Central Bank Meeting Day...
Daily Pfennig

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In This Issue..

* Euro fights back...

* Germany Factory Orders drop...

* BOE & ECB meeting today...

* Riksbank raises rates!

And Now... Today's Pfennig!

Central Bank Meeting Day...

Good day... And a Thunderin' Thursday to you! A rainy Thursday for us here in St. Louis, as the rains from Gustav reach this area. There's another Hurricane in the Caribbean now... There are two Central Bank meetings going on as I write this morning. The European Central Bank (ECB) and Bank of England (BOE) both are meeting this morning, and both are expected to leave rates unchanged. More on this in a bit, the Fed's Beige Book, and more this morning, so let's go!

Front and Center this morning, the euro spent yesterday on the rally tracks recovering from a 5-month low... When I turned on the screens this morning, the single unit was trading above 1.45 again, on expectations that the ECB would leave rates unchanged. But I've seen a softening in the euro, since arriving, that has come from an unexpected drop in German Factory Orders for the month of July.

However, the risk of inflation is seen as the greater of two evils as far as the ECB is concerned, which I might add is a gallant stand to make. Especially in these days of "let's see who can debase a currency faster"... Oh, that's the Fed playing that game all by their lonesome!

The BOE will probably leave rates unchanged too, because of the big bump they've seen in inflation recently... Yes, unfortunately for BOE Gov. King, inflation is rising at the fastest pace in more than a decade, and now sits at more than double the 2% target the BOE places on inflation... This "non-move" lower in rates only gets pound sterling a "stay in regards to the execution" in my opinion... The BOE will have to lower rates to hold off the economic recession wolfs...

The pound sterling has gotten tarred with the same brush that was used on the U.S. and it's housing problems, before the Fed and Treasury pulled the wool over the eyes of the markets with their "mortgage solution"... I say "pulled the wool over the eyes of the markets" because the legislature has been billed as the "end all" for what ails the housing and mortgage problems... Boy, are they going to get eaten by the wolf in sheep's clothing, when this all unravels... But for now... It's all seashells and balloons for these people... So, let them bask in their tanning booths, for the real sun is not shining on them, they just think it is!

Hey! Did you think that it was just the U.S. that "had a problem with the Chinese currency level?" Well, think again... The European Union, namely Germany, has been banging on the Chinese too... But they do it discreetly, not like U.S. Treasury Sec. Hank Paulson, or lawmakers, Schumer and Graham... Anyway, German officials met with the Chinese recently, and got the same smile, and agreement to "allow greater currency flexibility" that the U.S. always gets...

It was a bad day at the office for General Motors yesterday... First, the Wall Street Journal reported.... "GMAC Financial Services and its Residential Capital unit plan to close all 200 GMAC Mortgage retail offices and reduce ResCap's work force by 60%, or 5,000 jobs. ResCap, a large subprime-mortgage lender, lost $4.3 billion in 2007, and GMAC spent much of the year restructuring the firm, including job cuts and an overhaul of the business model. But the losses have continued to mount. GMAC, once a wholly owned unit of General Motors, is now 51% owned by private-equity firm Cerberus Capital Management."

Then, General Motors had to announce a 20% drop in auto sales last month... But then, Ford had a 27% drop, so it wasn't "that bad!" Shoot Rudy, even Toyota experienced a 9.4% drop in sales... So, it's not all SUV's and pick-em-up Trucks that aren't selling...

OK... Enough "car talk"... The Fed's Beige Book printed for everyone to see yesterday, and helped push the dollar lower. The Beige Book pointed to slowing growth and stubborn inflationary pressure. In one spot of the report the Fed Heads reported that, "the pace of economic activity has been slow in most districts. Many described business conditions as "weak", "soft", or "subdued"... They also noted that the impact of the stimulus checks appeared to be "waning", as consumer spending was referred to as "slow"...

That doesn't look anything like an economy that could withstand higher interest rates, does it? I don't think so, Tim! Today, we'll see the Weekly Initial Jobless Claims, the ADP Employment Change report for August, and one of my least fave economic reports... Productivity... Yes, productivity, which at one time probably was worth looking at, as we went from using an abacus to computers... But now, I feel it simply reflects that those that still have jobs are working harder!

None of this will be good for the dollar, so let's see if yesterday's dent to the dollar rally because of the Beige Book data, can continue today...

