US Consumer Confidence Plunges

March has been a very volatile month for the currencies and commodities, including gold and silver. But, on the last day of the month, they are stronger than they were at the beginning of the month…

Front and center this morning, we saw that Eurozone inflation moved well above the European Central Bank’s (ECB) ceiling target of 2%, printing at 2.6% for March, and increase from February’s printing of 2.4%… The 2.6% inflation rate is the fastest move in inflation since October of 2008, and, for those of you keeping score at home, March’s 2.6% inflation rate marks the fourth consecutive month of inflation exceeding the ceiling target.

This news has the euro (EUR) rising over 1.42, and is really putting the pressure on the ECB and ECB President, Trichet, to hike rates, which everyone and their brother now believes will happen soon.

I have to say that this pending move by the ECB has really opened some eyes around the world… For the first time in some time, interest rate differentials are going to come back, and be a force to reckon with. Sure, Australia, Brazil, Norway and Sweden have all raised rates in the past year and more, but if the ECB would raise rates, it would mean that the first MAJOR currency (dollar, yen, euro) has raised rates, and the rate differential between the euro and the other two (dollars and yen) would increase… This opens Pandora’s Box of rate differentials, and really highlights the fact that there are other currencies out there, besides euros, that already have rate/yield differentials versus the dollar and yen. And then the next thing you know, we have an all out assault on the dollar and yen again… As Chris told you, the carry trade is going to be the Cat’s Meow (ok I said that!) again!

And then we had US consumer confidence plunge, printing an index number of 81.1 in March… The fall was from an index number of 97.5 in February. This print of 81.1 represents its lowest level in five months. Seems the rising gas prices at the pumps is causing consumers to lose confidence… Hmmm… It’s about time, I would say… And then just wait till the government pulls the rug out from under stock prices…

We also saw January’s S&P/Case-Shiller 20-city composite home price report fall for the seventh straight month, though dropping by a smaller-than-expected 0.2% on a seasonally-adjusted basis from December (market expectations were for a 0.45% decline). The thing that really scares the bejeebers out of me is the fact that the monthly decline brings the index within one point of the recessionary low seen in May 2009! And… 11 metropolitan areas included in the measure dipped below the troughs seen during the recession.

And then, what do we have here? OK… I’ll let you decide, and then we’ll meet up again below, to see if we agree on what this all means… First of all… My good friend, Sean Hyman, sent me this last night… FDIC’s Bair admits that low interest rates have caused a “bond bubble”. And then reader, Scott, sent me this note this morning… “Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., said Treasuries “have little value” because of the growing US debt burden.” So… What do you think? Could this be… You decide, quick!

OK… I’m sure you all have now come to the thought that Chuck was bang on with his Treasury Bubble theory/call, and when people like Sheila Bair, and Bill Gross, see it, then it just puts that theory/call on terra firma, eh? Hey! Even a blind squirrel can find an acorn, folks, so I’m not patting myself on the back here, I’m just pointing out that I was the first to call a Treasury Bubble on the horizon, and now others are seeing it too! And like I said above regarding stocks… Just wait until the government pulls the plug on the bond buying…

Of course, I’ve also said that we’ll see QE3… And here’s the thing to remember… QE2 didn’t happen right after QE1, and so QE3 will not come along until the Fed Heads see that unemployment isn’t improving, mortgage rates are rising because of Treasury yields rising, and stock prices are falling through the floor… Later this year? Probably, but with all the quantitative easing that’s been put into the system, we could be looking at early next year…

Enough of that! Let’s look at some of the nice gains in the currencies overnight… The Aussie dollar (AUD) has moved well into the $1.03 handle, and the Brazilian real (BRL) gained 1% yesterday, pushing the real to the strongest level versus the dollar since August 2008… OK… We all remember what happened in August 2008 (it really began in July 2008), when all the walls came crashing down, and Humpty Dumpty has never been put back together again, here in the US. So… If we go back in time, we will see that the Brazilian real was kicking tail and taking names… But the real wasn’t the only currency doing so versus the dollar… In July of 2008 it looked like the end was near for the dollar, but then along came the financial meltdown…

And that’s interesting because now, today March 31, 2011, the Aussie dollar is stronger than it was in July of 2008… Along with most currencies (excluding the euro and sterling (GBP)), which have their own problems to deal with) So… Is the dollar on the tracks once again to oblivion? I doubt it… While the tracks seem to be greased right now, there will be a detour at some point, because the US cannot have everyone heading to the exit doors on the dollar at the same time, they need all the central banks and foreign investors to stay around, while they deficit spend… And deficit spend, and deficit spend… Hey! Did I mention deficit spending?

And… Here’s one thing that could put a damper on Chinese renminbi (CNY) gains versus the dollar, thus supporting the dollar… Chinese banks must cut their short dollar positions and also reduce their short-term foreign debt holdings, the currency regulator said on Wednesday.

The tightening of existing restrictions is the latest step by China to cut the scope for inflows of capital betting on faster yuan appreciation. In a short statement on its website, the State Administration of Foreign Exchange said it wanted to prevent illegal capital inflows and protect national financial security.

Chinese banks with dollar-short positions of $2 billion or more as of November 8 must reduce them by 60%, SAFE said. Banks with a dollar short of $2 billion or less must cut this position in half.

The euro’s rise that we talked about earlier, is being held back by the anticipation of what Ireland’s Stress Test results will reveal later this morning. I just don’t know what the traders are looking for here… The report is going to be bad…. I guess traders will be looking for degrees of “how bad” things are, I guess…

It’s Thursday, so the Weekly initial jobless claims will print, along with the Chicago Purchasing Manager (manufacturing) report for March, and February Factory Orders… I doubt any of this is market moving, but will most likely cause people to sit back and think about the so-called US recovery a bit…

Speaking of the so-called recovery… You know, that car sales here in the US have been quite strong so far this year; I even bought my beautiful bride a new car! But, I can’t help but think that the car sales are going to hit a speed bump here soon, as the horrible things going on in Japan, are going to put a crimp on the manufacturing of car parts… And unless you’re buying a German car, even US cars depend on Japanese car parts… So, I know, you’re thinking, Geez Chuck, you come back from baseball heaven, and you have to be this negative about the recovery? Yes… Facts are facts, no matter what your government tells you is going on…

Then there was this (from Bloomberg)…

Today, the Fed is set to disclose which banks borrowed from its discount window during the darkest moments of the 2008-09 financial crisis. This unprecedented view of the emergency loans the Fed extended to hundreds of banks is the result of a March 21 Supreme Court decision that left intact lower court rulings ordering disclosure in lawsuits filed by Bloomberg LP, parent of Bloomberg News, and News Corp.’s Fox News Network. Still, the Fed won’t disclose the collateral it accepted, which would reveal the risks it took. Future discount window borrowings will be made public, though only after a two-year delay, thanks to the new Dodd-Frank financial reform law.

What a bunch of bunk! Two years later? And we still won’t know the risks the Fed took on? Give me a break! And they call that transparency? That’s as transparent as thick mud!

To recap… The currencies today are stronger versus the dollar on news that interest rate differentials may be back in place, and that the ECB could very well be on its way to hiking rates, given the latest Eurozone Inflation report. Currencies like the Aussie dollar and Brazilian real are stronger now than before the financial meltdown, as then, it looked as though the end was near for the dollar. A couple of big names lend credence to Chuck’s call of a Treasury Bubble, and manufacturing here in the US (what’s left of it) could be facing new challenges from the lack of parts from Japan.

Chuck Butler
for The Daily Reckoning

The Daily Reckoning