December Retail Sales Disappoint

Today, we’re chock-full-o-stuff to look for, starting with a European Central Bank (ECB) meeting. And throughout the morning, here in the US, there’ll be even more “stuff” to look for, like retail sales. And since it’s a Thursday, the Weekly Initial Jobless Claims will also print. The Fed’s Beige Book printed yesterday afternoon, and we’ve got that to discuss this morning, too… So, let’s get this Tub Thumpin’ Thursday going, eh?

Front and center this morning… The Australian Jobs report printed yesterday afternoon, and it looks like we’ll be able to put another mark in the “pro” column for an Aussie rate hike in February. Here’s the skinny… Australian employment soared for a fourth straight month, as jobs created were three times more than economists estimated! The total number of jobs created was 35,200, and the jobless rate fell to 5.5% (from 5.6%).

So… The economists – or “experts,” if you will – got this one completely wrong… Their estimate for created jobs was to be 10,000… This is very strong employment growth for Australia, and once again places the spotlight on the Aussie dollar (AUD) as one of the best yielding currencies with a prospect of even higher yields as soon as February!

OK… This report doesn’t “seal the deal” in any shape or form, but it does “nudge” the Reserve Bank of Australia (RBA) in that general direction, for sure!

Traders took notice, right away, and began buying Aussie dollars, pushing them past 93-cents on the night…

The interest rate spread/yield differential between the US and Australia really was put up on top of the desk and asked to dance when US Fed Head, Dudley, said that short-term interest rates may remain low for at least six months and “possibly for as long as two years”!

Hmmm… Dudley said that it all “depended on how the economy develops”… WOW! A new Mr. Obvious! You mean, the Fed is going to react to how the economy develops? WOW, what a novel idea!

OK… I’m sorry I got carried away there… But since he mentioned it, we might as well take a look at the Fed’s Beige Book that printed yesterday afternoon…

The Fed’s Beige Book, which is a report on the pulse of the economy from each Fed region, showed that while the economy is slightly better, it continues to operate below capacity, or in their words… “The economy continues to operate at ‘low levels.’”

The Fed Heads also noted that holiday spending in 2009 was “slightly better than in 2008, but still far below 2007 levels… In fact, it was added that the 2009 improvement was so small it did not really represent a shift in trend.

OK… So, we have December retail sales printing this morning! Front and center, retail sales are expected to rise for this period, by 0.5% – a moderate rise, and one that’s disappointing, I would think, when talking about the month of December! And off quite a bit from November’s rise of 1.3%.

Now… I read a great description of what was going on in that 1.3% gain in retail sales from November, and thought it would be good to share… A lion’s share of the increase reflected a price-related 6.0% surge in gasoline station receipts. As well, the earlier-reported rise in unit motor vehicle sales was reflected in a 1.6% increase in sales at auto dealerships. Excluding these two components, retail sales rose a relatively robust 0.6%…

OK, it’s safe to come back now… We’ll also see the Weekly Initial Jobless Claims, which will remain above 400,000, for sure…

As I said above, the European Central Bank (ECB) is meeting as I type my fat fingers to the bone…

The ECB will keep rates steady Eddie this morning, but will probably announce more stimulus removal… Recall that last week I told you how the ECB had already removed a large chunk of stimulus, while the Fed continues to supply the monetary candy to the US economy…

The euro (EUR) spent yesterday going back and forth, above and below the 1.45 figure… This morning, the single unit has already been above 1.45 and now it’s back below that figure! There’s just no conviction to take the single unit much higher, right now… And that’s because there’s nothing coming from the ECB… That will change this morning, hopefully!

The boys and girls over at Government Sachs, er… I mean Goldman Sachs believe the euro will remain supported by its status as the dollar’s sole rival for currency diversification by central banks… “Given the Eurozone is pretty stable overall, although not overly attractive either, swings in dollar sentiment will likely be reflected in the extremely deep and liquid euro/dollar cross.”

Yesterday, I did a video and talked about why the euro, even with all the problems in Greece, Spain, Italy, etc. is far more valuable than the dollar… I noted all sorts of things, but said, “The euro’s problems can’t be as bad as those in the US with California, New York, Michigan, Illinois, etc.” Then later in the day, it was announced that Standard & Poor’s (S&P) cut California’s credit rating for the second time in less than a year. Now… That’s going to be a problem for the state of California, when it comes time to issue Municipal bonds, given the rating cut… It will make it more expensive to the issuer, for sure!

