Trichet Dashes Hopes of a Rate Cut

Good day… I’ll start this morning’s Pfennig with another version of Chuck’s view from the cheap seats… So Heeeeeres Chuck!

“The European Central Bank (ECB) left rates unchanged on Thursday, which surprised a few market participants. What didn’t surprise me were the words from ECB President, Trichet, who said… ‘Price stability is number one’. He went on to say… ‘The risks to inflation over the medium term are on the upside. They include the possibility that stronger than currently expected wage growth might emerge, taking into account tight labor-market conditions.’

“That was enough for the markets to hear… They are convinced that the ECB is not going to ease rates this month or next month (remember I’ve called for a May cut all along), and just knowing that, and knowing that the Fed will be cutting rates at least another 50 BPS on the 18th, sent the dollar to the woodshed… And a whippin’ is what it got!

“Euros (EUR) jumped above 1.54. Are you kidding me? No… I’m not! Euros, which once traded at 82-cents in 1999, are now above 1.54!

“You know… That if you just invested in the S&P 500 since 2000… Your return would be 1.5%, and when inflation is taken into consideration, your return would have been negative! But… Had you listened to me, in 2001… Your euro investment would be up close to 65%. But… Not many listened to me then…

“OK… I won’t dwell on all that… But today, is Jobs Jamboree Day… And the news for the dollar just keeps getting worse! The ‘experts’ only have us creating 25K jobs in February… And the unemployment rate rising to 5%… That’s quite a sad story right there folks… If the numbers do come in that bad, the dollar will end the week in the woodshed.”

Thanks to Chuck for sending me his thoughts from down in Florida where it was raining yesterday, giving him plenty of time to dissect the markets. As he mentioned, the markets are eagerly waiting for the monthly jobs report due out in a short while. The folks on Squawk this morning called this a ‘monster’ jobs number that could move the markets in a major way.

Many believe the numbers may actually come in below the expected 25K increase, with some calling for another fall in job creation after January’s 17K loss. And the other jobs numbers coming in today aren’t expected to be any better, with the manufacturing payrolls expected to have dropped by 25K in February. Average hourly earnings are also expected to have dropped on a year over year basis.

These numbers will have the equity jockeys calling for even bigger rate cuts, which will just spell more trouble for the U.S. dollar. Finally the falling dollar is starting to get some attention on the major networks, but most are realizing there is really nothing the Fed can do about the rot of the greenback given their focus on the economy. They have turned a blind eye to inflation, which will continue to eat away at the value of our U.S. dollar.

European Central Bank President Jean-Claude Trichet is obviously a man of his word, as he continues to keep his eye on inflation. He has been preaching restraint in wage growth, and kept his own pay raise to just 2% for 2007, below the rate of inflation. He also declined to step up his rhetoric on the euro, repeating his mantra that U.S. authorities favor a strong dollar. Trichet and the ECB have basically given the euro a green light for further appreciation, as a rising euro will likely help cool inflationary pressures in Europe, as a stronger euro will bring down their cost of oil.

Japan’s Prime Minister Yasuo Fukuda nominated Toshiro Muto to head the central bank, setting up a confrontation with the main opposition party, which indicated that it might block the appointment. Bank of Japan Governor Toshihiko Fukui, left interest rates unchanged at his last meeting yesterday. Muto, 64, has voted in line with Fukui at every policy meeting for the past five years; so don’t expect any major change of policy. The Democratic Party of Japan won control of parliament’s upper house and is delaying the appointment of the new governor. This new two party system has caused paralysis in Japan’s government but hasn’t hurt the currency yet.

Chuck sent me this short paragraph on the yen (JPY) last night… “I read an article by a major currency dealer the other night that I think needs to be revealed for all to see… The dealer believed that their ‘yen weakness’ was wrong, and they were going to be going long yen. That’s all fine and dandy… But they didn’t reveal if they were going to be removing shorts or whatever… My belief, given the way yen is looking very much like it is headed to 100 and below, is that they did remove their short positions in yen…”

The yen continued to gain as the carry trade was taken off again over the past few days. High yielding emerging market currencies are down and the yen and Swiss franc (CHF) outperformed all other currencies yesterday as investors reversed their short positions in these currencies.

Got to get going now, as the Jobs Data is already out and the phones are ringing off the hook. The payroll data showed a loss of 63K jobs last month!!! The dollar is going to get hit hard.

Currencies today: A$ .9360, kiwi .8006, C$ 1.0234, euro 1.5402, sterling 2.0133, Swiss .9782, ISK 67.96, rand 7.9793, krone 5.1350, SEK 6.0961, forint 171.88, zloty 2.3235, koruna 16.3348, yen 102.26, baht 31.53, sing 1.3845, HKD 7.7849, INR 40.515, China 7.111, pesos 10.8468, BRL 1.6857, dollar index 72.64, Oil $105.10, Silver $20.315, and Gold… $982.03

That’s it for today… Our little Christine’s husband is a basketball coach for a local high school team which is playing for the state championship this weekend. So good luck to the McCluer North Stars this weekend! I also have to congratulate the big boss’ daughter Jessica Trotter who scored the game-winning goal last night. Jessica was a soccer star in high school and got drafted to play on a coed team with our former professional soccer player Ty Keough and Kristin Kuchem. Ty tells me the game winner was quite a goal into the upper corner, just out of reach of the goalie! Hope everyone has a Fantastico Friday!!!

Chris Gaffney
March 7, 2008