Thursday December 14, 2006 - 10:09:15 GMT
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Black Swan Capital - www.blackswantrading.com
â€˘ The Swiss central bank raised interest rates for the fifth time in a year. (Bloomberg)
â€˘ The Nihon Keizai newspaper reported the Bank of Japan will probably leave interest rates unchanged at its next meeting. (Bloomberg)
â€˘ The yen hit record lows against the euro.
â€˘ European Central Bank council member Axel Weber signaled support for increasing interest rates again, saying forecasts on inflation by the bankâ€™s staff donâ€™t signal an all clear for policy makers.
â€˘ Key Reports (WSJ):
8:30a.m. Initial Jobless Claims. For Dec 9 Wk. Expected: -4K. Previous: -34K.
8:30a.m. Nov Import Prices. Expected: -0.1%. Previous: -2.0%.
10:00a.m. DJ-BTMU Business Barometer. For Dec 2 Wk. Previous: -0.1%.
â€śIf you come to a fork in the road, take it.â€ť
FX Trading â€“ A surprise!
Stronger-than-expected retail sales data was a big surprise yesterdayâ€”it gave the greenback a major shot-in-the-arm, changes the dynamics near-term, and sets the table for a decent $ correction.
$ Index CHART
Holiday infused retail sales rose 1.0 percent in November -- the first gain since July -- and left traders questioning whether U.S. economic growth is slowing.
These numbers followed Tuesdayâ€™s inflation-themed FOMC meeting. Those betting on inevitable rate cuts (and weâ€™re in that camp) were disappointed when growth concerns played second fiddle to inflation concerns yet again.
The way we look at it the Fed is throwing investors a serious head-fake here. Thatâ€™s because itâ€™s in the U.S. Central Bankâ€™s best interest to maintain the upper hand on the outlook for the U.S. economy. So many new bears are jawboning away at the U.S. dollar that it makes sense to keep them back on their heels with some heavy inflation rhetoric.
The Fed wants to see the rate of inflation return to their comfort zone (somewhere near 2%) so they can claim victory on the inflation front. Until then theyâ€™ll continue to spout the I-word. The FOMC meeting on Tuesday proved that even though the housing slowdown has been â€śsubstantialâ€ť, we concur and think there is more to go, Mr. Bernanke and Co. canâ€™t afford to capitulate to the â€śeconomic dark sideâ€ťâ€¦ yet. Yesterdayâ€™s retail sales surprise is a major prop for now.
So now what? We watch the numbers. We get CPI on Friday. Keep in mind oil prices have stabilized and could spark higher headline CPI. But as we all know -- core CPI is where itâ€™s at. The year-over-year core reading dropped to 2.7% in October from its peak of 2.9% in September. Any further easing might allow the Fed to focus their attention towards the real problem -- the economy.
Before then weâ€™ll likely get another dose of inflation news when import/export prices are reported later this morning. The dollarâ€™s decline makes U.S imports cost more and U.S. exports cost less â€“ plain and simple. We saw bonds tank on retail sales yesterday. Traders would likely keep this one day trend alive on any hint of inflation friendly news today.
US 30-yr Bond CHART
Jobless claims, also reported this morning, are expected to come in relatively unchanged at around 320,000. The addition of seasonal employees for the holidays will likely prevent any surprises to the downside though further weakness in the manufacturing and construction environment could potentially hold that surprise.
Despite yesterdayâ€™s surprise, it still appears Inflation is moderating and U.S. housing is already spilling over to an extent the Fed cannot ignore. Rates cuts are in the cards. That is, unless we continue to get more surprise.
John Ross Crooks III, Black Swan Capital
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