"Strong Vigilance Needed"

Good day. And a Happy Friday to one and all. A short week, and that’s just fine with me! Well, we did get a form of the word ‘vigilant’ yesterday from ECB President Trichet. And the euro did rally on the news, but…Ugh! The markets still seem spooked by two things: The ADP labor report that I talked about yesterday, and the North Korean missile tests that happened earlier this week.

The dollar bears have been spooked by these two items and they won’t feel comfortable until the Jobs Jamboree shows that the ADP report was bunk! Here’s my take on this whole thing: Bloomberg polls economists that I usually refer to as the “experts” (take that description with as many grains of salt as you wish). The “experts” say that 175,000 jobs were created in June. The ADP report says it will be closer to 350,000. That’s what has the dollar bears spooked.

I say that the 175,000 was “pushing the envelope” to begin with, so how could anyone get spooked by a number so far out in left field? Anyway, this is all a bunch of baloney to me. I’ve stated more times in the past than you can shake a stick at, the number of jobs is irrelevant since they don’t tell us the nature/quality of the jobs created.

OK. Enough on jobs. Let’s get back to the ECB meeting yesterday. Trichet had a lot of things to say, but the most important thing that he said was that “strong vigilance was needed.” That’s central bank parlance for: “We’re going to raise rates at the next meeting, dig?” I went back to the ECB meetings and saw that at each meeting prior to an ECB rate hike, Trichet would use the word ‘vigilant.’ This time he put the word ‘strong’ in front of it. Does this mean that the rate hike will be 50 BPS instead of 25 BPS? Well, on the outside looking in, it sure looks that way to me.

So, let’s look at some of the other sound bites Trichet laid on us: “the ECB never precommits on pace, size of rate moves,” and, “There was overwhelming sentiment for August 3rd meeting.” He thinks we’ll “see some correction in markets.” OK. He’s being quite vague there. And one could take out of it what they want, so here’s my take out of it! I think he’s referring to the bond market where a 50-BPS hike would really correct that bugger! In addition, he could be referring to the currency markets, which would really correct with that kind of rate hike. So, that’s my story and I’m sticking to it! I’m calling right here, right now, there’s no better place to be. The ECB ups the ante at the August 3, 2006, meeting to 50 BPS!

Onto other items, eh? How about that surge in metals/commodities yesterday? Copper price soared more than 6%, aluminum 4.8%, nickel 3.5%, and our fave of favorite, gold 1.1%. I’ll tell you what goosed metals, besides the fact that they have been taken to the woodshed long enough: On the back pages of the newspaper, you know where the print even gets smaller, there was a report yesterday that an economist saw China’s second quarter GDP outpacing the first quarter’s strong showing of over 10%. No slowing down, as the Chicken Littles keep squawking about going on there!

If China’s not slowing down, then commodities aren’t circling the bowl like many pundits have claimed. And if commodities aren’t circling the bowl, the Aussie and Canadian dollars aren’t either!

Speaking of China, the renminbi hit its highest level versus the dollar since last July’s revaluation, last night. I’m still keeping that light on for a renminbi move to 7.50, but that’s going to take some patience, and a long-lasting light bulb! The thing that really heats up when the renminbi moves strongly versus the dollar is the other Asian currencies.

The Japanese yen, for instance, took the renminbi move and ran with it. So did the Thai baht and the Singapore dollar. Get down, get funky – thank you, boys! And, don’t forget that next week, the Bank of Japan most certainly is going to finally remove the ZIRP! That’s the zero interest rate policy for those of you new to class! This rate hike is the biggest. It gets them off their duffs and makes them move rates. After this hike, the rest of them won’t be so hard to pull the trigger!

As I’ve been telling you over and over again, sounding like a broken record…no wait, a scratched CD…no wait, a corrupted MP3 file – oh, you get the picture, once the people holding short positions on yen via the “carry trade” begin to feel the heat of rate hikes, they’ll be closing those shorts, which means they have to buy yen. And when that happens, did someone say, “Asian currency rally?” I think they did.

Next week, we get a deluge of data here in the United States including the trade deficit tally for May, which should be a doozer! We’ll also see retail sales, so I’ll have to check the Butler Household Index (BHI) to see what to expect from June.

Currencies today: A$ .7475, kiwi .6070, C$ .9010, euro 1.2780, sterling 1.8420, Swiss .8150, ISK 75.75, rand 7.15, krone 6.22, SEK 7.17, forint 219.66, zloty 3.15, koruna 22.29, yen 114.70, baht 37.97, sing 1.5780, INR 46.07, China 7.9859, pesos 11.05, dollar index 85.28, silver $11.58, and gold $630.60

That’s it for today. The Jobs Jamboree is the key-master today. Remember, I went out on that big strong limb yesterday saying the risk is on the downside. Our colleague here in the office, Sue, was very excited yesterday, as she watched her son’s ship return from the Persian Gulf. How exciting to have her son back home! Well, it’s bagel and latte’ time. So, have a great Friday and weekend!

Chuck Butler
July 7, 2008

The Daily Reckoning