We're Ready to Hike Rates, But It's Just Not Time Yet!

And now… today’s Pfennig for your thoughts…

Good day, and a Tom terrific Tuesday to you!

Today I’m ready and willing to take on Janet Yellen’s latest speech, and show you some data that will have you believing you see the train pulling out of the station and heading to recessionville.

Front and Center this morning, the currencies which as the morning went along gave up some of their Friday gains, but as Janet Yellen began to speak, and the dovish tone in her voice sent the dollar back down the slippery slope, the currencies gained back lost ground earlier in the day, and ended the day looking like they are ready to go on a long run. They are stretching and loosening up right now, but the long run appears to be on the agenda.

And now, the time is near, and so it’s time for the June rate hike to face the final curtain. I told you yesterday that the Fed’s LMCI (Labor Market Conditions Index) was going to print and it has printed four consecutive months of declines. Well, make it five consecutive months now. The May LMCI fell 4.8 points, the largest monthly decline since 2009, and let’s not stop there, if you order in the next 15 minutes, I’ll tell you that the previous two months declines were further revised downward. I’m going to talk about Janet Yellen’s speech for a while now, so if you have no use for that, go ahead and skip ahead, but, I do believe you’re going to want to read what I have to say.

I had to stop and laugh – laugh out loud at that – when I read yesterday, when Janet Yellen said that, “one should never attach too much significance to any single month report.” And I agree! Don’t I always say “one swallow doesn’t make a summer”? But come on Janet!  “This one number” regarding the awful jobs print last week for May? Did they hide the fact that the previous two months saw HUGE downward revisions from her? Yes, the BLS had to back out some of their “adjustments” when they didn’t materialize to the tune of 59,000. But just playing along with the BLS, let’s just use the headline numbers from the BLS and in Feb job growth was 233,000, March it 186,000, April it was 123,000 and then May 38,000.   

Me thinks me detects a trend. And if I can see it (my wife contends I can’t see much!) then she can see it, and everyone else can see it, if they just take a step back, and look at the last four months, and then add in the last five months of the LMCI.  They will see that this was not just a “one month” event. Remember, the trend is your friend, that is when you realize that it is a trend!

In the end, I think the markets were surprised by her somewhat upbeat tone to her speech.  She was very positive in her forecast for the economy, and saw “good reason to expect that the positive forces supporting employment growth and higher inflation will continue to outweigh the negative ones. So, in essence, she sees the expansion as continuing, labor markets continuing to be strong, and inflation moving toward 2%…  In other words, the Fed’s bias to higher interest rates remains and recent soft economic reports have not changed her mind from this view.

I do believe that the June rate hike is out, but if by some miracle on ice the economy rebounds and the data improves by the end of summer, she could be back in the rate hike business. But if the economy does what I suspect it will, and I have some validity to this statement later in the letter, I do believe that she’s not going to get that chance to hike rates this year, and in the end, she’ll be reversing the one rate hike from December.

Is her “outlook” too Pollyanna? Well, let’s talk about what Chuck sees in the economy, vs. what Janet sees, because quite frankly, the Fed’s track record at making forecasts has been a bit shady in recent years, don’t you think? Green shoots anyone?

In my recent interview with the Daily Reckoning I said that I believed that the U.S. was heading to a recession if not already there (at that time first QTR GDP was just 0.7%). Well, now one of the most respected economists in the world (in my opinion) David Rosenberg of Gluskin Sheff, recently put out a press release that “goods producing employment has contracted for four months in a row, with 77,000 jobs lost over the time period. That’s the kind of decline last seen in Nov. 1969, May 1974, Dec. 1979, Oct. 1989, Nov. 2000, and May 2007 – all of which predated recessions by an average of five months”  I also read where the great economic mind himself, James Grant, thinks that we’re already in a recession.

I’m talking about an “official recession”, the kind the NBER (national bureau of economic research) announces to the world.  Because if we were just going by the numbers on the back of a cocktail napkin, I would say what I’ve said for seven years now, that we never really left the Great Recession. Sure there are no soup lines now, instead the unemployed get their pre-paid charge cards and checks in the mail, no need to go stand in line and receive the assistance. That might make them feel bad, and hurt their feelings.

The currency traders have taken the Yellen speech, for what it is. I remain silent here, and let that sink in. The dollar is getting sold like funnel cakes at a State Fair this morning. The price of oil is knocking on the door to $50, but gold is off by $3 in early morning trading. The Dollar Index is back below 94, and everything is about as it should be this morning, except the price of gold. UGH!

In a currency roundup from around the globe. The euro is soaring on the news that German Industrial Production just keeps pumping out great data. IP in Germany, the Eurozone’s largest economy, for April increased 0.8% and beat the forecasts, when compared to the previous month, which was revised upward by 0.2%! IP in Germany remains resilient, and is seeing a 6.9% increase in auto production. Given the Global slowdown, it’s amazing that German IP is so resilient, but then this goes back to everyone buying a new car, apparently it’s not just a U.S. thing.

