Eurozone CPI Goes Negative Again

by Chuck Butler, Daily Reckoning

And now… today’s Penning for your thoughts…

Good day, and a wonderful Wednesday to you!

The dollar has a different look to it this morning. Most of the currencies are in rally mode vs. the green/peachback, except the euro. The Big Dog, euro, can’t get off the porch this morning, and appears to be held back by a very weak CPI (consumer inflation ) report this morning, which has the markets clamoring for more Quantitative Easing/QE from the European Central Bank (ECB).

The problem, as I see it for the ECB, is simply that they’re probably running out of bonds that they would WANT to own. In other words, the bonds that the member countries have left, aren’t worth the ECB’s money. So, what to do, what to do?

One of the reasons I’m so far behind schedule this morning, is that the Rocktober Review & Focus was on my desk when I came in this morning. And I always have to stop and read it to make certain I remembered what it was I said in the letter that was written two weeks ago!

Well, in the letter, I talk about the Fed might have to consider implementing negative rates in the future. I should have said that the ECB might have to consider widening their negative rates. This deflation stuff is really grabbing hold of all the economies around the world.

The Aussie dollar (A$) is stronger this morning by 1/2-cent, on the news that some metals like copper and Aluminum had rallied overnight. I know it’s a week away, but the Reserve Bank of Australia (RBA) will meet on Oct 5 (next Monday night) and the RBA is the key master to what direction the A$ takes. I don’t believe the RBA will move rates next week, but you can never rule out a speech by the RBA Gov. that just whacks the A$… I also don’t believe we’ll hear anything like that either. So, it should be a good RBA meeting for the A$ on Monday.

Across the Tasman, the New Zealand dollar/kiwi, is also rallying today, but on its own data! New Zealand September Business Confidence recovered from the all-time record low number in August of -29.1, to remain in negative territory, but recover nicely to -18.9 in September. There was also a report showing that New Zealand GDP growth should be around 2% for the year. Now, that’s not exactly the boom side of GDP, but it’s also not the bust side of GDP either!

The Chinese renminbi is also appreciating overnight, marking three consecutive days of appreciation in the renminbi. Hmmm… I guess it’s about time for a reversal, eh? That’s been the pattern in the renminbi ever since the Chinese announced that they were giving the markets more control over the currency.

The economic slowdown in China continues to be exposed more and more, but I still don’t worry about all this.

Just Saturday night, I was introduced to someone, and the guy that introduced me called me a currency guru. The guy I was introduced to said, “Oh yeah, what do you think about the China meltdown?” I shocked him and said, “It’s just an economic cycle downturn, remember those?” Sure, with a county with the size economy that China has, the economic cycle downturn is worse than most other countries. But after years, of double digit growth, did you really think that it would last forever? Booms and busts. that’s what economies are supposed to be made of.

The Brazilian real really boomeranged last week, but this week it seems to be on the tracks that will take it to all-time record lows again. the latest CPI in Brazil printed at 9.75%, which indicates that the record high interest rates in Brazil still haven’t placed a governor on inflation. Does that mean that interest rates in Brazil need to go higher? What would Paul Volcker do?

I know it doesn’t really have anything to do with rising inflation, but the one thing, in my mind that would help Brazil’s economy, and overall psyche, would be for President Dilma Rousseff to leave office. And there is a whispering campaign to impeach her, but you need that to gain some real traction.

The euro alternatives of Norwegian krone and Swedish krona are basically flat to down just a smidgen this morning. Sweden’s Riksbank has been on the minds of economists and writers lately, as the poster-child of negative interest rates. I shake my head in disbelief that a Central Bank would get kudos for not only implementing negative rates, but then going back and widening the negative rates.  I wonder what the great economist, Hy Minsky, would think of this.

And the basket case known as the Japanese yen. Both Industrial Production and Retail Sales for August were weaker than expected.  Industrial Production printed -0.5% and Retail Sales were flat, nothing gained, nothing lost. And the yen is a bit weaker this morning. The fundamentals just don’t seem to hold water with the yen, and it has become a pure “sentiment” currency. At least for now that is…

A longtime Pfennig reader sent me a note yesterday, first singing along with me on Love Potion #9, and then letting me know that a dry bulk shipment firm in Japan had gone belly up. Well, this plays nicely in the sandbox with what I’ve been saying, that: 1. Japan’s economy is a basket case, and 2. That Global Growth is in trouble right now.

