U.S. Retail Sales Collapse In April...

Good day… I sure hope all the Mothers out there had a wonderful day yesterday… We had Chamber of Commerce type weather, which helped make the day top ten! I’m out the door later today to the Las Vegas Money Show… 2 presentations and a Forex panel… So, I’ll be talking a lot!

Ok… Friday was a pretty wild day on the desk here, as we saw more rot on the U.S. economy’s vine, and the dollar mini-rally end. And, recall on Friday morning I said that there were stories all over the screens claiming that investors were unwinding the carry trade, and I said I didn’t believe it? Well… There was no such unwinding going on… But talk about a market that is ripe for rumor!

Friday’s data had Retail Sales and Producer Price Index (PPI) that both proved to be a bit of a load for the dollar to carry. First, Retail Sales… Once again the Butler Household Index (BHI) was bang on with the forecast for a disappointing number. Retail Sales showed a 0.2% decline, disappointing expectations for a 0.5% gain. However the market found some joy in the data when they saw that March sales had been revised up to show a 1.0% rise from the previously reported 0.7% gain.

You just can’t ignore the weakness in Retail Sales… The higher energy prices, and the housing debacle, brought about this weakness… And this weakness in Retail Sales will bring about weakness in Corporate profits, etc. you know, like the thigh bone is connected to the knee bone…

Now onto PPI, which really doesn’t too much to get me lathered up, but the markets reacted to it, so here you go! The headline PPI rose 0.7% in April which was only slightly above the experts’ expectations for a 0.6% increase. The media though, latched onto the Core prices as they always do… And core prices were unchanged in the month. High energy costs are to blame for the .7% jump.

So… The dollar ended its mini-rally, which in reality was nothing more than a currency pause for the cause… You know, a breather from the strong run up in late April and into this month. This pause should allow the euro to form a nice strong base before moving higher…

You know… A long time reader and fellow lover of “24” sent me a note on Friday asking me about sustained dollar strength… Here’s what I told him… The dollar’s bounce back in the last 24-hours has been a direct result of stocks slipping. But given that the slide in stocks is a result of nerves about the U.S. Consumer, the logic for a stronger dollar seems a little perverse to me.

I will not argue that the dollar could generate a short-term rally… but fundamentals like productivity differentials, a dwindling yield advantage, the negative balance of payments, and the lack of foreign funding making sure the dollar can’t generate a long-term rally, sustained strength is not on the horizon for the dollar.

Of course that was written before stock rebounded on Friday…

There is GDP data out for the Eurozone, with Germany, France, Italy and Spain turning in their growth report cards this week. I would expect the Eurozone’s largest economy, Germany, will probably have slowed from the strong levels of the 4th QTR… Recall, that Germany put in place a VAT (tax) this year… However, most of the reports to date have remained reasonably strong… So, nothing to keep the European Central Bank (ECB) from their appointed rate hike rounds next month.

Kiwi is up to its old tricks again, trading up within spittin distance of 74-cents again… Last month kiwi hit its all time high since being floated of .7493… Reserve Bank Gov. Bollard can cry all he wants about how the strength of kiwi is “unjustified”… As long as he keeps the highest interest rates in the industrialized world, kiwi will remain the favorite investing currency of the carry trade…

There are rumors going round, someone’s underground and no, wait… Let’s try this again, there are rumors going around that China has made a smoky, back room deal with the U.S. … China agrees to allow greater flexibility in the renminbi if the U.S. backs off with the protectionism bills. We’ve heard these rumors before, but… We never had a move like we saw in renminbi on Friday… From 7.6965 to 7.6810… (remember renminbi is a European Style currency, and the lower the price the more value it gives when converted back to dollars)

Chris showed me an article he was reading in the Financial Times on Friday that highlighted the return of Warren Buffet to the currency markets… They said he was only invested in one currency… But even the FT didn’t know which currency… Chris pointed out that since Mr. Buffet is known for buying value, he could be looking at renminbi, Indian rupees, or Japanese yen…

I have no idea what currency he’s bought… But given the renminbi and yen’s Gov’t manipulation, I would think its rupee… Oh, he’ll tell us which currency next year! Thanks Warren!

The Data Cupboard here in the U.S. is bare today… But gets restocked tomorrow with CPI and the Net TIC Flows… The Net TIC Flows is the Big Kahuna tomorrow… It’s time to check on how well we are doing with regards to financing our Current Account Deficit…

Currencies today: A$.8340, kiwi .7390, C$ .9025, euro 1.3560, sterling 1.9820, Swiss .8210, ISK 63.50, rand 6.9370, krone 6.0450, SEK 6.81, forint 182.45, zloty 2.7720, koruna 20.86, yen 120.30, baht 33.50, sing 1.5150, HKD 7.8120, INR 40.87, China 7.6803, pesos 10.7930, dollar index 82, Silver $13.22, and Gold… $674.15

That’s it for today… All my bags are packed I’m ready to go… I forgot to get my boarding pass yesterday, and woke up at 2 am thinking about it… So went to the computer and printed it then… I sure hope Chris or Kristin remembered to print theirs! On the road again… Jen will have the conn on the trading, so hopefully things will be nice and smooth for her this week. AND>>>>> don’t forget that I’ll be two hours later with the Pfennig this week, as I write it from Las Vegas… Vegas BABY! Time to go… So have a great Monday and week!

Chuck Butler — May 14, 2007

The Daily Reckoning