Spending Picking Up in Japan?

Good day… Well… The dollar continues its dead cat bounce, as all the negativity toward holding dollars last month has dissipated…for now.

The euro has fallen back below the 1.30 level for the first time in seven weeks and fundamentally nothing has changed for the single unit. Economic growth is strong as witnessed by the rise in German Industrial Production, which rose 1.8% in November to be up 6.0% year on year. This is much stronger than expectations of a 1.0% rise in November. This is the largest gain in seven months and was boosted by cars, construction and office equipment.

And for those that have been Chicken Littles crying about how Eurozone countries were going to leave the euro because it was too strong for their exports, get this: German exports only fell by 0.5% in November, against expectations of a 1.4% fall. This doesn’t show any problems from the stronger euro in my opinion! Over on the other side of the ledger, imports fell 3.8% against expectations of a 0.3% fall. The larger than expected fall in imports saw the current account surplus beat expectations, rising from 11.6 billion euros to 12.5 billion euros.

Notice I said… current account surplus? That’s right… And it’s right as rain! Good as gold! All right on the night! OK… I think you get the point… It sure would be nice to have a surplus that didn’t drag down our economy, eh?

The Japanese yen actually rallied overnight while the dollar was strong versus the euro, sterling, etc. Yen got a boost when the Bank of Japan’s (BOJ) chief economist, Hayakawa, said that consumer spending has picked up in Japan, and over the longer term will gradually increase. Weak spending has been a problem, and probably the reason the BOJ kept the dust covers on a rate increase in December. I’m still out there on the limb with my call that the BOJ does increase rates at next week’s meeting. But there are not a lot of people with that same thought as me, I can tell you that!

I’m still waiting for an answer from the Bureau of Lies and Massaged Numbers AKA the Bureau of Labor Statistics, as to the number of birth/death model jobs AKA “ghost jobs” were added to that 167K figure for December.

The markets sure got lathered up and have remained lathered up since that jobs report printed on Friday. I see where those that were calling for a rate cut from the Fed in the first quarter have dropped by almost 50%. So, almost half of those that were calling for a rate cut and selling dollars have changed their minds based on this jobs report. Hmmm…

The Bank of England (BOE) and the European Central Bank (ECB) both meet tomorrow, and while interest rates WILL be going higher at both of these central banks in the future. They won’t be tomorrow. Not wanting to become “predictable” like the Fed was for two years, the BOE and ECB will take a breather this month. I would look for their rate discussions in February to yield another round of rate hikes.

I think that the markets are well aware of this, and yet they buy dollars. Mental giants the whole lot!

OK… Even with the strength in the dollar and the weakness in oil prices, gold has held the $600 level. I find this to be very telling…that there is strong demand for gold. India and the oil producing countries continue to show strong demand for gold. So gold is “Rock Steady”! I think that this could actually be a launching pad for gold, once this dead cat bounce in the dollar ends. But then that’s just me, and my opinion. I don’t know anything more than anyone else here…just offering my opinion!

Our Corporate FX guru, Ashish Advani, sent me a snippet of an article he read that made him think of the Pfennig immediately… So, here it is:

“Here is an interesting quote from ‘Van Hoisington and Dr. Lacy Hunt’ about what the inverted curve has done already to the economic growth. They are predicting more of the same for 2007 and thus pushing the economy into a zero GDP to a recession.

‘The economy has already shown a clear and unmistakable response to the inverted curve of last summer. Almost coincidental with the arrival of the inverted yield, the rate of growth in nominal GDP dropped sharply. For example, nominal consumer spending in October and November grew at an estimated 2.3% annual rate, down sharply from 5.2% in the third quarter and 6.7% in the second quarter.

‘The economy was, in reality, weaker in the fourth than in the third quarter, even though real GDP growth was a shade better. Accordingly, conditions forecasted by the inverted yield curve have already materialized.'”

Recall that last summer I told you that the yield curve had inverted, and remained inverted. This was an important indication of the future of the economy in the United States – that is, as long as history repeated itself like it had with regards to an inverted yield curve for decades. Normally, when our yield curve inverts, which means (for those of you new to class) that short term rates are higher than long term rates, it is an indication that the economy will suffer at least a major slow down, and even a recession in the coming months.

So… Van Hoisington and Hunt have basically said, “It’s already happening!”

There’s an interesting news headline that just flashed across the screen… Reuters is reporting that China’s President Hu is being urged to cede the presidency. Hmmm….

OK… Here’s a bit of news that will just make lawmakers Schumer and Graham’s skin crawl… China announced that their trade surplus jumped to a record in 2006 to the tune of $177.5 billion. If that’s not enough evidence of a potential overheating in the Chinese economy, I don’t know what is! China should be ready to allow greater flexibility in the renminbi. I doubt that they will, but they should before they have major overheating problems!

I’ll end this with some good news from down under. The Australian trade deficit narrowed in November to (in U.S. terms) $657 million, from $1.51 billion in October! This is huge! On top of that good news is the latest report on consumer confidence in Australia, which remains strong, and just posted the strongest consumer confidence in 17-months!

OK… So, let’s do a report card… Strong economic growth… The potential for higher interest rates… Strong domestic demand… An improving trade deficit, and consumer confidence soaring… Sounds like the currency associated with this report card should be looked at as a potential improving currency!

Currencies today: A$ .78, kiwi .69, C$ .8505, euro 1.30, sterling 1.94, Swiss .8055, ISK 72.25, rand 7.39, krone 6.3810, SEK 7.01, forint 197.50, zloty 3, koruna 21.36, yen 119.10, baht 36.05, sing 1.5350, HKD 7.7976, INR 44.55, China 7.8075, pesos 11, dollar index 84.75, Silver $12.43, and Gold… $611.40

That’s it for today. It’s Rod Stewart’s birthday… Rod is one of my beautiful bride’s faves. He’s 62 today… Congrats to Tony Gwynn and Cal Ripken Jr. as they were voted into the Baseball Hall of Fame yesterday. I’ve got some strong thoughts on the hypocritical baseball writers, but I’ll keep them to myself rather than stir up a hornet’s nest! Did you see that Sharp introduced an LCD TV that’s 108 inches? WOW! I would have to add a wing to my little house to put that TV in! Wired Wednesday coming my way… Can’t wait! Have a great Wednesday!

Chuck Butler — January 10, 2007

The Daily Reckoning