Oil Price Moves Higher Again

And now… today’s Pfennig for your thoughts…

Good day, and a Tom terrific Tuesday to you! It’s super Tuesday! 13 states will go to the polls today and casts their votes as to whom they want to see run for president. There are 595 delegates at stake today. So, good luck to the candidates.

Well, we have a few things to discuss this morning, so let’s get to it!

We need to start today off with some talk about data, which I don’t like to do, but, data had such a bearing on what happened yesterday, so let’s get this party started!  The Chicago PMI started us off yesterday morning, with a really weak print, and things went downhill from there. The Chicago PMI (manufacturing index) for February came in at 47.6, a drop from 52.5 in January, and the print was far worse than expectations of 52.6.  

The components of Production and Employment led the downward move for February, with the Employment component hitting a low it hadn’t seen since 2009!  It’s important to note that the Chicago PMI works just like the national ISM manufacturing index, which will print today, so the 47.6 print for February drops the Chicago manufacturing region into contraction mode.  Uh-Oh.

The Dallas report works differently, but had the same general weakness as it came in at -31.8, a better reading than the -34.6 print in January, but still very much negative.   And the U.S. Pending Home Sales for January, fell to their lowest level in a year, declining -2.5%..    Now here’s where I have to laugh, not at the drop contracts to buy previously owned homes. But at the reason the apologists gave for the drop.  They claimed that the data was weighed down by the “harsh weather”.

But then over at the Natural Gas readings, they claim that Natural Gas prices haven’t risen alongside the nascent recovery of oil, because the winter weather hasn’t been harsh. Hey! I don’t make this stuff up folks!

So, speaking of the nascent recovery of oil. The price of oil has jumped to a $34 handle this morning, and since this makes about a week of stability for the price of oil, the Petrol Currencies Traders decided to go ahead and give some love to these currencies that include: The Russian ruble, The Canadian dollar/loonie, The Mexican peso, Brazilian real, and Norwegian krone. Oh, shoot throw in the U.K. pound, just for G.P. The Russian ruble is the best performer overnight, with the Mexican peso not far behind the ruble’s gains.

Overnight, the Reserve Bank of Australia (RBA) did leave interest rates unchanged, as was generally anticipated. Except those that “generally anticipated” had just come on board recently. They weren’t out there on the limb with me months ago!  But, that’s neither here-nor-there, Chuck, don’t go getting all uppity on us!  You’re right. I don’t know why I went there.

But getting back to the RBA, they did make a statement after the rate announcement, and in the statement they tweaked the wording to say something about how they would have to cut rates should inflation remain too low. They didn’t stipulate what a “too low” level was, but I guess once the next CPI (consumer inflation) report prints in late April, we’ll find out, eh? Anyway, the Aussie dollar (A$) is slightly stronger this morning.

The Chinese allowed an appreciation in the renminbi’s fixing overnight, the first time in over a week that we’ve seen an appreciation in the renminbi. Yesterday’s comments on how China sure knows how to play the Currency Wars Game, got picked up by Dave Gonigam over at the 5 Minute Forecast, and I thank him for that. I always say that I love it when I see my name up in the lights! And in my opinion, you can’t get much brighter than those that shine for the 5 Minute Forecast!

In fact, the currencies as a whole are performing much better vs. the dollar this morning, as the weak data that printed in the U.S. yesterday is having a hangover effect on the dollar today. There are two major currencies though, not going along with the currency rally this morning – euros and yen. The euro has had a tough row to hoe lately, while the yen rises and falls with the spring temperatures. A cold front has moved in on yen overnight, in the form of the Chinese reserve ratio reduction that I told you about yesterday. The thing with weather fronts in the spring, is that they don’t last long. And don’t worry I’m not trading in my current job to become a weatherman! HA!

The euro seems to be trading in its same clothes as yesterday, as it hasn’t moved much, and the way it has moved has been downward. The Eurozone got some bad data yesterday, as their CPI fell -0.2% in February, from a 0.3 from a year ago. But this morning, the Markit Eurozone Manufacturing Index rose from 51 to 51.2 in February. And the Unemployment Rate dropped from 10.4% to 10.3%, with the labor participation picking up. So, maybe the euro can turn things around on today’s better data than yesterday’s bad data!

German Chancellor Angela Merkel, I do believe, is feeling some heat coming from the BREXIT talk, because once Britain leaves the European Union (EU), and do believe they will come their June referendum, it will give other countries now afraid of the big bad wolf (Germany) the gumption to go about making their own exits. And at the very least negotiate the same concessions that Britain negotiated last week. Denmark (DEXIT) would be the next to exit, then France (FREXIT), and shoot while we’re adding them up, let’s throw in Austria! (I think their short name would be interesting).

