The Markets are Smitten

And now… today’s Pfennig for your thoughts…

Good day, and a marvelous Monday!

Let’s start today’s letter a little differently than normal. Yes, I still don’t care about the BLS report any longer, but the markets do still care, and the markets move currencies and metals, so I am obligated to play along. And since the dollar seems to be back in control this morning, after Friday’s BLS Jobs Jamboree, I’m going to start today’s letter with thoughts on the Jobs Jamboree. Geez Louise, I totally dislike talking about this stuff, because it’s all smoke and mirrors and I just can’t seem to understand why the markets can’t see that! But here goes anyway…

Well, the Jobs Jamboree took place on Friday, last week, and once again amazed me at how brazen the BLS has become with their reports. Just keep printing it, and sooner or later, everyone will believe it. Well, almost everyone! The BLS reported that their surveys and hedonic adjustments brought the total of jobs created in March of 215,000. The Unemployment Rate rose to 5% (from 4.9%), and something that should have been more hailed than the supposedly 215,000 jobs created. And that is the Labor Participation Rate rose to 63%, the highest it’s been for a long time.   

64,000 of that 215,000 total were added with the Fed’s Birth/Death Model, that I continue to bang on for its inaccuracy. It is a proven fact that in 2015, there were more “deaths” of businesses than “births”, but that fact didn’t deter the BLS from adding jobs nearly every month in 2015. And with no fundamental changes in what’s going on in the U.S. I don’t know for a fact, yet that is, but I would suspect the same scenario is going on in the U.S. in 2016, that there are more “deaths” than “births”.  So, why would the BLS be adding jobs each month to their already suspect “surveys”?

So, to me, the even still questionable number of jobs should be 151,000. (215,000 – 64,000). I still believe that the 151,000 total is questionable. But just for fun, let’s say it’s true. I read this weekend that 52% of the jobs went to the lowest paying third of workplaces, and that only 11% of the jobs went to the industries that pay a middle-class wage.  I just don’t see how the markets can get all excited about this stuff.

Whew! I’m worn out after all that. You should have seen my fat fingers flying around the keyboard. I couldn’t type the words that my mind was thinking fast enough! But that’s my two-cents on the whole thing. The markets are smitten with the strength of the report, and think that the economy in the U.S. isn’t as slow as Fed Chair, Janet Yellen, would have us believe given her dovish speech last week. At least through the Jobs Jamboree last week, the markets were sold on the Yellen-factor, but since the Jobs Jamboree they have dismissed the Yellen-factor and it’s back to thinking that the U.S. economy has turned the corner.

Well, IF the markets want to move back to fundamentals instead of Central Bank guidance, I’m all for that! But here’s the problem – the markets have tried going back to fundamentals before, only to be pulled back into the Central Bank guidance trading due to some Central Banker speech, or monetary action. Memo to markets: So, you want to allow fundamentals to dictate currency values? Well, that’s fine with me, but just remember once you go back to fundamentals there’s no switching over to Central Bank guidance again!

And the markets will get their first test today, when the U.S. will print Durable Goods, and Capital Goods Orders, along with Factory Orders for February. These will all be final prints, as the preliminaries printed a couple of weeks ago. They’ll still show negative results. What will the markets do then?

Oh, did you see that Fed member Dudley, did a kid-like thing when asked about his thoughts on the economy, he did a “what she said” referring to Janet Yellen’s speech. We haven’t heard from the hawks like Bullard, Williams and Lockhart, since the Yellen speech, so when they do come out and talk again, it will be interesting to see if they’ve changed horses in the middle of the stream.

So, like I mentioned above, the dollar has taken back the control over the currencies this morning, and it started after the Jobs Jamboree on Friday. The price of oil has fallen again and this time it has fallen below $37 to a $36 handle. The Russian ruble is getting whacked because of this drop  in the price of oil and the other petrol currencies are falling in behind the ruble this morning.

