The Dollar Soars On Rate Hike Thoughts

August 22, 2022

* Currencies & metals see major selling late last week

* The Gov’t’s bond servicing costs are soaring higher! 

Good Day… And a Marvelous Monday to you! WOW! What a wonderful weekend here in the Midwest, weather-wise! I don’t recall an August where the temps are moderate, and a lovely breeze blows throughout the day! These are supposed to be the “dog days of summer”, and instead they have been “pleasant puppies”! My beloved Cardinals swept the snakes in Arizona, and now visit Wrigleyville for 5 games in 4 days… That’s tough on a pitching staff, so I’ve got to hope that their newfound depth holds…  The Allman Brothers greet me this morning with their big hit song: Melissa

Well. last week the light bulb over traders heads finally lit up, as they finally figured out that the Fed Heads are going to keep hiking rates, maybe not as aggressively, but hiking them nonetheless, and that brought about a dollar rally to write home about! The last two days of last week, saw the BBDXY rise from 1,273 to 1,286!  The euro is flirting with parity to the dollar once again, after weathering the last storm, the euro doesn’t look like it has the oomph to fight again… 

The currencies, for the most part, have all been taken to the woodshed by the traders, with only the Petrol Currencies holding ground to the dollar. The Russian ruble actually gained VS the dollar and trades this morning with a 59 handle… The Norwegian krone slipped just a bit, along with the Canadian dollar / loonie, while the Brazilian real held steady Eddie… 

The Chinese renminbi has been unable to hold steady, as the rate differential between the dollar and renminbi has widened after last week’s Chinese rate cut.  This rate differential is becoming a real problem for the renminbi and it’s only going to get worse, folks…  And if the renminbi is suffering, the Singapore dollar suffers alongside the renminbi. I’ve explained this relationship plenty of times in the past, so I won’t go down that road today again, other than to say that it’s an export competition thing… 

Gold got sold late last week, and on Friday, lost $11, to close the week at $1,748.60… Silver just keeps getting sold by the bushelful, and lost 46-cents on Friday to close the week at $19.16…  Historically, August is not a good month for the metals, but this August things are getting out of hand, with the selling getting very uncomfortable… Platinum and Palladium also saw major selling late last week, so the selling is not just in Gold & Silver. 

Bonds got sold last week, as that light bulb over traders’ heads got lit… the 10-year’s yield rose to 2.99% to end the week, and in the overnight markets last night it briefly touched 3.03%…  The Price of Oil held steady Eddie into the weekend, and trades this morning with a $90 handle. 

In the overnight markets last night… There’s been more dollar buying and the BBDXY has gained another 2 index point overnight. The euro is basically at parity with the dollar as it trades at 1.0015 this morning. The last time the euro was this low, it was on its way higher, and I was a one man band with the currency trading, and answering the phone… Jen was the one-woman band on the stock side, and our do it all assistant, Cheryl, was a rock… Can you say 1999/ 2000?  Yikes! That seems like ages ago! 

Gold has lost another $12 in the early trading this morning, and Silver has lost another 18-cents to bring it below $19!  Crazy, eh?  All the problems in the world, and they keep mounting, and Gold is getting sold? I’m at wits end here folks… All my beliefs of how markets work, are circling the bowl, every day… UGH! 

OK… Well with everyone in the markets agreeing that the Fed Heads are going to keep hiking rates, and there’ll be no “Powell Pivot”, in the near future, one has to turn their attention to the Fed’s borrowing costs… Those are rising folks, and not by inches, the costs are soaring, and that was before the last 75 Basis Points rate hike was made at the last FOMC meeting. 

The Fed Heads have their work cut out for them, with regards to fighting inflation with rate hikes. They got started way too late, and then they only hiked rates 25 Basis Points. It took a few months before the Fed Heads got serious about fighting inflation, with a 75 Basis Points rate hike (should have been more than 100 Basis Points, but I digress) . So not only are the borrowing costs soaring now, they are going to go cyberspace in the future, and then all hell breaks loose, folks… 

For, the question then begins to be centered around, “Who’s going to buy all those Treasuries, that are used to finance the debt”?  And then the next question for the Gov’t is “what service do we cut, in order to service the bond costs?”  Debt will eventually be our kryptonite folks… 

This Fed Head from Minneapolis, Neal Kashkari, has inserted his foot in his mouth, many times in the past, and just last week, he did it again, check this out from Kashkari: “So the question right now is, can we bring inflation down without triggering a recession? And my answer to that question is: I don’t know,” Kashkari said, during a talk with business leaders in Minneapolis.

He said he didn’t think the economy was in a recession right now.”

Chuck again… Memo to Kashkari, we are in a recession, and you should know better than to fight that fact!  Oh, and just last week, a survey of the large corporations in the U.S. all said that they are going to be laying off large numbers of workers… Hmmm

Reuters reported last week that “Swiss exports of gold to China in July rose to their highest since December 2016, Swiss customs data showed on Thursday, as demand in the world’s largest bullion market improved.

Switzerland shipped 80.1 tonnes of gold worth 4.4 billion Swiss francs ($4.6 billion) to mainland China, up from 32.5 tonnes in June and the second-highest monthly total in figures that stretch back to 2012.

Retail consumers in markets like China often buy less when prices rise and more when they fall. China had also in July emerged from COVID-19 lock-downs earlier in the year.

