compared to the German 10-year Bund, which this morning has a yield of 0.002%! OMG! That’s zero, zilch, nada, nothing, a big fat goose egg of yield! Crazy, and I don’t mean the number one song of all time played on jukeboxes, by the great Patsy Cline, I’m talking nut case crazy for going this low in yields. Somebody do something! This is CRAZY! SERENITY NOW!

OK, I’m back from yelling at the wall! Well, speaking of the U.S. 10-year Treasury’s yield, it sits at 1.68% this morning for institutional trading. I’ve explained this before, but for those of you new to class, retail/individual buyers of a 10-year Treasury won’t get 1.68% yield, the bond dealer will take his cut of the yield and the buyer will receive less yield, which means he pays more in dollar price. So, it’s say a retail buyer receives 1.50% for a 10-year Treasury, and for the next 10-years the buyer will receive 1.50%, no matter what rates do in the next 10-years. Seems like a layup not to do this, don’t you agree?

Gold ran up $19 yesterday! It’s down a buck this morning in early morning trading. But the early morning yesterday had gold up $8, and so it added another $11 as the day went along. I’m concerned about what I’m seeing these days with the Shanghai Gold Exchange (SGE) withdrawals. Recall that I had been in agreement with gold researcher extraordinaire, Koos Jansen, in the thought that the gold withdrawals represented a good indication of Chinese demand. And using this as a guideline, I see that withdrawals are down 17.7% this year so far, and that tells me that Chinese demand so far this year is lagging their previous years. Makes sense to me, in that China has other problems right now, and need to place their attention on those problems, and not how much gold they put in their reserves.

I received my latest World Gold Council (WGC) update on Tuesday. And in it the WGC tell me that gold is back in favor with investors (like they needed to tell me that!) but that the preferred method of buying is in the gold ETF. (UGH!)  A near record 364 tonnes of gold flowing into ETF’s in the first QTR this year. Now that’s all fine and dandy, because when an individual buys a gold ETF, it represents so much gold that the trust company that administers the ETF then has to go out and buy, right? And no one fears that the Trust companies don’t fudge the numbers, right? Just like trust companies that administer pensions always kept up with the funding of the pension, right?

I prefer physical gold, and always will. And if you’re thinking that you can get physical gold out of an ETF, think again. I guess if you really push the right buttons and pay the piper, it will happen, but it’s very difficult to do. And if that trust company goes belly up, holding that piece of paper isn’t going to do you much good.

The price of oil slipped back below $51 in the past 24-hours, and put the hurt on the Russian ruble, but the Canadian dollar, and Brazilian real just shrugged off the slippage in the price of oil, and continued to push the currency appreciation envelope across the table.

So, I’ve been talking a lot this week about what I see with a coming recession, that may already be here, and I was reading my latest letter from Danielle Di Martino Booth yesterday, and in it she had something that caught my attention, as she took the Fed to task for causing “Fedspeak to be lost in translation”. She pointed out that household income expectations six months out, and credit card usage had begun to move in opposite directions, which to her is a telltale sign of budgetary stress”. And then she went on to question if the Fed employed someone that does forward looking comparisons.

But the cat is out of the bag here! If there are budgetary stress among consumers, it won’t be long before they aren’t spending like they need to keep the economy going. I did mention the other day that Consumer Credit (read: debt) for April did come down, from $28 billion in March to $14 billion in April, that means consumers took on less debt in April. Which is a good thing for them, but a bad thing for the economy.

So, like I said above, the U.S. Data Cupboard is lacking data reports today and tomorrow. Today we get the usual Weekly Initial Jobless Claims that have become something of a “forgotten data print” by the markets. And that’s about it!  Next week at this time, we’ll be talking about the Fed meeting that ended the day before, and probably without a rate hike, and probably with some dovish talk to explain why rates didn’t go higher, when all the Fed members (save for a couple of the doves) were out in force talking about a rate hike in June.

OK, this is the piece I talked about yesterday, regarding the newspaper article I clipped out of my paper at home, and brought into work, and then completely forgot about it while writing the Pfennig. UGH (again, what a dolt!) So, this is an article about how there are now just two triple A corporations in the U.S. Wait, What?  Really? Just two? Say it ain’t so David Nicklaus! Here’s the link to the whole article, written by David Nicklaus, or here’s your snippet: 

Once upon a time, before the era of shareholder activism, corporate executives regarded a triple-A credit rating as a badge of honor.

A top-notch mark from Standard & Poor’s or Moody’s meant you ran the bluest of blue chips. You not only could borrow more cheaply than everybody else, you had Wall Street bankers lining up to buy you lunch and beg for your business.

Then Michael Milken popularized the junk-bond market, making it easier for risky companies to raise money. Globalization and technological change rocked many industries, and pesky activists such as Carl Icahn pressured companies to return cash to shareholders.

Suddenly, being in the exclusive triple-A club seemed less important. By 2005, S&P gave its top rating to just six nonfinancial companies, down from 32 in 1980.

Now, with Exxon Mobil having been downgraded in April, Microsoft and Johnson & Johnson are the club’s last two members.

Chuck again. Holy Corporate downgrades, Batman! There are just two AAA rated corporations in the U.S., down from 32 of them in 1980!  I’m flabbergasted, aren’t you?  What ever happened to the era where Individuals building bond portfolios wanted high-quality names they could trust?  Here’s a key to what’s happened.. They don’t give stock options to Corporate Treasurers and CFO’s for a higher credit rating.. They do give them stock options based on a higher stock price..

And with that, I’ll get out of your hair for today, and hope you have a tub thumpin’ Thursday! Be good to yourself!

Regards,

Chuck Butler
for The Daily Pfennig

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