So, anyway, Merkel warned of the risks to the euro if these “exits” continued, and the intra-European borders were shut down, saying: “If we disintegrate into small countries again, a common currency will be very difficult.” The next EU Summit is next week on March 7th, we’ll see what become of that!

On the Pfennig website readers can post comments about things I talk about, and I usually get back to them in the same day, sometimes not seeing them posted until the next day, delays my response though. Well, yesterday, a reader wanted to know why I’m always banging on Canada. What, what? I responded that I didn’t agree that I was always banging on Canada. I’ve always been a fan of Canada, their strong banking sector, the glut of raw materials, and before the new administration, they had a government that worked toward a Budget Surplus, and a narrowing of the Current Account Deficit. Their main problem has been the fall of commodity prices, and now the new government, which has made no bones about it, they are set to run up the deficit spending.

Speaking of Canada. Today they will print their December GDP and fourth QTR GDP (about time, eh?), and here’s where the drop in commodity prices are going to show up big, in that economic growth is probably going to be flat for the year on year comparison. Well, that’s better than negative growth, like we would be showing here in the U.S. if it hadn’t seen the additions made to it last year, that added up to 3% annually to GDP.

Well, yesterday morning, I left you with gold rallying back to regain the $11 it had lost on Friday. Gold ended the day up $16, to 1,238. and is up slightly this morning inching ever-so-close to the psychological $1,250 figure, which gold bumped up to last week, before getting taken down.

I have to tell you that I liked this short piece by Jim Rickards, who was writing for the Daily Reckoning  and called gold a chameleon, as it changed in response to the environment it is exposed to. For instance:

At times, gold behaves like a commodity, and the gold price tracks the ups and downs of commodity prices. At other times, gold is view as a safe-haven investment, competing with stocks and bonds for investor attention.

As JPMorgan said over a hundred years ago, ‘Gold is money. Everything else is credit’ Right now, gold is behaving more like money than a commodity or investment. It is competing with central bank fiat money for asset allocations by global investors. That’s a big deal because it shows that citizens around the world are starting to lose confidence in other forms of money such as dollars, yuan, yen, euros and sterling.

Chuck again. Great stuff on gold, eh? Jim also added that, “for the first time since 2008, it looks like central banks are losing control of the global financial system.” YIKES.

The U.S. Data Cupboard has the national ISM Manufacturing Index for February to print today. Remember, I’ve told you for almost a year now, how this data has been in a free fall from its high in August 2014 of 58, it has steadily fallen, and now sits below the line of demarcation between expansion and contraction, which is 50, and the January ISM printed below 50 for the second consecutive month, and I don’t see February changing the landscape here, and should remain below 50 for a third consecutive month, in the 48 range.

We’ll also see the total vehicle sales data for February. We’re still loving those new cars, and those new car loan terms, that now allow for 84 month terms! Gotta love it! Right?

Before I head for the Big Finish today, I wanted to mention a couple of responses I got to the “helicopter money” thoughts I wrote about yesterday:

Over the past 30 years, you think you’ve heard about every cock eyed idea – and then this ‘helicopter money’ comes along and one more time your jaw hits the ground with stupidity of bureaucrats.

And this one:

Chuck, we have had helicopter money for years. It’s called the earned income tax credit…$800 for doing nothing but earning money.

Over at www.usagold.com they have a commentary that was posted yesterday by Michael Kosares, who has been quoted by me before, so let’s see what they are talking about. Here’s the link to the commentary, and here’s the snippet:

When you have zero money for so long, the marginal benefits you get through consumption greatly diminish – but there’s one thing that doesn’t diminish, which is unintended consequences.

Something happened on the way to negative interest rates. Something unexpected. Gold and silver demand went through the roof. The first two months of business at USAGOLD were reminiscent of the 2009 run to gold. In London, where people have the additional concern of a potential exit from the European Union, investors were lining up around the block to purchase precious metals, and reports were circulating that ‘Some London banks are placing unusually large orders for physical gold.’ For the first two months of the year, the U.S. Mint reported gold coin sales running double what they were for the same period in 2015.

Chuck, so inquiring minds are probably asking the question, What’s behind the rush for gold? Well, the laundry list could become quite long, so I’ll stick to the major points, folks:

1.      All the talk about negative interest rates

2.      All the talk about banishing cash

3.      Market turmoil leads to safe haven buying

4.      Because in these times of deflation, near zero or negative interest rates, and the inability of central banks to promote growth, it just seems to make sense.

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. Be sure to sign up for The Daily Reckoning — a free and entertaining look at the world of finance and politics. The articles you find here on our website are only a snippet of what you receive in The Daily Reckoning email edition. Click here now to sign up for FREE to see what you’re missing.

The Daily Reckoning