The surge in shipments to China lifted Switzerland’s total gold exports to 186.2 tonnes in July, again the most since 2016.

Switzerland is the biggest refining and transit hub for gold and its data offer insight into global market trends.”

Chuck again, and it wasn’t only China that was receiving record amounts of physical Gold from Switzerland. India also was on the list of countries receiving record amounts of physical Gold… 

So… we’ve come a long way from the edge of the cliff that we peeked over early in July… The Bank of Japan (BOJ) was the first to make it clearly understood that they are not going to step away from their current Monetary Policy of negative rates and bond buying.  And the Fed Heads were sending so many confusing signals no one knew what to expect next from the Fed Heads…  And once again, the markets stepped back away from the edge of the cliff… Apparently, they didn’t like what they saw when they peeked over the edge… I don’t think anyone would like what they saw there either! 

Now, we’ve moved sufficiently away from the edge of the cliff, only to be revisited at a future date, and the risk off trading has been thrown out with the bath water… The dollar is flexing its muscles once again, and everything that isn’t dollars gets taken to the woodshed… 

Last week’s U.S. Data Cupboard was a mixed bag-o-nuts… Industrial Production and Capacity Utilization surprised with increases, but Retail Sales were flat as a pancake (head East), and Leading Indicators were negative… All in, I would say that the Data Cupboard, last week, was a disappointment. 

This week’s Data Cupboard is sporadic with data prints that move the markets, and we’ll see the first one on Wednesday, and then we’ll have to wait for Friday when Personal Income and Spending will print. Bad data prints have had the opposite effect on the dollar, than in the past… I’m just saying… 

To recap… The dollar traders have finally gotten the memo that the Fed Heads are going to keep hiking rates, and the buying of the dollar has gone hog wild… the BBDXY has gained 15 index points since last Thursday morning, and the euro has reached parity with the dollar this morning. The Fed’s borrowing costs are soaring folks… And that is not going to stop any time soon, so what service is going to be cut to serice the bonds? 

For What It’s Worth… In a recent interview I did with good friend, Dennis Miller, we discussed what kind of recession this is that we’re in, and that discussion can be found here: What Kind Of Recession Is This? – Miller on the Money

Or, here’s your snippet: “DENNIS: Chuck, once again, thanks for your time in helping educate our readers. In my recent column, What is normal? I pointed out in a normal economy, interest rates for both lenders and borrowers are above the inflation rate. Today – not even close!

Technically we are in a recession, but we are seeing “Help Wanted” signs everywhere.

Chuck, you analyze each week’s unemployment reports, what are they telling you about what is happening in the labor market?

CHUCK: It’s a crazy mixed-up world we live in these days, Dennis. Just last week we saw the Bureau of Labor statistics (BLS) print a 528,000 jobs created number for July…. But looking under the hood, I found that 340,000 of those jobs were created out of thin air by the BLS (they made up the number). That leaves only 128,000 real jobs created in July, and that would look like it should.

Each Month the BLS reports that 4.3 million people quit their jobs. I find this to be quite telling of the labor markets these days.

The pandemic, and subsequent economic shut down, has created a country of people that won’t work for minimum wage, won’t work long hours, and won’t work in an office, or restaurant, or retail store, etc.

That’s why you see so many HELP WANTED signs, people just don’t want to work any longer.

The Weekly Initial Jobless Claims have been ratcheting up in recent weeks and is beginning to look like it will explode higher very soon.

So, to sum it all up…. The employment situation in this country isn’t as rosy as the BLS or the Gov’t want us to believe it is. And all signs point toward very weak employment, during this recession that we are in.”

Chuck again…  Yes, it is a crazy mixed-up world of markets right now, and it takes a lot of gray matter to keep up with them and understand what the heck is going on… I give it my best effort, the old college try if you will, and in these interviews, I do with Dennis Miller, he gives me tough questions to answer. He puts me through the gauntlet! I hope you have a chance to go to his website and read the full interview… 

Market Prices 8/22/2022: American Style: A$ .6918, kiwi .6206,  C$ .7702, euro 1.0015, sterling 1.1813, Swiss $1.0426, European Style: rand 17.0402, krone 9.7838, SEK 10.6573,  forint 405.74,  zloty 4.7446,  koruna 24.6174, RUB 59.82, yen 136.78, sing 1.3848, HKD 7.8457, INR 79.56, China 6.8384, peso 20.19, BRL 5.1695,  BBDXY 1,288.06, Dollar Index 108.29,  Oil $90.00, 10-year 2.99%, Silver $18.98, Platinum 886.00, Palladium $2,053.00, Copper $3.62, and Gold… $1,736.43

That’s it for today… The Butler family celebrated daughter Dawn’s birthday yesterday, a grand time was had by all (I think!) I put the Green Big Egg through the paces, and we had some scrumptious smoked turkey for dinner! I cut eating any bread out of my diet last week, and it paid off, I don’t think I can do that all the time, but every now and then it’s ok… At my age, and physical limitations, I find it very difficult to lose any more weight than I already have…  In fact, I’ve been at the same weight now for a couple of months… UGH!  Heartsfield takes us to the finish line today with their great song: Pass Me By… I hope you have a Marvelous Monday today, and please Be Good To Yourself!

Chuck Butler