Playing Games With Inflation…

Good day… A tough two days for yours truly on the trading desk has now ended. But once again, I was tied to the desk trading all day with no time to read, research, etc. So, I’m playing catch-up this morning. Good thing the currencies are trading in a tight range!

Well… The Fed’s FOMC started their two-day meeting yesterday, with a rate announcement due this afternoon. I don’t expect the FOMC to have voted for a rate hike at this point. However, I can’t get past that information I gave you yesterday regarding consumer inflation in real terms running at plus 10%. If the Fed members have any inkling of this information, they should be voting for a rate hike NOW! But they won’t, because they have their heads buried too deep into the sand.

So… Look for the usual from the Fed today… Rates remain unchanged, and the statement following the rate announcement will mention something about inflation fears remaining. MEMO TO THE FOMC: IF YOU HAVE INFLATION FEARS… RAISE THE RATES! If you don’t raise the rates, and keep pointing to inflation fears, you become the boy who cried wolf.

OK… I’m sitting here shaking. It’s sooooo cold in our office, you could hang meat in here! I keep what I call a “grandpa sweater” here in the office, and I’ve just had to shake it off and put it on, in an attempt to get warm! UGH!

The data in the United States begins to trickle in today and really heats up as we head into the end of the week. But first we saw some good data in Europe this morning. In the United Kingdom, January consumer confidence unexpectedly rose. The U.K. consumer confidence is measured by an index number that has been negative for some time. But a rise in the number is still a rise!

In Germany, the unemployment rate fell in January to its lowest level in five years! I just wrote some info on the euro for our marketing people, and sure would have liked to have this data in my back pocket for the report! The economic growth in Germany is very strong right now, and hiring is taking place as evidenced by this latest report.

Of course the European Central Bank (ECB) will be monitoring this data very closely, as wage pressures add to inflation, and with the economic growth going on, I think we’ll see Eurozone inflation kick back above 2% in January. Add that to the fact that money supply growth is running at twice the accepted rate, and you’ve got the fixins for a rate hike at the ECB’s next meeting on February 7-8.

The ECB isn’t playing any games with inflation, like the Fed did, and this will continue to be the case. I saw a report claiming that Big Ben Bernanke was hoping the “credibility” that he earned in his first year would allow him to carry out his theories. Credibility? Who told him that he had built credibility? Real inflation is over 10%, and he thinks he has done a “credible” job? GIVE ME A BREAK! I don’t know whether to go into a belly laugh, or start screaming at the walls! This report has really gotten my blood boiling… Which I guess isn’t bad considering how cold I was before I began talking about this report!

Previously in the Pfennig (I would love for Jack Bauer to say that!) I talked about the upcoming G-7 meeting and how the Europeans were up in arms about the weakness in the Japanese yen, and how the United States is sparing the rod with the Japanese regarding the weakness in the yen. There’s all kind of smoke about how G-7 will issue a communiqué regarding the weak yen. Here’s my take on it: I would love for G-7 to take the Japanese to the woodshed for keeping their currency so weak… But I doubt that will happen… And when the G-7 doesn’t issue a communiqué about the weak yen, I see yen falling even further. Without any love from G-7, Japanese yen will most likely fall to 125… OUCH!

I see this as a real turn-around level for the yen… I’m not a chartist, but if the charts said yen was oversold at 121, (as they said they were) imagine how oversold the charts will indicate yen to be at 125!

The other funding currency for the “carry trade” is the Swiss franc, and the poor franc is seeing some real weakness, falling below 80-cents for the first time in a while. The Swiss National Bank (SNB) needs to get back to their old rate policy, when they would follow whatever the German Central Bank, the Bundesbank, would do. If the Bundesbank hiked rates, the SNB followed and so on.

The data cupboard in the United States will print fourth quarter personal consumption, GDP, and Employment Cost Index (ECI). It will also print the Chicago Purchasing Manager’s report for January. The ECI used to be a very important piece of data that the markets watched because they thought the Fed watched it… And personal consumption was something the Fed used as an inflation indicator, but I doubt they even look at it any longer.

The Chicago Purchasing Manager’s report is really just the pulse of manufacturing in that region. It is expected to remain above the expansion level of 50.

Then this afternoon, the FOMC rate decision and statement… So, there will be plenty to follow today… And the tight currency range? I’m hoping it’s a thing of the past!

Currencies today: A$ .7720, kiwi .6825, C$ .8465, euro 1.2949, sterling 1.9530, Swiss .7980, ISK 68.28, rand 7.28, krone 6.30, SEK 6.99, forint 198.91, zloty 3.03, koruna 21.80, yen 121.50, baht 34.75, sing 1.5370, HKD 7.8070, INR 44.16, China 7.7745, pesos 11.03, dollar index 85.16, Silver $13.38, and Gold… $646.40

That’s it for today… Pitchers and catchers report in two weeks! That’s music to my ears! Twenty-Five years ago we woke up to over two feet of snow here in the St. Louis area… Now THAT was a snow! 25 years ago… WOW! My oldest son, Andrew, was just two weeks old, and I was at a Bank retreat, learning how to be a better “manager”… The journey home took two days! It’s supposed to snow tonight. You don’t think? Nah! No way we get two feet again! Have a great Wednesday!

Chuck Butler — January 31, 2007