The Fed Flip-Flop!
Can anyone figure out the Fed? Last week the Fed indicated that a June interest rate hike was back on the table after indicating in March that the softness in the global economy might preclude any further interest rate hikes.
Consequently, the market began to discount the potential for a further rate hike. So it was a bit of surprise, and a flip-flop, that the Fed was suddenly looking at an interest rate hike once again. This came from the minutes of the April FOMC as well as statements from the president of the NY Fed.
We take a look at the core inflation rate vs. not only the headline CPI but also the Personal Consumption Expenditures Index (PCE).
The core inflation rate has been above 2% for the past number of months, well within the Fed’s target zone for the core CPI. The core CPI is the headline CPI less food and energy. The volatile factor has been energy prices, which for months have been falling. Falling energy prices have been a major contributor to the weakness in the headline CPI.
The PCE is, however, below the Fed’s target, so it adds to the confusion as to why the Fed flip-flopped. The central bank’s credibility is now on the line come the June FOMC.
Deutsche Bank Again!
Does Deutsche Bank (DE:DBKGn) have a death wish? Deutsche Bank has been at the heart of a number of financial scandals over the past few years, ranging from the LIBOR scandal to rigging in the London gold market.
Deutsche Bank has paid some $14.1 billion in fines since 2012, the most of any bank in the EU. But now there is even more. Deutsche Bank recently took a charge of €450 million for its role in “equity trading fraud.” Another report said that Deutsche Bank was under investigation by the SEC for manipulation in its mortgage bond trading business.
Finally, Deutsche Bank is just one of a number of high-profile international banks that are being sued over their role in the LIBOR scandal. The surprise, if any, is that the Federal Appeals Court in New York allowed lawsuits to be reinstated.
Confidence is a fragile thing. It is essential that investors have confidence in the banking system. The ongoing investigations of, and fines imposed on, some of the largest banks in the world over manipulation is not generating confidence in the global banking system. Nor are flip-flops from the world’s most important central bank.
Weekly Market Review
Stocks
Many are looking for a collapse in the stock market. So what happens? It goes up instead. The question being asked by the bulls is “so what’s the problem?” But market participants tend to be long-term focused, or at least they say they are, but they are actually watching all the short-term gyrations.
Money flows drive the markets, and this past week money flows from the EU especially helped push the US dollar and the stock market higher. Much of this goes through the world’s largest banks, and it is the large behemoth global banks that dominate the global banking world. In the US alone, six banks out of over 5,200 control some 62% of all assets. Even that 5,200 figure is down from 14,000 in 1985.
The charts continue to suggest that the markets are topping and, while some breadth indicators are mixed declining volume on the upswings, that does not engender confidence that the market could well move higher. The Dow Jones Transportation is not confirming the Dow Jones Industrials. The fact that the averages must confirm is a key Dow Theory tenet. So, as they say, caveat emptor.
Currencies
The Fed flip-flop helped push the US dollar higher. Many are now saying that the US dollar is headed to new highs. But a look at the USDI suggests that there is still considerable work to be done before the US dollar does actually make new highs. The high could be in.
The jury is out, and we outline some key points of resistance that must be overhauled if the USDI is to actually make news. As well we look at the Canadian dollar and its relation with oil. Right now the Canadian dollar has been weakening, but oil prices have been holding up. In the past when this occurred, oil prices soon followed the Canadian dollar down. The opposite usually takes place at lows.
Gold and Precious Metals
The seeming shift by the Federal Reserve from putting any further interest rate hikes on hold to one of hinting that an interest rate hike could be back on the agenda for the June FOMC caught market participants unaware last week. While the US dollar soared, gold swooned. Money flows out of the EU into the US helped push the stock market higher. A correction for gold was most likely overdue, given that bullish sentiment had jumped as high as 90%.
As well, the commitment of traders (COT) indicated that the commercials were at their shortest level in months. Typically, this has led to a gold market decline. So far the fall has been largely muted with gold down only 6% from the recent highs, leaving gold still up 15.5% in 2016.
Signs continue to indicate that the economy is not all that strong. We look at the recent NY Empire State Manufacturing Index as well as the Philadelphia Fed Manufacturing Index, and can’t help but note that they have been negative eight of the past ten months. That is more typical of what happened during the 2008/2009 stock market crash and subsequent recession.
The positives continue to shine through for gold, as they do for gold stocks and silver. There are naysayers out there naturally, but overall the signs continue to be positive despite the pullback. This should be viewed as corrective action within the context of an emerging new bull market. Key points for gold are included with the report.