Why The Fed Members Could Be Re-Thinking Their Inflation Calls

And now… today’s Pfennig for your thoughts…

Good day, and a tub thumpin’ Thursday to you!

Well, we have more China fear in the markets today, and we had differing opinions from traders regarding the FOMC Meeting Minutes yesterday. So, we’ll touch on those two things, and more today. Are you strapped in? Alrighty then let’s go!

China’s stock market had to close early for the second time this week overnight, after plunging 7%!  It was an ugly day in China folks. The stock markets got whacked and had to close early, The Peoples Bank of China (PBOC) weakened the renminbi by an even larger amount than they did the previous day, and this drop in the renminbi’s value has now happened for eight straight trading days. And then we had the Chinese reserves figures print, and they showed that reserves had dropped by $108 billion in dollar terms, in December, to $3.3 trillion.

I know that still seems to be quite an impressive reserves figure, but Shoot Rudy, I remember when it was $2 trillion on the way up, and everyone thought it was the Holy Grail for reserves! I think it’s important to look at this and remember that last June, Chinese reserves hit a high of $3.993 trillion, so in six months or so, reserves have dropped to $3.3 trillion. $108 billion was spent just last month!

What have I always told you about this? That China had a Treasure Chest of reserves to spend should they need to, and it appears they are doing just that!

Unfortunately, none of what they are doing seems to wrap a tourniquet around the stock market, or the economy for very long. Of course it’s not just the Chinese stocks that are getting whacked at the start of this year. I read on the Bloomberg this morning that in just three days of trading in 2016, more than $2 trillion has been wiped from the value of global equities, with volatility soaring 13%.  And then the other thing is that it’s not just stocks getting whacked!

The price of oil slipped to a $33 handle overnight, and it Black Gold, Texas Tea, looks to be on its way to $30! This is a 12-year low for the price of oil. Let’s see 12 years ago, was 2004, and the price of oil was on its way up, not down like now.

Yes, it’s one of those times where you can throw a dart at a wall and find an asset that’s getting sold. But you had better not come close to treasuries and gold, for they are the two assets that investors are flocking to right now. You had better think about getting in line quickly because these two assets are going to get very crowded soon.

For gold, that would be a good thing to see investors flock to the shiny metal once again, but for Treasuries, which have already seen this kind of buying for the past few years, and with the Fed talking rate hikes, this could very well end up being risky.  Sure, I know, you’ll get your principal back at maturity, but in the meantime you’re stuck with a low yielding assets, when there are newer issues of the same asset with higher yields attached to them. Talk about buyer’s remorse!

But for now, it’s all about dollars, Treasuries and gold. With all this rot on the currencies’ vines, one would think that the Dollar Index would be soaring past 100 right now. But it’s not! And why is that, I hear you asking. Well, because the euro, which I have told you time and time again, has the greatest weighting of the Dollar Index, and the euro is in rally mode the last two days vs. the dollar. Go figure!

Euros are stronger in price today, along with Norwegian krone, Swedish krona, Swiss francs, Japanese yen, Polish zloty, Czech Koruna, Hungarian forints, and the best performer overnight, Danish krones! New Zealand dollars/kiwi and Singapore dollars (S$) are flat this morning. The rest, led by the Aussie dollar (A$) are getting sold vs. the dollar this morning.

I did a double take on the Norwegian krone performance this morning, given the slipping in the price of oil, for the rest of the Petrol Currencies are getting whacked good, but there it was, a rally in krone. Well, bust my buttons! Proving once again that even a blind squirrel can find an acorn! Actually, though, I think the selling of Norwegian krone has gotten ahead of itself, and this is simply a retracement before more selling come back to the krone.

So, what’s up with the Danish krone? Well, look at it like this, the krone is pegged to the euro, so when the euro has a good day like today with the single unit up 3/4’s of a cent, the krone can then push the currency appreciation envelope. What? You didn’t know that the krone was pegged to the euro? Well, you must be new to class because I’ve talked about this for over a year now.

In fact last year at this time, it appeared to me that the Danes would break the peg to the euro, but that appearance faded away, and now we’re back to the peg. The reason for the peg is that the Danes voted no several times in the past to convert to the euro, so this is a way for the government to stay on an even playing field with the euro.

Anyhoo, the krone is also getting some looks from investors because there were rumors going ’round that we could see a rate hike in Denmark. What? Who started that rumor? Are they nuts? Everyone else around the world except, Brazil and Russia and the U.S. are cutting rates, I don’t know where this stuff gets started, but it’s crazy talk, folks. Crazy I tell you!

I also mentioned above that Japanese yen was rallying vs. the dollar.  The yen has really pushed the currency envelope so far this year. I just get a kick out of watching yen traders push the currency to stronger levels in the face of such awful economic data out of Japan. This has to prove that the recent strength of yen is simply a case of Traders still believing that Japanese yen is a “safe haven” currency. As If!

