No "Surprise" To Us!

Good day. And a happy Friday to one and all! I’m a bit under the weather this morning, so this might end up being short-n-sweet. As you all know, sometimes I get on a roll, and then it becomes an epistle!

Well. The Bank of England (BOE) and the European Central Bank (ECB) both did as I thought they would yesterday, and raised rates 25 BPS respectively. As I was signing off yesterday, the BOE had wet their powder, and the pound sterling was soaring. So, let’s talk about that rate hike first.

The headlines read: “The Bank of England Surprises The Markets With A Rate Hike” Surprised? Well, I guess anyone that doesn’t read the Pfennig might have been “surprised.” We certainly were not, as I had chronicled the sizzling growth, and inflation pressures for the past few months. Anyway, the pound sterling continued its flight to higher ground all day after the announcement, and the statement afterward that left the door open to further hikes.

Pound sterling also got a boost from a story in the U.K. papers yesterday that the Bank of Italy had cut the U.S. dollar portion of its reserves by 21%, while increasing its pound sterling portion from 0% to 24%. There were no actual hard numbers discussed, but one would have to figure that we’re talking about something that’s larger than a breadbox! Pound sterling seems to be stealing the spotlight from the other European currencies right now. Pretty interesting, eh?

Later yesterday morning, the ECB walked the walk, after talking the talk all month about higher interest rates. The euro received little support from the announcement, as I said yesterday that I had thought the rate hike had already been priced into the euro’s value. Both the markets and I were concerned about ECB President Trichet’s press conference afterward. Would he back off his mega-hawk stance, or remain dedicated to fighting crime, seeking truth, justice and the American way? Wait, he’s no Superman! But seriously, what would he say?

Well, Grasshopper, Trichet remained a central banker that the inflation hawks can be proud of! How about these two comments from Trichet: “Monetary policy remains accommodative,” and, “Progressive withdrawal of accommodation warranted.”

OK. For those of you new to central-bank parlance, basically Trichet said that rates were still accommodating, which means low. And that (I loved this statement) “progressive withdrawal of accommodation warranted,” which means, he feels that he will continue to remove the low rates, and do so with a 50-BPS hike in his back pocket to pull out anytime he believes it necessary to do so. There! Hope that helps!

In a “real surprise move” yesterday, the South African Reserve Bank (SARB) raised interest rates 50 BPS! This was a real surprise, given the fact that the SARB had allowed the miners to dictate interest rate direction in recent times, which meant lower rates! And the South African rand suffered. So, I don’t know what got into the SARB, but at least they did the right thing; the rand is on the rally tracks.

Yesterday, I mentioned the resurgent precious metals. Gold and silver have really come back strongly, after the correction. Of course the weaker dollar that really began to show up in July helps gold and silver to keep shining! Shine on, shine on harvest moon…

So, now all eyes turn to the Jobs Jamboree today. The “experts” believe the United States added 144,000 jobs to the payrolls in July. You know, something that I stopped talking about long ago, because I had beaten the horse enough, is the Bureau of Labor Statistics’ birth/death modeling. I’m going to be checking the BLS after today’s jobs data to see just how we’re doing. My guess? Well, my guess is that “ghost jobs” created by the BLS still make up a large part of the job creation that is reported each month. Just a guess, but I will report more on that on Monday – No wait! I’m on vacation next week! Chris will have to pick up the ball and run with that one!

And you all know that I personally don’t get all lathered up like the markets do with the number of jobs created, since there’s no indication of what type of jobs were created. Instead, I look for inflation pressures in the average hourly earnings, and average weekly hours. Right now, the “experts” believe that average hourly earnings fell in July, while average hours remain unchanged. If that is what actually happens, it will tell us that there are no inflationary wage pressures, which would be another sign to the Fed.

After five consecutive weeks of funds flowing outbound in Japan, a simple rate hike turns the flows around. Net capital flowed into Japan last week, and with rates on the rise there, I suspect we’ll be seeing a lot of this in the future, which should be a harbinger to better levels for the yen.

Currencies today: A$ .7610, kiwi .6190, C$ .8830, euro 1.28, sterling 1.8925, Swiss .81, ISK 70.65, rand 6.8750, krone 6.16, SEK 7.21, forint 213.50, zloty 3.06, koruna 22.1650, yen 115.40, baht 37.85, sing 1.5750, INR 46.54, China 7.9784, pesos 10.95, dollar index 85.22, silver $12.26, and gold $645.52

That’s it for today. Chris will tell you all about the FOMC meeting next week. I think they will pause. My beloved Cardinals have hit another rut. I have no idea what’s going on with this team! Eating some saltines and sipping on Sprite, maybe my under-the-weather feeling will go away! I had better stay away from my Friday Latte’, eh? Have a great Friday and weekend! Talk to you again on the 14th!

Chuck Butler
August 4, 2006

The Daily Reckoning