Moderate Growth? (I have to laugh!)

Good day… Well… The Fed diffused the time bomb ticking on the dollar yesterday, at least for another day, that is! As you’ve probably heard by now, the Fed left rates unchanged yesterday, as expected, and changed the wording of their statement by oh-so-little. So, the potential fireworks that could have come from this FOMC meeting did not materialize.

The dollar isn’t quite out of the woods just yet… Today, the Bank of England (BOE) and the European Central Bank (ECB) are meeting, and as I’ve been saying over and over again, I do not expect the ECB to move rates higher today, while I DO expect the BOE to surprise with a 50 BPS hike. We usually get the news from the BOE as I head to the currency round-up, so we’ll go on to other things and come back to the result later in the program.

In an example of buy the rumor and sell the fact, well, sort of that is… Pound sterling, which was being marked up earlier in the week as my call for a 50 BPS hike spread, is now being sold as we get closer to the rate decision announcement… Hey! Even if the BOE opts for 25 BPS and keeps the hawkish statements going, pound sterling is cheap here…

OK… Back to Big Ben Bernanke and the Fed Heads… Back in the late 80’s, Lindsay Buckingham of Fleetwood Mac fame, recorded a song that reminds me of Big Ben’s statement yesterday… Tell me lies, tell me sweet little lies, oh you can’t disguise… Get this… While we only created 88K jobs in April… And 1st QTR GDP fell to 1.3%, The Fed said in the statement that they still they look for the economy to expand at a moderate pace going forward. Maybe 1.3% is “moderate” to them, eh? And… They still fail miserably at recognizing the rot on the housing sector’s vine… That’s sad isn’t it? But then again they say a dog can’t smell his own you know what… And since the Fed is the root of the problem in housing when they kept interest rates so low for too long, and then flooded the economy with money supply, maybe they can’t smell their own you know what!

I’ll say this for Big Ben and the Fed Heads… They aren’t falling into the “economy is faltering, we had better cut rates” trap, just yet that is… However, as I’ve said before… If they still fear inflation, as they should I might add, then why aren’t rates going higher to combat it? Because… They are stuck in the mud, folks… The economy is going into the pits, and they can’t cut rates because inflation pressures remain… And they raise rates because the economy is going into the pits!

Anyway… I still expect the Fed to cut rates in August… Right about the time my darling daughter, Dawn will be making me a grandfather for the first time!

After the two European Central Banks meet today, we’ll see the color of the March Trade Deficit, which should remain within spittin’ distance of $60 Billion per month. Since the media never focuses on the Trade Deficit, traders, except me, don’t either… Tomorrow, though is the next large piece of data that could move the markets… Retail Sales for April will print… And according to the Butler Household Index (BHI) the number should be disappointing, weaker than last month’s robust .7%, which was fueled by Easter sales…

The dollar also has the subcommittees on currency manipulation hanging over it like the sword of Damocles… They began their meetings yesterday, and their report is due out later this month… I don’t see one thing in this report that could possibly be dollar friendly!

Now, onto more favorable or “happy news”! In the South Pacific, Australia reported that employment gained four times as much as the experts forecast in April! This report has fueled expectations once again, that the Reserve Bank of Australia is not finished with their rate hike work. The A$ gained ground on the news…

Across the Tasman, Australia’s kissin’ cousin, New Zealand saw their employment gain too! Employers in New Zealand added more than double the jobs expected by the “experts” in the first quarter… 25k jobs were added, and has underpinned the kiwi.

One thing that I think the Fed’s decision to keep things the same does is keep the trend toward taking risks on the tracks… Where has all the Risk Aversion gone? Long time passing… Just look at the Icelandic krona for an illustration of what I’m talking about… Yesterday the krona had weakened VS the dollar to back above the 64 level… After the Fed signaled all clear on risks, the krona rallied to below the 64 level once again…

As I said yesterday, base and precious metals have really seen some profit taking the past few sessions… Doesn’t Gold at $678.10 just scream… “Buy me!” But what do I know? I just give opinions based on fundamentals… I don’t have a crystal ball, well, one that works anyway!

Still waiting on the BOE to make their announcement… I’ll go fill up my coffee cup, and see if they have done the job yet… Be right back! OK! I’m back! And here’s the news… The BOE just announced a 25 BPS hike, not the 50 BPS hike I had gone out on the limb for… I’m so disappointed! UGH! The BOE is talking hawkish, but come one… If inflation risks are tilted to the upside as they are suggesting, why not go ahead and book 50 BPS? Bawk, Bawk, Bawk… Do I hear a chicken? I do believe I am!

Pound sterling isn’t getting hit though… As I said earlier, even if it is just 25 BPS and the BOE still talks dirty, no wait, I mean hawkish, pound sterling should be underpinned, and that’s exactly what’s happening. Still… It doesn’t dilute my disappointment in the BOE!

Now… We wait for the ECB, which I don’t believe will move rates today, choosing to use this meeting to prepare the markets for a rate hike in June… Should they do just that, then I see the euro moving higher today…. U.K. Prime Minister Blair, just announced that he would step down on June 27th…

Currencies today: A$ .8330, kiwi .7350, C$ .9030, euro 1.3540, sterling 1.9910, Swiss .8215, ISK 63.60, rand 6.96, krone 6.03, SEK 6.80, forint 183.50, zloty 2.78, koruna 20.88, yen 120.25, baht 32.80, sing 1.5175, HKD 7.82, INR 41.25, China 7.6930, pesos 10.8110, dollar index 82.07, Silver $13.31, and Gold… $678.20

That’s it for today… Still no word from the ECB, so I’ll go ahead and finish up, and get to work. Hey! Great day at the ball park yesterday… What a doozy of a day! OK… Here’s your notice… Sunday is Mother’s Day! Are you ready? Don’t forget! And don’t let your kids forget! Time to go to work… Have a great Thursday!

Chuck Butler — May 10 , 2007

The Daily Reckoning