June 14, 2018
* Currencies rally on U.S. rate hike…
* All three anti-dollar assets rally!
Good Day… And a Tub Thumpin’ Thursday to you! WOW! It’s Flag Day! So, Happy Flag Day to one and all! Well, for the first time in over a week, I had a good night’s sleep! And woke up ready to fight a bear! Or at least dollar bugs! I watched another night of weak at-bats by my beloved Cardinals last night… They just have no consistency whatsoever, and I blame the manager for that. I’m just saying… The Cornelius Brothers & Sister Rose greet me this morning with their song: It’s Too Late To Turn Back Now…
That’s funny, because I think that’s what the Fed Heads are saying to each other about now… It’s too late too turn back now, with their rate hikes that is… Yeah, they sure sounded quite hawkish yesterday, and mentioned that their going to pick up the pace of rate hikes because in their words, “the economy is strong”… But I’m of the opinion that the Fed is hiking rates to fill their quiver with arrows to use on the upcoming recession… And that’s why they’re picking up the pace, because they see it coming, and they haven’t got enough arrows in their quiver to combat it…
And just like in the Wizard of Oz, my all-time fave movie. (you should ask me to do the Lollipop Guild skit sometime!) Dorothy sees the Kansas twister coming and she can’t get to the storm cellar… It’s too late to turn back now for Dorothy, and the Fed Heads… the recession is coming, and you turning hawkish now so late in the economic cycle is only going to make matters worse!
So, did the dollar get all kinds of love because the Fed Heads have turned hawkish? No sirree Bob it didn’t, the currencies have been on the rally tracks since the Fed announcement and press conference yesterday, and now we wait for the ECB’s decision, which will come shortly this morning…
Well, this morning, the European Central Bank (ECB) is meeting, and this is a BIG meeting for ECB President, Mario Draghi… The markets have grown tired of hearing that “an explanation “ was forthcoming when talking about the stimulus unwind, and they are wanting to see something concrete at the meeting today, or else!
But I have faith in Draghi, he might not always do what’s right for the euro, but he does understand what the markets want, and I think he’ll deliver them what they want today… We won’t have to wait long to hear about it as the meeting should end about the same time I get this out the door, or shortly afterward!
The euro has climbed back above the 1.18 handle this morning ahead of the ECB meeting, so apparently traders are thinking like me, which is usually a bad combination, folks! HA!
In fact, all three anti-dollar assets are on the move VS the dollar since the rate hike decision yesterday… euros, Gold & Oil… The price of Oil is within spittin’ distance of $67 and Gold did trade albeit briefly above $1,300 yesterday, but the “boys in the band” saw to it that this move over $1,300 didn’t close there… However, the “boys in the band” will have to be back at it again this morning, because Gold has gained $6 in the early morning trading today, and back above $1,300…
Alrighty, let’s get to the “I told you so” part of the letter today… Remember when the tax deal was put through, and I said I doubted it would do more than just add to our deficit spending, for the tax deal wasn’t about you and me, it was about Corporations, and I said, that I thought those Corporations’ Big Shots would use the tax deal to buy back their company’s stock? And thanks to a story on CNBC.com I found this: Stock buybacks in 2018 to total $800 billion thanks to tax reform
I told you, I told you, I double, double told you!
Since the rate hike yesterday was such BIG news, well, actually the Fed Heads statement that they are picking up the pace of rate hikes was really the BIG news, let’s circle the wagons and talk about it some more…
Well, as expected, the Fed hiked their Fed Funds rate 25 Basis Points (1/4%) yesterday, and repeated their earlier stance of looking to hike rates again in Sept and December. But will they actually get the chance to do that? I doubt they will, and have been shouting from the rooftops for sometime now that they’re going to have to begin to reverse these rates hikes and end up looking very foolish doing so.
It’s not just the actual rate hikes that are putting the governor on the economy, but as I’ve stated before, you have to also add in the Quantitating Tightening…. Talk about something that continues to go along and fly under the radar! But, it’s there, and it’s causing problems already… I’ve read where $500 Billion of QT, is equal to 1/4% in rate hikes… So, since the Fed has been performing QT since Rocktober of 2017, they’ve held to their unwinding schedule that looks like this:
The schedule of monthly caps consistent with the Committee’s September 20 decision and the June 2017 addendum is as follows: Monthly caps on System Open Market Account (SOMA) securities reductions Treasury securities Agency Securities1 Oct – Dec 2017 $6B $4B Jan – Mar 2018 $12B $8B Apr – Jun 2018 $18B $12B Jul – Sep 2018 $24B $16B From Oct 20182 $30B $20B
So, if my new math is correct, The Fed will have unwound a total of $80 Billion in Treasuries by year end. They will reach a total of $2.5 Trillion by 2023… 2.5 Trillion would be equal to 1.25% in additional rate hikes… But if things go the way I expect them to go, the Fed won’t see the end of the “great unwind”… They’ll be back to Quantitative Easing before they get to the end of their “great unwind”…
And further more… I’m sick and tired of hearing the Fed heads say that this “great unwind” is not contractionary… But wait! Didn’t they spend many years telling us that Quantitative Easing was stimulus? So, when you take the stimulus away, why wouldn’t that be contractionary? Man, I would love to be able to throw that in their faces and hear what they have to say about that!
