Mixed Bag of Data

Good day… We got a mixed bag of data yesterday as producer prices, the NAHB housing index, and ABC consumer confidence numbers all came in lower than expected but were offset by a sharp rise in the TIC flows. Industrial production and capacity utilization both came in as expected. The dollar was still trending off throughout the day and fell sharply in Asian trading. The dollar index fell to the lowest since 1992 on speculation that slowing U.S. economic growth will stop the Fed from raising rates. I will have more on the dollar index in a bit, but first let’s look at the numbers released yesterday.

Producer prices unexpectedly fell last month with the overall number falling 0.2% for the month and rising just 3.3% year on year. Industrial production showed a slight increase of 0.5% in June compared to a revised drop of 0.1% in May. Capacity utilization increased to 81.7% from 81.4% in May. These figures support the Fed’s opinion that the U.S. economy is recovering from the slowest growth in four years without a surge in inflation that would require higher interest rates. The dollar trended off on the thought that the rate spread the United States has enjoyed over the past few years will continue to narrow. The sell off in the U.S. dollar was somewhat tempered as traders wait to see if the CPI numbers will show a similar drop this morning.

There was no surprise in the housing numbers, as confidence among U.S. homebuilders fell to the lowest level in 16 years, signaling the housing market will continue to tumble. The National Association of Home Builders sentiment index declined to 24 this month, the lowest since January 1991, from 28 in June. Readings of less than 50 mean most respondents view conditions as poor.

The biggest surprise came in the form of the Net Long-term TIC flows. This number reflects the total net foreign acquisition of long-term securities, the increase in foreign holdings of U.S. short-term debt, and the change in holdings of U.S. dollars by foreign banks. Chuck was all over this data yesterday and wanted me to pass along the following:

“Net long-term portfolio inflows into the United States rebounded to a record high of $126 billion in May from $80 plus billion previously. For the first time since January, inflows substantially exceeded what I feel to be the level that we need to attract each month to cover the current account deficit and FDI outflows, which is around $80-85 billion.

“So, if we think back to May, the dollar rebounded to a small degree, right? This data confirms why. But isn’t this all so backward looking? The trend for the year remains at a level that is barely enough to cover the bills each month. So, let’s not get all lathered up over this data, for as I always say… One swallow does not make a summer!”

The overnight markets seemed to agree with Chuck, and the dollar continued to get sold in Asian trading. As I stated in the opening paragraph, the dollar index, which tracks six major world currencies, fell below important support levels and traded down to the lowest level in 15 years. According to charts based on Elliot waves, this break of key support means the dollar index may fall to a 15-year low around 78.20.

Neither Chuck nor I are chartists, but we do get input from sources that follow these charts very closely. Kevin Edgeley, a technical analyst at Goldman Sachs Group in London tells us the dollar index’s decline over the past week below the wave lows of 81.28 on March 11, 2005, and 81.251 in May 2007, may be forming the last of a five-wave downtrend. “We would expect to see acceleration below the 80 level to complete the wave v of 5 above 78.20,” Edgeley wrote in a research note yesterday. “The Trend Strength Indicator continues to point up, confirming the bearish bias.” This is all foreign to me, but I like his conclusion. The dollar will continue to get sold off, and this move down will actually accelerate in the coming months.

The pound sterling (GBP) moved up over $2.05 after the minutes of the July 4-5 meeting of the Bank of England policy makers were released this morning. The vote to move rates up was 6-3, and no immediate indication was given on the future path of interest rates. The pound rose to a 26-year high against the dollar on speculation that the bank will take its main rate higher after pausing at the next meeting. The BOE’s preferred gauge of consumer prices climbed 2.4%, the fourteenth month that inflation has exceeded its 2% target. U.K. unemployment fell to a two-year low in June as a boom in London’s financial services industry supported economic growth and drove the number of people in work to a record. This low employment will continue to create wage inflation, pushing the BOE to raise rates further.

The minutes of the BOJ meeting were also released overnight, and showed that the policy makers are monitoring the effect of rising global bond yields to gauge inflation expectations. The policy board voted 8-1 to keep the rate on hold last week, after the unanimous decision to stand pat in June. It is widely assumed that they will raise the key rate next month. Indications are that the bank will raise rates three more time by March, when the current fiscal year is over and Governor Fukui’s term ends.

Gold climbed to a five-week high in London as investors sought an alternative investment to dollar-denominated assets. Silver also rose, moving back above $13 before moving down slightly this morning. Investors and financial writers are excited about our big announcement of our newest product: the silver MarketSafe CD. Here is what Addison Wiggin, author of the 5 Min. Forecast had to say about our latest offering:

“This won’t be news to silver bulls, but gold’s junior cousin continues to bump up against critical resistance at $14. A break through at the $14 price point could send silver somewhere into the stratosphere, like what happened back in the glory days of the Hunt brothers in the early ’80s.

“Not since the early ’80s has this market seen such impressive potential to the upside. But, if you’re new to the game, you may be a little wary of putting your money down, especially in a market historically noted for intense volatility and the subject of so much speculation.

“One safe way to play this trend? The 100% principal-protected silver CD, on offer from EverBank for the first time today. The MarketSafe Silver CD is a remarkably unique way to both boost your savings and benefit from any upside in the silver market over the next five years. The best part is your principal is 100% protected for the entire ride.”

Call volume was pretty high yesterday as we had investors scrambling to get into our final offering of the Japanese REIT MarketSafe CD and others asking about this latest offering. It is great to work for such an innovative company and to give investors so many different opportunities to diversify out of the U.S. dollar.

Today will be another big data day, as we will see consumer inflation data along with housing starts and building permits. After yesterday’s PPI data, I don’t expect to see a jump in the CPI data. I think everyone knows my opinion on the housing markets, and today’s numbers should confirm that the current housing downturn will continue. So the dollar will likely continue its slide after the numbers are released.

Federal Reserve Chairman Ben S. Bernanke will be addressing lawmakers in Washington today, and will likely tell them that inflation is the Fed’s main concern because unemployment is near a six-year low and the economy is picking up. The Fed head and his team continue to paint a rosy picture of our economy despite data that indicates we are not moving in the right direction. It is rather obvious that the FOMC isn’t going to move interest rates and Bernanke’s report will do little to move the markets.

Currencies today: A$ .8755, kiwi .7905, C$ .9550, euro 1.3784, sterling 2.0494, Swiss .8320, ISK 59.72, rand 6.9710, krone 5.7446, SEK 6.6544, forint 178.46, zloty 2.7268, koruna 20.4878, yen 122.12, sing 1.5191, HKD 7.8211, INR 40.4050, China 7.5680, pesos 10.7573, dollar index 80.505, Silver $12.96, and Gold… $667.34

That’s it for today… Chuck let me know that this summer is the 40th anniversary of the summer of love. He was sure that I am too young to know what he is talking about… But, most of our readers aren’t, and they will sit back and say “Whoa” like he did when it came to him! He is correct about my lack of understanding what he was talking about, but hopefully his reminder will put a smile on some of your faces. Have a great Wednesday!!

Chuck Butler — July 18, 2007

The Daily Reckoning