For those of you keeping score at home, here are some of the data reports that have recently printed, while yen traders push the currency stronger.

Japanese Household Spending fell -2.9% year on year, Japanese Unemployment Rate rose to 3.3% from 3.1%, Japanese Industrial Production fell -1% vs. the previous month, Japanese Retail Sales fell 1% year on year, and -2.5% vs. the previous month.

Remember when I used to remind everyone all the time that the U.S. was turning Japanese, yes, I really think so?  Well, maybe Japanese yen Traders are turning American! I say that because, hasn’t the dollar been strong the last couple of years, with weak and getting weaker all the time, economic data?

Which brings me to the thought that I’ve been swishing around in my empty head, and that is. That the dollar isn’t getting stronger, but the other currencies are doing whatever they can to get weaker.

Well, the U.S. Data Cupboard was well stocked yesterday, and it printed some data that continued to show the U.S. economy going backwards instead of moving forward. For instance, Factory Orders fell -0.2% in Nov, and -0.3% minus Transportation. Durable Goods Orders were flat, and CAPEX Orders were -0.3% in November.  The ADP Employment Change report was strong though, showing 257,000 jobs in December, it will be interesting to see how that plays through to the BLS surveys tomorrow.

We then had the Trade Balance for November. And while the November Trade Deficit narrowed a bit, the Rocktober Deficit was revised upward by a large amount. Let’s see how it all turns out..

My GDP tracker, really dropped yesterday, after the Rocktober Trade Deficit was revised upward to $44.6 billion from $43.9 billion. I now believe that 4th QTR GDP will drop to 1.1% from 2.1% (as I keep saying miraculously) in the 3rd QTR.  Total exports dropped -0.9%, and imports fell -1.7%…

Now this tells us two things, folks, so get a piece of paper so you can write this down.  Exports are down because the dollar is too strong, for its fundamentals, period.  And imports are down, because the U.S. Consumer isn’t spending like the Fed, and the government needs them to!  If this pattern keeps up, we’ll be in recessionville before you can shake a stick at it!

And finally to end the day of data, we had the Fed’s FOMC Meeting Minutes print, and there were lots of differing opinions on what the Fed was saying. I have my opinion, of which I’ll share with you, of course!

The Fed’s FOMC Meeting Minutes (the Minutes) from their last meeting printed yesterday afternoon. Hmmm, is all I have to say. Because I’ve already said it all before. But for those of you new to class, or missed class on the days I talked about it, I’ll go through it again.

First and foremost, I believe that the Fed hiked rates in December just to save face with the markets, after having promised them a rate hike for over a year.  And now we have the meeting minutes. Uh-Oh. You see, I read them, and I think that they sounded dovish! The Fed members expressed concern over the dollar strength. Hmmm, the Dollar Index has risen over 1% since they last met, if they were concerned about dollar strength then, what now? And further they expressed concern as some members saw considerable risk to the Inflation outlook.  Hmmm… Well, if they saw considerable risk to the inflation outlook then, I wonder what they are thinking now.

And gold is starting out today the same way it has started the first 3 trading days of the year, with a rally. The shiny metal is within spittin’ distance of $1,100 this morning. I’ve been pretty amazed that gold has gone through the first three full trading days without being whacked by the price manipulators. Are the PM’s still away from their desks? Or did they make a New Year’s Resolution to keep their hands out of the cookie jar in 2016?  I can only wish that would be the case!

But China is putting a lot of fear into the markets, and with the Fed still talking about more rate hikes, that fear is coming from all angles, and that has lent itself to pushing the price of gold higher. Let’s see where this takes us, eh? We’ve seen a lot of false dawns with gold rallies in the past couple of years, only to have the rug pulled from under our feet, by the price manipulators.

I found this on MarketWatch yesterday, and I briefly mentioned it above, so this is what you were supposed to read on about!  You can read the entire article here, or, as always, I have a snippet or two for you here!

An update of an economic model used by the Federal Reserve suggests the staff of the U.S. central bank has sharply lowered its forecast for inflation over the next six months.

The Fed periodically releases updates to its FRB/US, one of several economic models used by the Fed, to improve public understanding of how it works.

According to the path implied by the latest update to the model released late last year, the Fed’s staff now sees core inflation ticking up to 1.4% in the first quarter of 2016, then dipping to 1.3% in the second quarter and then moving higher towards the Fed’s target.

Chuck again. Hmmm… if this doesn’t make you go hmmm, then I’m lost! Because the Fed members have told us over and over again, that they fully expect inflation to reach their target of 2% in 2016. Hmmm, wait! Didn’t they tell us that in 2015 too? I get confused as to what they’ve told us and when, so please accept my apology if they didn’t tell us that in 2015 too!  But I do believe they did.

That’s it for today. I hope you have a tub thumpin’ Thursday!

Regards,

Chuck Butler
for The Daily Reckoning

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