Manufacturing Around The World Takes A Hit.
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In This Issue.

* Book squaring weakens currencies.

* Aussie Retail Sales rebound.

* Brazil cuts their internal rate!

* Swiss franc rebounds.

And, Now, Today's Pfennig For Your Thoughts!

Manufacturing Around The World Takes A Hit.

Good day. And a Tub Thumpin' Thursday to you! And welcome to September! I sure missed my que yesterday when signing off, I should have said. And I'll see you, in September. but I didn't, so it's not so cute any longer, eh? I'm feeling a bit better today, as Chicago sang, Feeling stronger every day! But that's not what you opened this email to read about, so let's get to business!

Well. yesterday morning I told you that with the day being the last of the month, we could very well see some currency weakness, as traders square their books, and close out short positions in the dollar. And that's exactly what I think we saw yesterday. The bias switched from dumping dollars to buying them, but not at breakneck speed, just a gentle flow.

That currency weakness has carried over to this morning's trading, especially in the euro, which has seen about 1% taken off its figure from yesterday morning. You know. if the euro wasn't the offset currency to the dollar, it would be much weaker, probably down to parity or even below. But, that's not the case here. The euro, gets strength in dollar weakness, I know it sounds weird, but that's the way it is. The things going on in the Eurozone, aren't that much different than what's going on here. Yes, at least they've acknowledged the problem and are addressing it. Here, we hold up banners saying we want to do something, but then forget about it, because it is far easier to spend what you don't have, than to be held hostage by a budget!

Long time readers know me. they know that for a long time now, and I mean a long time now, I've harped and harped about the deficit spending and the growing debt. I'm not some Johnny come lately to this fight! In 2003, a couple years after I began this daily fight against deficit spending, I was interviewed by the Wall Street Journal, and in the interview, I told the writer that I was a Frontiersman in this fight against deficit spending, and what it would eventually do to the dollar.

So. I know a thing or two about this deficit spending thing, and how it can get fixed. The problem is it's much like taking a druggie and making him go cold turkey. The pain that controlled spending can cause is very strong, and I don't think we, as Americans, (as a whole, not individually, so I'm not talking about you, because you are a Pfennig reader and that's a step in the right direction!), have become too soft. And not willing to deal with the pain. we'd rather not deal with it, and simply kick the can down the road, for some future generation to deal with. Well. in Europe, the can kicking came to the end of the road, when will it come to the end of the road here?

Man! I really went off on a tangent there, eh? Imagine, sitting on the pool deck with me, and making the mistake of bringing up deficits. HAHAHAHAHA! As I've told you many times before, my buddies, know better!

OK. besides the euro backing off 1% since yesterday, what else is going on? Well, let's see, we did get to see the color of the latest Retail Sales Figure from Australia last night. Retail Sales in July, rose .05% from June, which happened to be the first monthly gain in 3 months. So. all those guys that priced in a rate cut from the Reserve Bank of Australia (RBA) have to be feeling a little beaten right now. For, first we had the RBA talk hawkish, and not even mention the need for a rate cut at their last meeting, and now this strong Retail Sales figure.

I've been on the opposite side of the fence from the guys that were pricing in a rate cut, as I held the light on for yet another rate hike. (talk about being on opposite ends of the earth!) I saw where Chris wrote earlier this week that he agreed with me that Australia's economy was stronger than most realized, and that there would be no rate cut now. Well, this Retail Sales figure puts the markets back on the correct tracks. that to a rate hike! And that idea will underpin the Aussie dollar (A$) all day, every day!

And. as I write here this morning, the A$ is approaching $1.07. In early August, one would have thought the opposite would be happening now, given the A$ had fallen to parity. And a lot of investors panicked and sold. Well, that's what happens when you have knee jerk reactions and believe non fundamental hogwash!

The Swiss franc was back on the rally tracks overnight, surging to $1.25 (from $1.23 yesterday!) I guess traders saw the book squaring (buying dollars) and confused it with risk aversion! HA! No. look, the Swiss economy is weakening by leaps and bounds, and they're tiny to begin with! The interest rate is zero, and the Central Bank has spent millions trying to stem the currency's rise. I would have to think that the move to $1.25 will be short-lived. that is, as long as no "new" geo-political problems emerge.

The New Zealand dollar/ kiwi. has really latched on to the A$'s strength. but it's not just the A$ pulling the kiwi higher. The New Zealand economy continues to recover from the Earthquakes last year, and investors are taking notice, because. As you may recall, the Reserve Bank of New Zealand (RBNZ) made "emergency rate cuts" to help the economy after the earthquakes. And now. investors are waiting for the RBNZ to reverse those emergency rate cuts.