The Reserve Bank of Australia (RBA) left rates unchanged, and that caused a short squeeze in the Aussie dollar (A$) due to traders thinking that the RBA would opt to go back-to-back with rate cuts. But RBA Gov. Stevens said, that “In Australia, recent data suggests overall growth is continuing, despite a very large decline in business investment. Other areas of domestic demand, as well as exports, have been expanding at a pace at or above trend.” And the A$ is best performer overnight!

Pound sterling/pound, saw a roundtrip yesterday. OK, on Friday, the pound was 1.45 and change because the latest poll showed the “don’t leave” vote in the lead, then yesterday morning the pound had lost 1.5-cents on a weekend poll showing the “leave vote” in the lead, so guess what the latest poll showed? That’s right, that the “don’t leave vote” was back in the lead. And the pound is back above 1.45! I got a kick out of a headline story on Bloomberg, that said, “Pounds round trip shows trader fickleness as Brexit vote nears” See there? Haven’t I always told you that currency traders are “fickle”?

In China, their latest report on their FX reserves showed that the FX reserves level fell $28 billion to $3.192 trillion. But most of the drain was caused by FX revaluations dropping, and not because the Chinese were spending reserves to defend the renminbi, or implementing any stimulus measures.

I was sent an email from a dear reader, who forwarded an email that he received from a friend of his that lives in China. And the friend pointed out that the info that I had told you about with the steel tariffs increasing for Chinese steel sent to the U.S. was old news, that it had been announced in March.  Hmmm… Well, I won’t argue with him on that, but I could have bet the farm that I read that it was just announced last week. Oh well, the fact remains the same, it was done, and I don’t think it was a good idea. And again, I’ll point out that trade wars have caused major problems for the country that started the trade war. And again, I’ll point out Smoot-Hawley. And President Bush attaching a huge tariff on Japanese steel right after he took office.

And China continues to weaken the renminbi stealth-like. Small moves downward each night, keeps the wolves that want a stronger renminbi (like the U.S. and Eurozone), at the door. And with the dollar now seeing more days down than up, no one is for the wiser with regards to what China is doing, because everyone is focused on the dollar.

The petrol currencies led by the Russian ruble, and followed by the Canadian dollar, Norwegian krone, and Brazilian real are all on the rally tracks this morning. The Central Bank of Russia (CBR) is scheduled to meet this week, and I don’t think that they’ll use this meeting as an opportunity to cut rates. Interest rates in Russia should remain very high, as inflation in Russia is real problem right now. And the Brazilian real continues to book gains vs. the dollar. I had thought that after the impeachment of Rousseff, that real traders would take some of the gains out of the currency. But that hasn’t happened, and now we’re getting closer to the Olympics.

What does that have to do with the currency’s value? Ahhh, grasshopper, I’ve pointed this out before, but we’ve found that historically, when the Olympics come around the host country sees their currency rally. We saw it with Greek drachma, Spanish pesetas, and so on. So, I’m not saying that this is carved in stone, I’m just saying that historically this has happened, and it could happen again.

Gold gained $4 yesterday, and is down $3 this morning, so, if things remain unchanged today, and they won’t, but if they did, the two days would be a wash. I’m surprised by gold’s inability to add on by large chunks to the $33 move on Friday. One would think that all that manipulation getting gold down by nearly $100 in May was over with, as we turned the calendar to June. Oh well.. demand for physical gold and silver is strong, and eventually, there’s going to be investors that want gold and can’t find it, is how I see things working as we go along and the Central Banks of the East continue to horde physical gold production.

The U.S. Data Cupboard has the Productivity data for us today, and the Consumer Credit (read: debt) numbers. Productivity has become a real “key word” for economists, and once again it was the kind of talking about productivity, Big Al Greenspan himself, that got everyone talking about it again. Productivity has dropped here in the U.S. and Big Al says that this is something that will hurt the U.S. economy. Was it “Good Al” or “Bad Al” that said that? I’ll let you decide. I have nothing but warmth in my heart for Al Greenspan. NOT! Almost had you there didn’t I? HA!

For What It’s Worth. I found this yesterday, and it plays so nicely in the sandbox with the other things I talked about today, so I thought it would be quite appropriate to have it as my featured FWIW today. I found this on MarketWatch, and it’s about five things that could turn America into another collapsed empire, and can be found here, and for your snippet, I’ll just give you the introductory paragraph, and then list the five factors for you!

Many people have written about poor countries that have fallen apart. But rich nations fall apart, too. In fact, nations are just as likely to unravel after periods of prosperity as after periods of depression. The 2016 presidential campaign appears so bitter precisely because so many Americans worry that the “other” party’s candidate will annihilate the nation.

I have found five forces that undermine nations after they achieve economic success – and they are biting down on the U.S. today. We have little time to spare to renew the nation. Whichever candidate wins in November better come up with tough and effective solutions.

1.      Falling Birthrates

2.      Globalized Trade

3.      Rising Debt loads

4.      Eroding work ethic

5.      The challenge of patriotism in a multicultural country

Chuck again. I found this article to be very interesting indeed, and would have to say that we’re borderline having all five truly entrenched.

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


Chuck Butler
for The Daily Pfennig

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