The Dollar Takes Ahold of the Rate Hike Talk

And now… today’s Pfennig for your thoughts…

Good day, and a Tom terrific Tuesday to you!

Well, the BS (Big Shift) that I talked about yesterday, has really taken ahold of the markets. Bond yields are rising, stocks are getting sold, the commodities, minus oil, are seeing their recent gains slip away, and the currencies are folding like a lawn chair vs. the dollar. This has become more than just that “last gasp rally” that I’ve talked about for the dollar as I thought it was fading in the strong dollar trend. This rate hike talk has really taken the markets by surprise, and now has their undivided attention.  The dollar is rallying again this morning, with only a small number of currencies, like the Russian ruble, gaining vs. the green/peachback.

And all the focus is getting put on the Janet Yellen speech this coming Friday. Recall last week I told you that it was very curious that this speech was put on the schedule at the last minute, as the speech will come before the “black out date” ahead of the Fed meeting. And according to Fed member Williams, we had better pay attention to what she says, because, “she speaks for the committee.” So, right now, the odds of a June rate hike have gone from 10% to 65% in a week, and if Yellen follows up the recent pro rate hike in June talks from the Fed members, then I would expect that percentage for odds of a rate hike to rise significantly.

All this talk about a rate hike in June is beginning to give me a rash. Need I remind everyone that on April 11th, Fed Chair, Janet Yellen was called to the White House for an unscheduled meeting with the President and VP.  It was widely rumored afterward that Yellen was brought there to hear the President tell her face to face that there will be no rate hike before the election (read into that what you may).

Now maybe that wasn’t the reason she was brought there, but really, couldn’t anything else that was discussed be done over the phone, via email, or even a card or letter? Old school, I know. And tea and crumpets don’t seem to be the president’s style. So, what is all this talk of a rate hike in June going to achieve if there is no rate hike June? Well, it slowed down the markets a bit from getting too cocky. So, maybe that was it. It also stopped the dollar selling on a dime, so add that in. But in the end, all this rate hike talk is just talk. I’ve told you this before but it works well here too. My dad always told me, “Chuck, money talks, and BS walks”.  And in the words of Charlie Daniels, “sometimes I think that preacher man would like to do a little walkin’ too.”

Have you ever heard the phrase: “A Two-handed economist”? You know the kind that says, “on one hand I see this happening. On the other hand I see this happening.” The “this” being something completely opposite of each other. Well, that’s what we received from Fed St. Louis President James Bullard yesterday in his speech, when he said, “that “below trend growth” is a prime reason a lower tightening path could be justified (so read from that no rate hike). Then he argued that “rates kept too low for too long could cause financial instability in the future and therefore stronger market expectations for a rate hike in June are probably good.” (read from that a rate hike). Which way are you going Mr. Bullard? Tell us, tell us, please!

He did stray from the recent rhetoric from Fed speakers who go out of their way to tell their audiences that they are in favor of a rate hike in June. But, then the markets just take what they want from something a Fed member says, so they forgot all about the first part of Bullard’s speech and concentrated on the second part where he suggests a rate hike is coming. Really? Come on markets, why go down this rabbit hole? And now I’m going to take issue with something Bullard said. That “rates kept too low for too long could cause financial instability”. Really? Wait, what? You just now figured that out? Didn’t we figure that out in the last decade with Big Al Greenspan’s attempt to sell houses? I mean, promote growth.

So, like I said earlier the markets have the dollar on top of the currency hill today, and even a nice print from Germany on GDP isn’t enough to stop the dollar from taking a pound of flesh from the euro this morning. Yes, in Germany, a pick-up of machinery and equipment investment of 0.9 points to 1.9% vs. the previous quarter, stronger imports and exports and a strong increase in construction investment, pushed the German first QTR GDP to 0.7% vs. the previous QTR.

The only hiccup to the report was a weaker than expected contribution from personal consumption. I know that 0.7% GDP growth doesn’t sound like a things are looking up in the Eurozone’s largest economy, but it is. Recall that not that long ago, Germany was in a recession, and growth was 0, zero, nada, zilch, nothing.

Germany also saw the Expectations Index as measured by the think tank ZEW fall in May from 11.2 to 6.4, and the Current Situation rise from 47.7 to 53.1. Hmmm, I guess it’s a case of everyone is happy now, but see storm clouds gathering. Hopefully those storm clouds dissipate.