The Antipodeans (see? I can use big words! HA!) are finding life on the other side of the first QTR difficult. I was doing some reading this weekend, and came across a report that illustrated the Aussie dollar (A$) and N.Z. dollar/kiwi  and how for the last few years they’ve really started the year with strong moves, only to give them back the rest of the year. I found this to be very interesting, but you have to remember, the “last few years” we’ve been in a strong U.S. dollar trend, so things could get pretty screwy the rest of the year in a strong dollar trend. But I’m getting the feeling, my spider sense is tingling, that we could be nearing the end of the strong dollar trend..  And if the feeling/sense comes to fruition, then all the things that went on in the past few years would be thrown out with the bath water.

The Reserve Bank of Australia (RBA) will meet tonight. And although a rate cut remains on the table at the RBA, they will keep rates unchanged tonight, in my opinion, which could be wrong. Did you know that Australia booked the fastest economic growth in the developed world last year? We have some feeling that commodities like iron ore are seeing recoveries in their prices, and Australia put a budget surplus on the books last year. So, why is the rate cut still on the table, I hear you asking?

Well, the problem is the U.S. and the Fed. If the Fed keeps going down this path of not hiking rates further, then the pressure will be on the RBA to cut rates, because the A$ will continue to rise as long as the rate differential is steady between the U.S. and Australia. The RBA can’t have the A$ get out of whack (too strong) with other commodity currencies or Australia loses to the cheaper competition. So, to keep a lid on the A$ as long as the Fed keeps their interest rate powder dry, the RBA will keep the rate cut on the table, just to remind the markets of the risk they take by driving the A$ too high.

I wanted to let you in on something early, and that is the next currency of the month is going to be the A$. I’m just now putting together the rough draft for that article – ‘A Return To the Land of Oz’ is what I think I’ll call it!

The IMM Futures Positions last week saw more cuts in long U.S. dollar (USD)  positions, and cuts in the short positions in euros and A$’s. I think these futures positions reports are good indicators of what the traders are thinking, but they’re always a week in arrears. So, you must take that into consideration.

The euro was quite the perky currency last Friday morning, rising to 1.1420, before falling back below the 1.14 figure. I read this past weekend that 1.15 is a real tough psychological level, and should the euro pass 1.15, then it’s going to be a strong indicator that the strong dollar trend has ended. Well, not just pass 1.15, but pass it and remain there, making that a new base to move higher.

Remember, the euro is the offset currency to the dollar, and dollar weakness shows up here first, and once dollar weakness is the trading scenario, the euro will rise, no matter what the economy of the Eurozone is doing. No, it can’t withstand another round of Greek problems, but a slow economy is a piece of cake for the weak dollar trend to deal with!

There’s an article on the Bloomberg this morning that talks about how Citigroup, which is the world’s biggest currency trader, isn’t buying into the dollar retaining the strength it gained from the Jobs Jamboree on Friday. Citigroup told their clients that until the Fed rhetoric changes and they begin to talk about a rate hike in June, the dollar weakness should remain. Pretty interesting, eh? You would twist that all around and come back to the same thing I’ve been saying.

It’s a holiday in China today, so no fixing took place for the renminbi. It’s the Ching Ming Festival in China today, at least that’s what the calendar says! HA! China will see their latest on the PMI’s and FX reserves this week. I don’t foresee any major moves in the PMI’s, (manufacturing index), so the markets’ real attention will be on the FX Reserves, to see if the recent trend to spend these reserves in the economy continued at the fast pace it was on prior to year-end. 

My thought here would be that spending of the reserves slowed. And that would send a good message throughout the “risk” markets.  Or the vice versa would send a bad message to the “risk” markets.

The latest poll in the U.K. on whether or not to leave the European Union (EU), which is being called BREXIT, showed a 43% to 37%  edge to the “yes” leave the EU camp.  That’s actually closer than I would have thought it to be. But then the government hasn’t gotten behind the BREXIT campers yet, and they will, and leaving the EU puts additional pressure on the pound.