OK. Yesterday, there was a piece of data that printed that wasn’t on the docket, provided by Bloomberg, and this piece of data is quite interesting. Here’s the skinny: The U.S. Trade Deficit’s Advance Trade Report widened from $59.2 billion in July to $67.2 billion in August. WOW! Goods exports fell -3.5% in August, while goods imports only rose 1.8%.

I love the reports on this, because they always miss the biggest reason the Trade Deficit keeps widening. And that is that the dollar is too strong to compensate for the higher priced goods that we attempt to export. But don’t let that get in the way of a “feel good” story about how cars aren’t selling abroad, or something like that. Because they aren’t selling due to the high value on the dollar in the terms of trade. It’s that simple folks. But it’s the elephant in the room apparently.

Keep serving the Kool Aid, for U.S. consumers are still not only drinking it, they are guzzling it faster than it can be made up and cooled! U.S. Consumer Confidence rose in September and did not fall, as I thought it would!. That’s right, it rose from 101.3 to 103.0 this month.

Are you kidding me?

I just mentioned yesterday that U.S. stocks were down around 4% so far this month, and Consumer Confidence increases? You’ve got to be kidding me! As kids we used to say this when someone would say, “are you kidding me?” we would say, “I wouldn’t kid you, you’re my favorite goat!” HA! I had to bring some levity here quickly, folks, because I was about to go to the “Serenity Now!” shouting out loud!

What is the Income Play Rich Investors Love? (Hint: It’s Tax-Free)

The U.S. Data Cupboard has only a couple of regional manufacturing indexes (Chicago and Milwaukee) today, but let’s not forget the ADP Employment Change for September that’s supposed to give us an idea as to what the BLS Jobs Jamboree will have for us on Friday. The ADP report, which I’ve always said would be a better way to look at jobs created, is expected to rise 190,000 for September.

Well, gold is down again this morning. Last week’s late week run up in the price of gold is just about been sold down in the first three days of this week. Gold’s weakness this week is all tied to the Fed members, led by Janet Yellen, talking about rate hikes this year. That’s a smoke screen put up by the Fed members to keep the markets’ interest.

Oh, by the way, the Fed’s preferred data print for consumer inflation PCE, as I told you last week, was only 1.3%… Is that 2%? Is that near 2%? Isn’t 2% the level of inflation the Fed has been anticipating for two years now? Hmmm… OK, I was just checking. Because I thought the Fed said that they would hike rates when inflation was 2%…

Before I head to the Big Finish today, I wanted to talk a little bit about stuff that we don’t normally touch on here. Back in 2007/08, I talked about derivatives, Credit Default Swaps, and so on, because they were thought at the time that they would cause the financial system to meltdown completely. Well that didn’t happen, and I left these things on the side of the road to move on to something else.

But here they are again. I found this on Bloomberg. Don’t worry, I’ll keep it short, and crystal clear:

At the height of the financial crisis, the unprecedented decline in swap rates below Treasury yields was seen as an anomaly. The phenomenon is now widespread.

Swap rates are what companies, investors, and traders pay to exchange fixed interest payments for floating ones. That rate falling below Treasury yields – the spread between the two being negative – is illogical in the eyes of most market observers, because it theoretically signals that traders view the credit of banks as superior to that of the U.S. government.

Oh boy! So that’s where we are now, eh? The markets are so screwy folks. There are no fundamentals here to describe this, none whatsoever!

The GATA people sent me this yesterday, which was originally found here.

And it’s not the usual stuff, but I thought it was quite interesting so here we go with the snippets!

The state House Rules Committee voted Monday to remove a proposed requirement that high school students be taught about the gold standard.

The provision was part of Senate Bill 524, a proposal to add a list of new “founding principles” to those that lawmakers required state schools to teach in 2011. The measure would also add a test on the “Founding Principles” beginning next school year.

The curriculum, a model bill from conservative free-market think tank American Legislative Exchange Council, requires students to receive education on the nation’s “founding philosophy and principles” as found in the Declaration of Independence, the Constitution and the Federalist Papers.

Chuck again. So, when I read the release from the GATA folks, I was steaming, I must have been like a cartoon character, with the steam coming out of my ears! So, what are they going to replace learning about “founding philosophy and principles of the founding fathers” with? How to Twerk? Or how about, no. Stop it right there Chuck! I’m going to step away for a moment…

OK, I’m back now, and ready to just leave that for everyone’s own thoughts, for mine were going where they shouldn’t.

That’s it for today. I hope you have a wonderful week!