Philly Fed Index Plunges!

Good day… And a Happy Friday to one and all! A no data from the U.S. latte’ morning Friday to boot! The data from the U.S. yesterday caused all sorts of problems for the dollar, and stocks… Bonds went goofy with the data, and the currencies made some nice gains… So, we head into the weekend on that note…

This morning, France printed a nice Consumer Spending report for August, and that has the euro pushing even higher… French Consumer Spending for August gained 3.3%, the largest one month move in 7 years… Sort of like the 7-year itch! I know, I normally don’t pay any attention to French data… But this one stands out like one of those knuckleheads that dye their hair purple and spike their Mohawk!

OK… Yesterday we saw Weekly Initial Jobless Claims, Leading Indicators, and the Philly Fed Index, and as I expected yesterday, the Philly Fed Index was the only market mover in the lot… And brother did it move the markets! And well it should given the absolute plunge in the numbers…

The Philly Fed Index plunged to a negative -.4 from a previous reading of 18! Any number below zero indicates contraction in manufacturing for the region… WOW! The real drop in the index came from a complete lack of orders… You know, this data says a lot… I have a good friend that is the foreman a huge tool and shop in the Midwest. He was telling me recently that his shop was merely working on past orders, and hadn’t received any major new orders, that their customers all seemed to be “waiting for something”…

This plunge in the Philly Fed caused stocks to fall… Bonds to rally… And the dollar to get sold like funnel cakes at a state fair! The euro has finally moved back above 1.28, and the pound sterling has gotten over its fear of heights and gone past the 1.90 level. There was also a weak Leading Indicators, which I explained yesterday as a piece of data that thought the markets should pay attention to, but doesn’t… And the Weekly Initial Jobless Claims were larger than expected… So… Overall… Not a good day for on the U.S. data front.

I think, we’re beginning to see a return in the “negative sentiment” for the dollar… Each morning I scour the news and have noticed more and more interviews of traders who are negative toward the dollar… It’s a groundswell at this point… A whispering campaign… And when it’s in full force, I will welcome them to my bandwagon! But, when it’s in full force, I think things could get as ugly for the dollar as it was when we closed out 2004…

Well… Our Treasury Sec. Henry Paulson has been meeting with the Chinese this week, and while he’s been there, the renminbi has really made a strong move (well, for the renminbi that is) VS the dollar. Last night, old Hank let us know that China agrees on principals with him… Just not timing… Well… Hank, I learned long ago, that timing is everything! So… You’ll leave there with nothing, but some parting gifts… When will we ever learn…. When, will, we, ever, learn?

Now… In another chapter of the Tale of Two Cycles… We switch to comparing where in the cycle we are with U.S. & Japanese manufacturing… Well… We haven’t seen the National ISM Manufacturing data, but if the Philly Fed Index is just an spec on the ISM radar, it will indicate that the national manufacturing will be weaker… In Japan, confidence and optimism is very strong as indicated by the latest Manufacturers’ Index which jumped to 12.7 this quarter from a previous quarterly reading of 1.4! But don’t take this data as your only indication of manufacturing strength… How about capital expenditures? How does an increase in Business investment at the fastest pace in 5 years sound?

Japanese yen is the most undervalued currency we follow… There’s no way it should be wallowing around in the mud above 110… I was thinking about yen this morning on my way to work, and recalled the trillions in yen that the Bank of Japan spent 3 years ago to keep the yen from getting stronger… They haven’t really been in the markets to perform physical intervention since then. Instead, they use verbal intervention, which scares the bejeebers out of yen buyers, as they recall the pain they suffered from the Trillions of yen the Bank of Japan spent… However… Just like most things… Yen buyers are going to forget the pain, and try their hand at driving the yen stronger VS the dollar.

Maybe, maybe I’m wrong, to go on singing, singing my song… On yen… But I won’t back down… (ok… First the Blue Jays, and then Tom Petty, I’m on a roll today!) Yes, yen is testing me… There’s going to be a change in PM soon, as current PM Koizumi steps down… His Deputy Dawg, Abe, will step into the PM role, and not miss a beat. Abe has been around Koizumi during the economic reforms and endorses them. So… Maybe, maybe I’m wrong… But I can’t help but think I’ll be right in the long run…

The Emerging Markets have all been hit again overnight, as South Africa posted a nasty looking 2nd QTR Current Account Deficit that now amounts for 6.1% of GDP… This has led a sell off of all the Emerging Markets… Mexico, Iceland, and more have taken on some water… Again… This looks as though it will be short-lived.

ECB Ministers were out in force overnight… Weber… Trichet… And more, have been pounding the drum for higher interest rates to combat inflation pressures, caused by higher priced energy. Yes, energy prices have backed off recently… But do you really believe that this is something that will remain in place given the demand for oil these days? I believe this is merely another round of weaker prices followed by spikes… The ECB agrees with that, and therefore they are going to keep inflation below their ceiling target of 2%… That’s providing price stability my friends, and it should be enough to catapult the euro higher..

Currencies today: A$ .7545, kiwi .6590, C$ .8985, euro 1.2825, sterling 1.9050, Swiss .81, ISK 70.70, rand 7.65, krone 6.50, SEK 7.23, forint 215.85, zloty 3.10, koruna 22.20, yen 116.15, baht 37.42, sing 1.5825, HKD 7.7830, INR 45.91, China 7.9195, pesos 11.10, dollar index 85.01, Silver $11.28, and Gold… $591.15 (have you noticed Gold slowly moving higher again?)

That’s it for today… I had a total brain drain yesterday forgetting to say Happy Birthday to Chris Gaffney’s son, Brendan. Brendan is the same age (3 months younger) as my little buddy, and is quite the hockey player I’m told! Here’s hoping my beloved Missouri Tigers don’t have a let down tomorrow… They’ve been known to do that in the past! Our little Christine just called in, and her little guy is sick, so we’ll have to do without our cheerleader today, so here’s my attempt… It’s our Friday, yeah for us! Have a great Friday and weekend!

Chuck Butler
September 22, 2006

The Daily Reckoning