Well, I need to get this out the door, so I can sit back with a cup of coffee and see what Mario Draghi has to say this morning… I usually like to have the Thursday Pfennig be a bit longer because there’s no Pfennig on Friday any longer… But not today! I’ve said all there is to say about the rate hike, the ECB, and more…
Oh, and China’s Peoples Bank of China (PBOC) left their key interest rate on hold last night, and that has the Emerging Markets and the rest of Asia in a good mood… At least for today that is!
So, what was up with the U.S. Data Cupboard this week? Here’s what I’m talking about… Usually, PPI (wholesale inflation) prints before CPI (consumer inflation), but not this week! The mental giants switched the order, which makes no sense, but it was done anyway. Well, after a week or so of non-meaningful economic data prints, we’ll get back to the meat today and tomorrow, with May Retail Sales today, and Industrial Production and Capacity Utilization tomorrow…
May Retail Sales are expected to gain 0.4% for the month, which is not bad, but it’s also not good, and not worthy of a faster pace of rate hikes, I’ll tell you that!
To recap… The Fed did hike rates yesterday as expected, but then threw a cat among the pigeons by announcing that they will pick up the pace of rate hikes… Chuck thinks this is them in panic mode, as they see the recession coming and they haven’t prepared the storm cellar! It’s BIG day for the ECB and Mario Draghi, Chuck thinks he’ll do the right thing today, and that should send some major love the euro’s way… And then Chuck pulls out the abacus to do some quick calcs on the Fed’s QT…
For What it’s worth… Back in the day… Back when I was with EverBank, and I wrote the monthly newsletter for clients, called: The Review & Focus, I wrote a piece in the winter of 2017, at that point, xci could see the writing on the wall for me, so I decided to go out on a limb and call out the Fed Rate hikes, pointing to the increased bond servicing costs (interest) , and pointing to the new President at that time, Donald Trump and saying that he said that if rates went to 4% “We’re screwed” (pardon the salt, but it’s what he said!) The Bank didn’t much care for me pointing out how the Fed was going to bring us under… But it went to press, and so on… life went on until… Until today, when the MarketWatch folks sent me an email with words from Jeff Gundlach, the new Bond King, who is calling out the Fed rate hikes… ( I bet he gets more attention than I did, when I did it!) and it can be found here: https://www.marketwatch.com/story/the-us-is-on-a-suicide-mission-warns-bond-king-gundlach-2018-06-13?link=MW_popular
Or, here’s your snippet: “Here we are doing something that almost seems like a suicide mission,” he said in a fresh webcast about his DoubleLine Total Return Bond Fund. “We are increasing the the size of the deficit while we’re raising interest rates.”
“It’s pretty much unprecedented that we’re seeing this level debt expansion so late in an economic cycle,” Gundlach reportedly said, noting that both Fed fund-rates and the debt-to-GDP level are rising.” – Jeff Gundlach
Chuck again… Yes, here we are pretty much at the end of the road as far as the economic expansion is concerned, and we’re still hiking interest rates… Seems pretty strange to me, but then I’m just a country bumpkin, what the heck do I know above all those PHD’s at the Fed!
Currencies today 6/14/18… American Style: A$ .7550, kiwi .7040, C$ .7714, euro 1.1825, sterling 1.3428, Swiss $1.0164, … European Style: rand 13.18, krone 7.9950, SEK 8.6095, forint 272.60, zloty 3.6143, koruna 21.7415, RUB 62.71, yen 110, sing 1.3336, HKD 7.8479, INR 67.60, China 6.3988, peso 20.57, BRL 3.7125, Dollar Index 93.30, Oil $66.91, 10-year 2.94%, Silver $17.15, Platinum $907.03, Palladium $1,015.70 and Gold… $1,305.11
That’s it for today, and this week! I had a very frustrating day at the Social Security Administration’s office yesterday… It’s no wonder this country is in the debt situation it is in, and the years of neglect are showing… But that sounds like a personal problem, so I’ll leave that there! This Sunday is Father’s Day… Time to tell your dad that you love him, and thank him for all he’s done to make your life what it is… I miss my dad every day, for when I sit down to write, there’s a picture of him, me, and my late brother David from many years ago… And when I sing the national anthem at baseball games, I close my eyes and see him sitting there smiling at me… Stealers Wheel takes us to the finish line today with their song: Stuck In The Middle With You… Clowns to the left of me, jokers to the right, and I’m stuck in the middle with you… (man you don’t know how many times I thought that in the old days!) And with that it’s time to head out and make this a Tub Thumpin’ Thursday! Please Be Good To Yourself! And Don’t forget your DAD! Bye~
Chuck Butler