Positive Rate Differentials Finally Come Into Play!
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In This Issue.

* 10-year Treasury yield drops to 2.42%!

* Eurozone on holiday today .

* Aussie CAPEX forward looking positive.

* U.S. 1st QTR GDP to print negative? .

And Now. Today's A Pfennig For Your Thoughts.

Positive Rate Differentials Finally Come Into Play!

Good Day! . And a Tub Thumpin' Thursday to you! It's been 2 days since my last stomach episode that I refer to as: An Inlyta moment. So, I'm half expecting that all to change today, as 2-days is normally the extent of the "good times" my stomach gets to enjoy! But, I won't sit here anticipating it, in fact, I'm looking forward to the breakfast sandwiches that our little Christine will be bringing in today!

I was also looking forward to coming in and seeing what happened to the currencies after seeing the U.S. Treasury 10-year yield fall to 2.42%... Rate differentials are HUGE in currency valuations, although there are some caveats to that general thought. And with yields and thus interest rates falling once again in the U.S. one would think that the dollar would be put on the chopping block, and the currencies and metals would benefit.

Well, the currencies that enjoy a wide interest rate differential to the dollar are looking quite healthy today. The marginal rate differential currencies are flat to up a bit, and those that employ the U.S.'s ZIRP, are nowhere. (ZIRP is the zero interest rate policy) So, the Aussie dollar (A$), New Zealand dollar / kiwi, S. African rand, Mexican peso, and Indian rupee are all looking quite healthy today, while the Canadian dollar / loonie, Norwegian krone, Swedish krona, and Swiss franc are up a bit VS the dollar, and currencies like: Chinese renminbi / yuan, Singapore dollars (S$), Japanese yen, euros, and honkers are nowhere. down mostly, but going nowhere.

Most of the Eurozone is closed for Ascension Day, and with that, there has been no data printed, and the euro tries to participate in the rate differential rally, but for the most part it's a case of not having the "right stuff" to participate. And while the A$ is on the rate differential rally tracks this morning, it also got a boost from the latest CAPEX (Capital expenditures) report. I've talked at length about how important CAPEX is for a country's economy, and while this report showed some slippage, the forward spending plans component of the report were very strong, so the outlook is good, which is good for the economy, and gives you a feeling that rate hikes won't be too far behind the economy boost.

Speaking of the Eurozone. The European Central Bank (ECB) is scheduled to meet in the first week of June.. And everything I read these days, says that the ECB will announce their latest stimulus measure at this meeting, and it appears that announcing negative deposit rates is a "done deal".. I think at this point, something like that would be boost to the euro, given that most of the bad stuff the ECB could do has already been priced into the euro. As long as the ECB doesn't announce a major bond buying program, the euro should be able to stand up to what the ECB has for it in June.

A little talked about currency like the Czech koruna gets some spotlight shown on it when the Eurozone is taking a Holiday. And today is no different. the koruna is moving quite strongly VS the dollar, and somewhat against the euro this morning on news that the Czech Premier, announced that he would not raise Corporate Taxes. That's HUGE folks, for a country's economy. Just look at the malaise the U.S. economy has been experiencing, as the known and unknown taxes of the new healthcare stuff weighs heavily on U.S. Corporations.

In the largest positive rate differential country (Brazil), the Brazilian Central Bank (BCB) left rates unchanged at their meeting yesterday. This pause for the cause was expected, so no nastiness was experienced by the real, but today might be a different story. Since the theme for today is positive rate differentials, some traders might take the BCB pause as an indication that rates have gone as high as they are going to go. You know.. Everything's up to date in Kansas City, They've gone about as far as they can go! I think this "feeling" will dissipate over time, and the real can get back to enjoying the largest positive rate differential!

The Russian ruble is rallying again. Which has happened quite a bit recently. I find this recent rally by the ruble to be quite interesting, given the rot it should be experiencing as Russia is thought to be the aggressor of the problems in Ukraine. But I think this whole, "We are going to change the world" stance that Russia and China have undertaken, is a powerful force for the ruble.

