U.S. GDP Weakens

Good day…and a Happy Friday to one and all! The end of the 3rd quarter to boot! Chris Gaffney mentioned yesterday that he thought that September had gone by fast. Recall, this month began with me in Montreal…to me that seems like eons ago! It’s sort of like when I was a kid and I would turn the calendar over to the month of December. Much like waiting for Christmas to come…waiting for the dollar to enter this next large downward leg seems to take as long!

The dollar rallied again yesterday following some not so dollar friendly news. Here’s the skinny: 2nd QTR GDP printed its final revision, and in the end it dropped to 2.6% from the last reading of 2.9%. But don’t worry about that the media says, this is an aberration, growth will be stronger in the second half of the year. Of course, I have no idea what the heck they are talking about, as the monthly data since the end of June has been awful. But again, a “feel good story.” Oh, and the Weekly Jobless Claims inched up again last week.

So, we head into the 4th QTR with the dollar booking gains. But, as I pointed out yesterday…the dollar has lost ground overall this year. If you just want to use the dollar index, which is a measure of the dollar vs. a basket of currencies led by the euro with a large weighting, the dollar index has fallen from a level of 91.17 at year-end to 86 today. And, if you want to use the euro, the dollar has lost nearly 7% of its value…put a trend line on either of those measures and you’ll see that what we have is a slow, general depreciation of the dollar in 2006.

Our Corporate FX guru, Ashish, sent me a note yesterday highlighting another reason the pound sterling has taken on water here this week. Apparently, there has been an error discovered in the latest GDP calculation, which suggests an overstatement of nationwide U.K. inflation. The second quarter GDP deflator was slashed back down to 2.2% from 3.4%. This has led traders to believe that the Bank of England’s Monetary Policy Committee (MPC) won’t have to raise rates and instead put them in the same boat as the Fed Reserve, having come to an end of rate hikes, and looking at the next move to be a rate cut.

NOT SO FAST! I can’t believe traders can’t see the trees in the forest on this one! All this does is put the MPC in the same boat as the ECB! The ECB sees inflation slowing due to the drop in oil prices, but is still on a mission to hike rates and be prepared for a rebound of oil prices. In my opinion, the MPC will do the same. They are probably now on a quicker pace to raise rates…but a rate hike scenario nonetheless! Therefore, these lower levels in sterling should be looked at as blue light specials. Attention pound sterling shoppers…we have a blue light special in aisle 3…

I just received an email from a trader in London, and he says that Reuters is reporting that ****** a CHINESE FOREX REGULATOR TO ISSUE UNSPECIFIED NEW RULE FRIDAY ********

WOW! I wonder what that will be? If it’s something of measure, I’ll send out an additional Pfennig note later today. So, if you see another Pfennig coming through later, it’s not a dupe of this one!

I have to say that since summer began, and now the beginning of fall, I don’t recall ever seeing such a lack of volatility in the currencies. I bet if you went back to June and counted the number of times I’ve said, “The currencies traded in a tight range yesterday” it would add up to quite a few times! I say this just to point out that I’m still waiting for the big move to come along in the currencies, which we normally see this time of year.

OK…we end the week with an interesting mix of U.S. data. Right out of the gate this morning we’ll see two of my faves to track: Personal Income and Spending. Always nice to see how much more we spend than we make (NOT!). We’ll also see the U. of Michigan Consumer Confidence report for the first two weeks of September and finally, the latest Chicago Purchasing Managers report.

We’ll have to wait till nine my time, this morning to see if the rot on the Philly Fed Index’s vine carries over to the Chicago PM (it’s all a heat beat of manufacturing, no matter what they call it). I suspect the Chicago PM will be weaker, which taken with the Philly report, will carry into the National Manufacturing data which they call the ISM. And we’ll see the ISM on Monday!

Yesterday, I typed the Swiss franc price incorrectly in the currency roundup. I apologize…fat fingers…typing at 6 am…what else can I say?

Currencies today: A$ .7460, kiwi .6522, C$ .8980, euro 1.2675, sterling 1.8710, Swiss .7980, ISK 70.05, rand 7.76, krone 6.50, SEK 7.3150, forint 215.40, zloty 3.13, koruna 22.35, yen 117.85, baht 37.50, sing 1.5840, HKD 7.7922, INR 45.96, China 7.90, dollar index 86, Silver $11.58, and Gold… $601.84

That’s it for today. Left early yesterday to sit in a dentist’s chair for 2 1/2 hours…and I get to do it again next Thursday! YAHOO! NOT! Last weekend of the regular season for baseball. The playoffs start next week…I sure hope my Cardinals can hang on! A double header tonight for my little buddy’s flag football team. And this just in: Reuters now reports that ***** China NOW DENIES ANY ANNOUNCEMENT *****

Have a great Friday and weekend!

Chuck Butler
September 29, 2006

The Daily Reckoning