OK… I came in this morning, and turned on the TVs… And on one of them there was a discussion about foreclosures in the US. There was a guy from RealtyTrac – the people that count the beans in the housing sector – who was talking about how there had been 300,000 plus foreclosures in December… Now that’s rotten! Foreclosing on someone in December? That’s cold, Willis! OK, I digress; let’s see what else RealtyTrac had to say… How’s this for size? Nearly 3 million households received at least one foreclosure notice in 2009… That’s one in every 45 homes that were in default… That’s a 21% increase over 2008.

I understand that there are so many foreclosures that some are delayed simply because there are delays in processing delinquent loans!

OK… Now… You have to understand that this is something I find disgusting – people losing their homes… But… You can go back to 2006, when I was banging the drum and saying there was a housing bubble… I can remember talking to some home loan guys back then, and telling them about the housing bubble, and them telling me that I was Loony Toons!

The reason I talk about this is to illustrate the problems the Fed will have in removing stimulus… And… Add to all this the fact that there are still millions of loans that will re-set later this year into next year… If the Fed moves rates higher, those loans will be at a huge risk of default.

Let’s talk about something else… Yeah, right here, right now, we can talk about Brazilian retail sales, which printed this morning… Brazilian retail sales soared 8.7% in November versus the previous year… OK, let me take you back to December, when I wrote about how traders in Brazil were trading on thoughts that holiday sales would be brisk… I said then that all this confirms domestic demand… So, if November’s retail sales were this strong, one can only imagine December’s bounty!

One has to believe that the Brazilian Central Bank (BCB) will have to entertain thoughts about raising interest rates soon, given this strong domestic demand… I’m going to go out on the limb here, and say that the BCB will raise rates by the end of April… Probably 50 BPS (1/2%). So, go ahead and mark it down, and see if I nailed it, or fell on my face…

I have to say that I’m impressed by the Brazilian Sovereign Wealth Fund’s ability to move the real (BRL) weaker. They’ve been in the markets buying dollars by the truckload, and pushing the real weaker. Hmmm… Think about this for a minute… The government announces a Sovereign Wealth Fund that will buy dollars… And the BCB is probably about ready to raise rates, which would make the real more attractive. You don’t think these two opposite pulling forces on the real were done as a package deal by the government, do you? Nah… That couldn’t happen… NOT! I personally believe that the government knew the economy was soaring and that they would have to raise interest rates aggressively at some time in the near future, so why not introduce a way to keep the real from soaring at the same time? Pretty darn smart on their part… But then, what happens when the Wealth Fund runs out of money?

Gold found a way to add about $5 to its figure, yesterday… (It’s given back $4 this morning, though! UGH!) I saw a headline story on gold the other day shoot across the Bloomie, that said… “Gold may increase to $5,000”… I laughed out loud and said, these claims by people are crazy! I mean, I could say, “Gold may increase to $10,000”… Either way, it’s just a guess, folks… That’s all these people are doing – guessing… And… Probably attempting to get rid of their inventory! HA!

The thing I always come back to when talking about gold at $2,000, $3,000, $5,000, whatever is this… For gold holders, $2,000 gold or whatever price, would be nice… But stop for a minute and think about that… Think about what the economy must look like if gold is at $2,000 or above… That’s a scary sight right there, folks.

To recap… The currencies traded in a very tight range yesterday, with gold adding $5. The ECB meets today, with no rate movement expected, but maybe an announcement of more stimulus removal. US retail sales hold the key to the markets today, and US foreclosures were 21% higher in 2009 than 2008! UGH!

About Chuck Butler 105 Articles

Affiliation: EverBank

Chuck Butler is President of EverBank® World Markets and the author of the popular Daily Pfennig newsletter.

With a career in investment services and currencies extending over 35 years, Mr. Butler oversees all aspects of customer service and the trading desk for EverBank World Markets. A respected analyst of the currency market, Mr. Butler has frequently made appearances or been quoted by the national media. These include the Wall Street Journal, US News, World Report, MarketWatch, USAToday, CNNfn, Bloomberg TV, CNBC, and the Chicago Tribune.

Mr. Butler was previously the Chief International Bond Trader and Director of Risk Management for Mark Twain Bank, and has held significant positions in the investment industry since 1973.

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