The Rate Hike Creeps Back On The Table

Today’s Pfennig for your thoughts…

Good day, and a wonderful Wednesday to you!

Well, the stock market bulls tried to pull stocks out of the doldrums of the last two trading days that saw over 500 point losses begin to scare the dickens out of the moms and pops in the stock market. And it all worked pretty well, until we neared the closing bell, when the rug was pulled out from under the bulls, and the bears enjoyed another day of losses, this time losing 200 points at the end of the day.

So, with the recovery in stocks going on most of the day, the thought of a full recovery entered into the minds of traders in all assets, and that thought led to another, which would be that the rate hike from the Fed was back on the table.

And that thought led the euro and other currencies to losses on the day, along with gold, it was not a fun day for the currencies and metals. Even at the end of the day, it was as if it was too little, too late to change traders’ minds.

The euro did recover a little and fought back to reach 1.15 again, but in the overnight trading, the Big Dog, euro, has lost 1/2-cent.

You know, as the days have gone by this past week, I’ve been intrigued with the price action of the Japanese yen. There’s nothing in Japan that would warrant a yen rally, but we had one, and since then the yen has basically played follow the leader, with the euro being the leader.

And talk about volatile. Are bonds supposed to be volatile? Well, the answer is no. But these days with all the yay and nay on a rate hike going on, bonds have been caught in the tug-o-war.

Now, you all know that EverBank’s mortgage company, EverHome Mortgage is quite large, and every day, I get multiple emails from the guy that prices the mortgages, and here lately he’s been whipsawed throughout the day. I feel for him, but like I said the other day, these are the days that traders make their salary.

I told you last week that China had recently unloaded $180 billion of U.S. Treasuries. And now I read that China has recently unloaded another $100 billion of Treasuries.  That sure will throw a spanner in the works of the machine that’s trying to slow down the volatility of treasury bonds.

Speaking of China…  The renminbi depreciated a very large amount last night, I think I can detect that the trading band the renminbi is supposed to be trading within, has either been widened or trashed.

We had a long discussion about China yesterday in a meeting I attended, and I tried to explain that China is moving toward having the renminbi’s price directed more by the markets, than a government manufactured fixing each day. But I also warned that I think that 2015, is going to go down as the first year that the renminbi has lost value to the dollar since breaking the peg in July 2005.

I see more Reserve Ratio Requirement reductions, and more rate cuts this year, and probably within a couple of months, and none of that bodes well for the currency, but once the economy bottoms out, and inflation begins to become a problem from all the stimulus of rate cuts, etc. That’s when we’ll see the renminbi come back, for the Chinese know all too well that a strong currency combats inflation.

Well, the U.S. Data Cupboard yesterday was another day of one piece of data being strong, and another piece being weak. Yesterday, I told you about how Consumer Confidence was expected to rise by 3 points in the index this month. But that was chopped liver compared to the actual rise from 91 to 101.5! WOW! Everybody is Confident!

We’re in the money, we’re in the money, we’ve got a lot of what it takes to get along, we’re in the money, The sky is sunny.

Many years ago, when I started in the financial business sector at a brokerage house in St. Louis Stifel Nicolaus, the guy that ran the back office was a guy named Don Jackson, and whenever the brokerage would have a big day, he would walk around the office singing we’re in the money. I used to think he was playing with some missing marbles when he would do that, but here I am now doing it all these years later.

But I’m doing it facetiously, and not seriously like he did!

And then the piece of data that wasn’t so good, was the region PMI (manufacturing index) from Richmond, which saw a drop that it hadn’t seen in 9 years! Uh-oh!  But just like the Data Cupboard, the regionals have been mixed. The empire was weak, the Richmond was weak, but the Philly was strong.

Today’s Data Cupboard finally has a real piece of data, in Durable Goods Orders for July, which will most likely print negative. UGH!

Gold is down another $6 this morning. and has been down $7 and change while I was writing. I really don’t have anything on gold this morning, other than the thought process of the markets that I talked about at the top of the letter today, being responsible for gold’s weakness the last couple days.

I know that a lot of the gold bulls were really going out on a limb last week, when gold popped up over $1,100 again, and they all thought “this was it”.  And it very well could have been gold’s time to recover, but it doesn’t look like that after all, so we need to put away our banners, and signs pronouncing that gold is back for now.

Not for good, just for now.

Ok, a quick and dirty one, for I’m fading fast here. But this was sent to me and can be found here.

The Federal Reserve Bank of New York released its latest Report on Household Debt and Credit Developments, and the news isn’t good for student-borrowers.

As of the second calendar quarter ending June 30, seriously delinquent student loans (which the FRBNY describes as those whose payments are 90 or more days past due), increased to 11.5% of the $1.19 trillion dollars’ worth of education loans, versus 11.1% in the first quarter.

Before you dismiss four-tenths of one percent as decimal dust, consider this: Although student loans make up only 10% of all consumer debt, the amount of seriously past due student loan payments total nearly one-third of all seriously past-due debt payments. What’s more, of the total $1.19 trillion in outstanding education-related loans, only about half that amount is actually in repayment at this time (the balance is deferred because the borrowers are still in school).

So instead of 11.5% being seriously delinquent, it’s actually twice that amount: 23%.

Chuck again. Those darn pesky Student Loans. Hey! Everybody goes to college right? But not everybody can pay for it without a loan, and therein lies the problem, folks.

You increase the number of people receiving loans, and you increase the number of people that will default on that loan.  It’s just like I tell my kids all the time when we see someone or hear of someone doing something idiotic.  The population just keeps growing, and as the population grows, so does the number of idiots out there.

That’s it for today. I hope you have a wonderful Wednesday.


Chuck Butler
for The Daily Reckoning

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