This morning. the risk assets are looking a bit wobbly, and it's all due to the poor results of manufacturing reports from Germany, France, Italy, & Sweden (Switzerland and Norway were stronger, surprisingly). This carries on the trend in the U.S. where we've seen one regional manufacturing report after another disappoint. Well. today, we will see the National ISM Manufacturing Index. and unless someone pulls a rabbit out of their hat, the index will fall below 50 for the first time in 2 years. Recall, that last month, the index fell from 55.3 to just above 50 at 50.9. In February of this year, the index stood at 61.4.

But remember. stimulus was in force then, and not so much now.

With it being a Tub Thumpin' Thursday, that means the Weekly Initial Jobless Claims will also print this morning. In fact they will go first! Look for the Initial Claims to remain above 400,000. and that, is a very sad thing folks.

Ok. back to currencies. Well. Big news from South America this morning. The Brazilian Central Bank cut their internal interest rate (Selic) 50 Basis Points (1/2%)! The rate fell from 12.5% to 12%... This came as a surprise to the markets, but not to me, as I had told you last week that Brazil's leaders were looking to cut rates. The interest rate committee's vote was split 5-2 on the rate cut, and their communiqué said that "the committee saw a substantial deterioration in the international outlook as the U.S. and Europe struggle with debt and anemic economic growth."

So. another country that has to alter its interest rates because of the debt and anemic growth of the U.S. and Europe. Remember, that the RBA had passed on a rate hike due to the same problems.

There was story on the Bloomberg that said Brazil's President, Dilma Rousseff, wants "real interest rates" (you know the difference between the interest rate and inflation) to be 2-3%, by the end of 2014. The rate currently stands at 6.5%... Well. that means that Brazil has a lot of work to do to lower inflation, and their interest rates. I don't see how, in a country where the World Cup and Olympics will be held in the next 5 years that you could achieve lower inflation. All the infrastructure that has to be built, comes to mind here.

Then there was this. Did you see that JPMorgan Chase analyst Colin Fenton just predicted gold could spike to $2,500 an ounce over the next four months? I've long thought that Gold would need to its inflation adjusted all-time high of around $2,400. But in the next 4 months? That's pretty aggressive talk don't you think? Yes. anything is possible but, as I've said a few times in the past. $2,000 Gold represents a very bad economy in the U.S.. and if that's true, then $2,500 Gold would mean things are pretty dark here. I would have to say that JPMorgan Chase is a bit conservative in their forecast, considering some of the other forecasts I've seen recently. But, what do these guys know that we don't? not much folks, so therefore make sure you take these forecasts with however many grains of salt that you wish!

To recap. The book squaring yesterday for month end did cause some currency weakness, but the soft manufacturing indexes from Germany, France, Italy, and Sweden really made the risk takers back peddle this morning. Aussie Retail Sales were strong in July, and the A$ is pushing on the $1.07 door this morning. Brazil cut 50 basis points from their Selic rate, and made claims of getting real interest rates to 2-3%... I doubt that will happen!

Currencies today 9/1/11. American Style: A$ $1.0695, kiwi .8490, C$ $1.0220, euro 1.4275, sterling 1.62, Swiss $1.2515, . European Style: rand 7.00, krone 5.39, SEK 6.3785, forint 191.30, zloty 2.9050, koruna 16.9130, RUB 28.99, yen 77, sing 1.2050, HKD 7.7855, INR 46.09, China 6.3812, pesos 12.35, BRL 1.59, dollar index 74.51, Oil $88.30, 10-year 2.20%, Silver $41.59, and Gold. $1,821.65

That's it for today. I didn't last long yesterday, only being able to get in ½ day. today, I hope will be better. Well.. it's September. When I was a kid, that's when we went back to school. And September and October are usually the best weather months for us here in St. Louis, so we've got that to look forward to! And with September, it means that there 's only about 28 games left in the Baseball Season. UGH! I'm really looking forward to next Tuesday night, when I'm taking Alex to go see Carlos Santana at the Fox. I've always held Carlos Santana at the top of my guitar players list. And with Alex becoming such a gifted guitar player, I thought it would be a great night for us. So, I've got that to look forward to! And with that. I'll get out of your hair for today. I thank you for reading the Pfennig, and hope you have a Tub Thumpin' Thursday!

Chuck Butler


EverBank World Markets



Posted 09-01-2011 5:00 PM by Chuck Butler