The Indian rupee is also rallying again. The powerful message that the people of India have given with their throwing out the ruling party that led to all the problems of largess in India, and electing a new party that has grand ideas to revive this once powerful economic engine. I would have to think that while the big gains in the rupee have already been seen, we could see small gains every time the new Gov't announces a new plan that gets the markets all lathered up.

And then finally the final letter of: BRIC. China. While reals waits, rubles and rupees rally, and the renminbi / yuan sees another mark down by the Peoples Bank of China (PBOC). I think that we could very well see an extended period of weakness in the renminbi folks. The Chinese economy is cooling its heels, and to that extent, the PBOC is in no mood to make things difficult for exporters. Yes, this is classic currency wars stuff.

A few years ago the BRIC countries decided to add an "S", making them the BRICS. That "S" belongs to the South African rand. So to complete my sweep of the BRICS, I told you above the rand was looking quite healthy on the positive rate differentials, but there's a more to this story. S. African PPI (wholesale inflation ) rose 8.8% in April from a year ago, and beat expectations of an 8.4% gain. So, the markets have it in their minds right now that interest rates could be headed higher, thus widening the positive rate differential in favor of the rand!

Well, the disappointing thing I saw this morning that I didn't anticipate, was Gold being down again. But there it was, in all its glory. Down $5. I just don't get it. Yes, I know that Central Banks around the world are worried about the life expectancy of their respective currencies and with that, they feel that Gold is the culprit, so they look the other way while price manipulators rule the roost. Why disappointing? Well, if U.S. rates are falling once again, what does Gold have as a competitor as a deposit? That's my thought.

But new Belle of the Ball, Palladium, is faring better than it's kissin' cousins of Gold & Silver. the metals market is all about Palladium these days, and the metal has responded with a rally that takes it to 2011 prices. The high back in 2011 was $861.24. Today, Palladium is $837.70 ( I saw it at $838 when I came in) up just $1.50. But up when Gold is down, and I think that's a key!

Well, the U.S. Data Cupboard was on holiday yesterday as only the weekly Mortgage Applications (-1.2%) printed. Today, we'll see some what could be interesting data. Front and center in the Data Cupboard today, is the first revision of 1st QTR GDP. Remember when it first printed at .1%, I said that it was simply a "rounding error" from being negative. Well, since that time, we saw some revisions to data in the first QTR, and I told you when that happened that we would most likely see 1st QTR GDP print negative on the revision, and that's exactly what I think we'll see today. Look for a negative -.5% print. Shouldn't be good for the dollar, but then we'll see the "bad weather" excuses come scurrying out of the wallboards once again!

We'll also see Personal Consumption for the 1st QTR, Weekly Initial Jobless Claims, and the Bloomberg Consumer Comfort index. So, something for everyone!

And then a friend of mine, and dear reader, Bernie, sent me a note about some things that he found interesting in the Sunday paper in Arizona where he lives. He wanted to confirm what I've been saying about the U.S. economy. and here were some things he came up with from the paper that day:

1. Unemployment claims have risen to 27,528 over the last three months to levels last seen in April of 2013 (27,564).

2. Job growth has declined in the last three months. A year ago it was 55,600 (April 2013), but in April 2014 was 40,600.

3. Construction jobs have taken the biggest hit. In April 2013 they were 7,900; in April 2014 they were 600. [That figure may be in error as it is abnormally low. The prior month's figure was about 2500.

Before I head to the Big Finish today. Did you see that Apple is going to pay $3 Billion for the headset company: Beats? This is what Apple decided would be their biggest acquisition to date. I'm not passing judgment on this, just reporting the facts, you get to decide..

For What It's Worth. So, yesterday, I was looking through my usual list of sites for stuff that would catch my eye, and there it was on kingworld.com, the great Richard Russell, talking about Gold. Well, you know me, and any time I can get Richard Russell in the Pfennig, I'm taking that opportunity and running with it! So, here's Richard Russell talking about Gold.

"I'm going to talk about one of my favorite topics -- gold. One advantage of gold, unlike real estate, is that gold is extremely liquid. At any time you can buy or sell almost unlimited quantities of gold. Another advantage of gold is that gold is easily kept and stored; gold doesn't spoil or tarnish. Another advantage is that gold is outside the "system." It is anonymous. Gold can be handed down from generation to generation. Gold is a good conductor of electricity; it is malleable and ductile.