The Nordic currencies of Sweden and Norway have really gotten sucked down into the fray of the dollar rally... But there was good news from Sweden this morning, as the Swedish Central Bank, The Riksbank, raised interest rates 25 BPS to 4.75%. The Riksbank tried to curb the enthusiasm from this rate hike by saying that they believe growth and inflation will slow in the coming months... But who are they kidding? If they really thought that growth was going to slow, why would they raise rates now? I fully expect the Riksbank to leave rates at this level for the remainder of 2008, which should provide a nice underpin for the krona, once the markets get past the "statement" by the Riksbank.

I was reading a report yesterday in which the writer was of the belief that the dollar was staging a rally based on the thought that the Fed will be raising interest rates while the ECB begins to ease rates... Hmmmm... OK... I just talked about the Fed's inability to raise rates with the economy in the dumpster... But what about the ECB? Are they going to begin easing rates to help their stumblin', rumblin' fumblin' economy? Whew! That's a tough one! Because if the last 6 months tells us anything, the answer would be NO! The ECB has stated that they are more interested in fighting inflation that providing a background for growth.

Of course, that stance could change in a NY minute and without warning... So... We have to keep our finger on the pulse of the ECB press conferences that follow most meetings of which there is one today. So, I'll keep my eyes and ears open to what ECB President Trichet has to say today.

I was talking to someone yesterday and the question came up was... "when will we know that the housing debacle has bottomed?" I talked about the glut of inventory that had to be removed, and for that to happen house prices would need to come down more.... Then, this morning, I read a story that appeared on MarketWatch yesterday by one of my fave economists, Irwin Keller... Here's what he had to say...

"Since this whole mess started with housing becoming irrationally exuberant, it must end with a return to sanity in this key sector of our economy. And in spite of what you may have read or heard about the "unprecedented" decline in home prices, normal housing prices are still beyond the horizon.

According to the latest data from the Census Bureau and the National Association of Realtors, median home prices in July equaled 3.6 times median household incomes. This may be down from the peak of four times incomes set back in 2005, but it is still far above the 2.9 times of the 1980s -- when housing was more affordable and sales and construction grew at a steady pace.

In the halcyon days of the early 1970s, when home sales and construction were at their peaks both in absolute terms and relative to the size of the population, the ratio of home prices to incomes was less than 2.5.

To get back to the average of the 1980s, home prices would have to fall another 20%, on average. Add another 10 percentage points decline for housing to be as affordable as it was in the 1970s.

Of course, these ratios could be reached through a rise in household incomes. But this would take much longer, since incomes are growing less than 2% per year these days, owing to the drop in employment and the inability of workers to secure raises."

Irwin Keller's full article can be seen here: http://www.marketwatch.com/News/Story/Story.aspx?guid=e6ac18e5822848098610eafb5d486170&siteid=nwtam&sguid=4_Zk_zE6gESrwakLkKbqXg

OK... So, the German Factory Orders has brought about the "game on!" again, with the "who's economy is worse" game... And the euro is getting pushed lower... Already 70 ticks lower than when I came in this morning!

The emerging markets currencies of Mexico and Brazil, have finally succumbed to the dollar rally... These two had held their heads above water for some time, but are now getting caught in the undertow of the dollar rally... I had high hopes that of these two, Brazil could withstand the pressures... But the pull is just too strong right now... Time to head to the Big Finish!

Currencies today 9/4/08: A$ .8345, kiwi .6845, C$ .9415, euro 1.4465, sterling 1.7815, Swiss .9025, ISK 85.10, rand 7.8915, krone 5.5480, SEK 6.5575, forint 165.20, zloty 2.3425, koruna 17.15, yen 108.35, baht 34.44, sing 1.4310, HKD 7.8065, INR 44.36, China 6.8362, pesos 10.42, BRL 1.6775, dollar index 78.23, Oil $110.15, Silver $12.96, and Gold... $807

That's it for today... The NFL season kicks off tonight! WOW! All those Fantasy Footballers getting their lineups ready, etc. I participate in two Fantasy leagues, but I really don't get too excited about all of it... I got to sit in with one of my fave economic professors yesterday... I was "schooled" on CPI, which you know I say is "stupid"... Well... I still think it's "stupid" but I do know even more than I did before about it! Have you noticed that everyone is wearing those "green" sport jackets now... (not The Masters type green!) We used to have a funny saying that went, "if the customer wants a green jacket, sell him a green jacket"! But, now that these guys on TV are all running around with green jackets on, the saying isn't as funny any longer! UGH! I used to have green jacket back in the 70's! So... Welcome to the start of the new NFL season, and have a Thunderin' Thursday too!

Chuck Butler


EverBank World Markets



Posted 09-04-2008 9:15 AM by Chuck Butler