Did you hear about the antitrust lawsuits that are being filed against 16 of the world’s largest banks, including JP Morgan Chase, and Citicorp? The lawsuits are accusing the banks of hurting investors who bought securities tied to LIBOR by rigging the interest rate benchmark?  The U.S. Courts of Appeals in NY said, “Requiring the banks to pay treble damages to every plaintiff that ended up on the wrong side of an independent LIBOR denominated derivative swap would not only bankrupt 16 of the world’s most important financial institutions, but also vastly extend the potential scope of antitrust liability in myriad of markets where derivative investments have proliferated.”  Uh-Oh.

I’ll be sure to keep my eye on this new folks, because this is HUGE! I know that sounds a lot like a FWIW article, but I had it on my mind right now, and had to get it out!

The Aussie dollar (A$) took it on the chin again last night, as traders see interest rates here going in the opposite direction than those in the U.S. and even a speech by Reserve Bank of Australia (RBA) Gov. Stevens wasn’t enough to wrap a tourniquet around the A$.

And as I said above the Russian ruble is one of the few currencies to carve out a gain vs. the dollar this morning.  I don’t see anything moving the ruble in this direction, as the price of oil is pretty much flat overnight.

The price of oil saw some slippage overnight, but not much and oil still maintains a handle of $47 this morning, so given all the dollar strength everywhere else, this slippage isn’t anything to be concerned with.

Gold lost $3.70 yesterday and is down another $8.70 this morning. Like I said above, this dollar strength thing on the rate hike talk is nothing to stand in front of. I guess if Gold is going higher eventually, according to James Rickards, then these are buying opportunities. Speaking of James Rickards… Bullard and the other Fed speakers didn’t give gold traders/investors any reason to push the envelope on such a “nothing kind of day”. I actually slept through a lot of the day, so it was a nothing kind of day for me too! 

I was reading my 5 Minute Forecast, which can be found here (you’ll have to subscribe to read it, but I don’t go a work day without reading it!) and in the 5 Minute Forecast (The 5) editor, Dave Gonigam was going through the paces of explaining why James Rickards believes that gold will eventually end up with a price of $10,000 per ounce. So, I borrowed a shot piece of that, on the manipulators for you to read. here goes!

‘Gold manipulation can be done by market players like hedge funds, COMEX operators and other players using ETFs and leasing and unallocated contracts. These manipulations do exist and can influence the price of gold in the short term.’

So there’s no need for any tinfoil hat here – gold manipulation is real. But it’ll fail in the end, says Jim: ‘Ultimately, the macro forces driving gold to $10,000 will overpower the manipulators. But until then, the price of gold will move, in part, because of manipulators’ actions.’

The U.S. Data Cupboard is darn near empty today. Yesterday, the Flash PMI’s for the U.S. manufacturing sector showed some real problems as the index number fell to a 7 year low, of 50.5. Just a rounding error from a sub-50 level. I would be worried about that if I were Janet Yellen, but then who knows what keeps her awake at night.

For What it’s Worth. This is good… as it is an article on that’s title is “U.S. Warns Japan on yen interventions as G-7 reaffirms deal ‘no competitive devaluations'”. So, this sounds to me like it is about the so-called Shanghai Accord. You can read the entire article here, or here’s your snippet..

“The U.S. issued a fresh warning to Japan against competitive currency devaluation on Saturday, exposing a rift on exchange-rate policy that overshadowed a Group of 7 (G-7) finance leaders gathering hosted by the Asian nation.

Japan and the U.S. have been at logger-heads over currency policy, with Washington saying Tokyo had no justification to intervene in the market to stem yen gains, given the currency’s moves remained “orderly”.

In bilateral talks ahead of the second day of G-7 talks in Sendai, Japan, on Saturday, U.S. Treasury Secretary Jack Lew told Japanese Finance Minister Taro Aso that it was important to refrain from competitive currency devaluations.”

‘Secretary Lew underscored that the commitments made by the G-20 in Shanghai to use all policy tools to promote growth – fiscal policy, monetary policy and structural reforms – and to refrain from competitive devaluation and communicate closely have helped to contribute to confidence in the global economy in recent months,’ according to a statement by the Treasury Department.

Chuck again. yeah, right, there’s no “accord”.  But as I’ve said before, I do believe that the accord has started to fade, as the dollar strengthens, and the currencies that had gained on the accord have given back those gains.

That’s it for today. I hope you have a Tom terrific Tuesday, and be good to yourself!


Chuck Butler
for The Daily Pfennig

P.S. Have you thought about investing in gold but don’t know the best way to do it? Then you need to see the FREE special report we’ve produced called The 5 Best Ways to Own Gold. It answers all the questions you have. We’ll send you your report immediately when you sign up for the free daily email edition of The Daily Reckoning. It combines hard-hitting information with charm and wit to bring you a unique perspective on the world. Click here now to sign up for FREE and claim your special report.

The Daily Reckoning