Gold was considered wealth five thousand years ago, and it is considered wealth today. Gold is the first metal named in the Bible. One of the items the three wise men gave to the infant Jesus was gold. Gold doesn't become antiquated, although many other items that are treasured today may become worthless over the years. Almost all "items of value" are subject to trends. For instance, the works of the great British landscape artists were treasured fifty years ago. Today nobody wants them.

I'm particularly interested in the action of gold from now to July, its traditionally weak season. I have expected the bear market in gold to end in July. Therefore, the less gold gives up in price from now to July, the more bullish the situation.

I see signs of manipulation in gold through the action of "paper gold" on the COMEX. Occasionally we see huge masses of futures being dumped in a matter of minutes on the thinly traded COMEX. All this in an effort to keep the price of gold down. Eventually, gold will reach its rightful level. So to coin a phrase, "You can't keep a good currency down."

Will the US government confiscate gold? My answer is NO, they will not. How would confiscation help the US? If the US possessed a huge hoard of gold, an extra few hundred tons of gold might boost confidence in the dollar. But I suspect that the US has sold or loaned all of its gold. If I'm wrong, then let an audit show me that I'm wrong.

If the US confiscates anything, it will be cash. This is what the US badly needs to carry its enormous debt. The US can confiscate cash through higher taxes or through a wealth tax. I believe in an emergency, Congress would vote for a wealth tax -- say a tax on a person's wealth over $400,000. Remember, a government will do anything it has to that will allow it to remain in power."

Chuck again. WOW! A powerful message this morning from Richard Russell! I have to say that I agree totally with Richard Russell, here regarding confiscation of Gold. I also agree that grabbing cash is much easier. One day, you look at your bank balance and it has taken a trip to the barber for a haircut. That's how it would happen folks. And NO I'm NOT SAYING IT IS GOING TO HAPPEN! I'm just saying that IF the Gov't choses to confiscate anything, it will be cash.

To recap. 10-year Treasury yields have dropped to 2.42% and the rate differentials are getting played in the markets today. Finally! I might add! The high yielders are looking quite healthy, the barely have a rate differential currencies are flat to up a bit, and the ZIRP countries are going nowhere this morning. The Eurozone for the most part, is on holiday today, so no data there. U.S. data should be dollar negative today, and Gold is taking on water once again, while Palladium holds steady Eddie.

Currencies today 5/29/14.. American Style: A$ .9300, kiwi .8500, C$ .9210, euro 1.3615, sterling 1.6720, Swiss $1.1150, . European Style: rand 10.4415, krone 5.9540, SEK 6.6275, forint 222.35, zloty 3. 0430, koruna 20.1780, RUB 34.67, yen 101.55, sing 1.2545, HKD 7.7530, INR 58.88, China 6.1705, pesos 12.86, BRL 2.2320, Dollar Index 80.42, Oil $102.83, 10-year 2.42%, Silver $18.88, Platinum $1,446.05, Palladium $837.00, and Gold. $1,253.10

That's it for today. Cardinals take one on the chin from the Yankees last night, UGH! You can't win them all, but when you play the Yankees, that would be really nice! Although this version of the Yankees doesn't exactly make you want to root against them, for there are no lightning rods on the team... Oh well, at least the fans got to see Derek Jeter before he retires. The disgusting truth of what has been going on at the VA hospitals continues to be exposed. I just shake my head in disgust. I have to stop there. At the wedding & reception I attended last weekend, I ran into three old Mark Twain Bank friends. Linda B., Susan and Mike S. We all tried to figure out how we just found out that we knew the bride! So, that was fun, catching up. Deep Purple was just playing: Highway Star on the IPod. Great song to get you going in the morning! The Song: Happy, played this morning. I love the smile that song puts on people, including me! OK. enough of that. I hope you have a Tub Thumpin' Thursday!

Chuck Butler
EverBank World Markets

Posted 05-29-2014 6:49 PM by Chuck Butler