In Canada this week, we’ll see two data prints that will give us a good idea whether or not the Canadian economy is on terra firma or not.  Tomorrow we’ll see the latest Trade Balance, with hopes that the trade deficit narrowed in February. And then on Friday, we’ll see the labor report for March, which is expected to show 10,000 jobs created in March, but I’m of the opinion that the number will be larger than 10K. and that would send the message to the markets that the economy is stronger than they’ve previously  thought! And that should reflect in a better valued loonie!

The U.S. Data Cupboard on Friday finally showed some life in the ISM (manufacturing index), which rose to 51.8 in March, from 49.5 in Feb. This is the first gain in this data in over a year, and I think it says a lot about the fact that the dollar lost a lot of ground in March, thus allowing exported manufactured goods to be more competitive.

I remember writing a letter to the head of the manufacturing sector here in the U.S. back in 2001, reminding him that he should be putting pressure on the Fed and Treasury to weaken the dollar, which at that time in 2001, was quite strong. I don’t for one minute believe that the letter ever made it to his desk and opened in front of his eyes, but I can imagine that it did, and somehow was responsible for the reversal of the strong dollar a year later! Yeah, right, Chuck, I’ve got a bridge to sell you too!

I already told you that today’s Data Cupboard has the Factory Orders and the Durable Goods and Capital Goods orders, which will print negative. Will this be the data that makes Friday’s one month in over 12 strong ISM print, one fleeting moment?

Gold, which enjoyed its best quarter in the first quarter, in over three decades! And that was with gold getting taken down during March, is starting the new quarter on a down note, the same as it ended the 1st quarter. The shiny metal is down $5 this morning after being $10 on Friday. UGH! 

I was both pleased and ticked off by stuff that James Rickards said this past weekend about gold. First the thing that ticked me off, Rickards doesn’t believe in unallocated gold or pooled gold. He says that “unallocated gold means no gold”.  Well, I beg to differ with him on that point! I have to wonder if he has ever owned unallocated gold and then needed to fabricate it? I have and it worked beautifully, just the way it’s supposed to, without me having to buy the gold again because I already owned it, and if the holding company didn’t own it, they took a HUGE loss, but to prevent against that happening the holding company and EverBank have an agreement that they will never be short to EverBank. So there!

The thing he said that made me smile, was that “As interest rates increasingly become negative, gold becomes the high-yield asset”. He went on to say, that…

…governments can’t reliably dump U.S. government debt instruments to protect themselves against dollar devaluation, since the president can freeze any threatening financial transaction, none more easily than government bond transactions. But governments can hedge their dollar exposure by buying gold, and many indeed are doing so.

I found this on Bloomberg this morning. And Bloomberg pulled the article from the Charlotte Observer, and can be found here in its entirety, and here’s the snippet:   

Not every milestone is worth celebrating.

For the first time ever – or at least since the company went public some 45 years ago – Walmart’s revenues shrank from the year before, according to its annual financial filing released Wednesday.

Walmart is clearly having trouble adapting its gigantic stores to the Internet age. To be sure, it is a retail juggernaut that brings in half a trillion dollars (that’s right, trillion) in sales every year. And with more than 11,500 stores in 28 countries, there’s no way it will disappear anytime soon.

Still, Walmart might have just hit its growth limit.

And the sales dip comes despite the fact that Walmart spent $11.5 billion (roughly matching what J.C. Penney made in sales last year) to build more than 400 new stores, remodel old locations, and revamp its website and other technology to better serve its customers.

Chuck again. I had just mentioned to the family last week that bricks and mortar stores were going to end up being dinosaurs as we go forward with the internet buying and having things shipped to your door, without having to leave your house. They laughed at me. Of course, all mad men get laughed at, at first! HA!

And with that I will send you on your way to hopefully having a marvelous Monday, and remember to be good to yourself!

Regards,

Chuck Butler
for The Daily Pfennig

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