Has the Fed lost its ability to shock or is the market frozen with fear of the unknown and determinedly looking in the opposite direction? As we comb through the minutes of the FOMC meeting on March 18 which were released yesterday, it looked as though the tone of the meeting was considerably more hawkish than subsequent utterances would have one believe.
A closer study of the minutes could lead the reader to assume that the meeting was pretty lively as it seems that the interpretations as to what happens next is as varied among the members of the FOMC as it is among the rest of us. That said, it is often stated that he who controls the minutes controls the meeting and what we read is what the writers and the editors want us to read.
Once again, there was a key passage which reads: “Participants expressed a range of views about how they would assess the outlook for inflation and when they might deem it appropriate to begin removing policy accommodation. It was noted that there were no simple criteria for such a judgment, and, in particular, that, in a context of progress towards maximum employment and reasonable confidence that inflation will move back to 2% over the medium term, the normalisation process could be initiated prior to seeing increases in core price inflation or wage inflation.
“Further improvement in the labour market, a stabilisation of energy prices, and a levelling out of the foreign exchange value of the dollar were all seen as helpful in establishing confidence that inflation would turn up. Several participants judged that the economic data and outlook were likely to warrant beginning normalisation at the June meeting.
However, others anticipated that the effects of energy price declines and the dollar’s appreciation would continue to weigh on inflation in the near term, suggesting that conditions likely would not be appropriate to begin raising rates until later in the year, and a couple of participants suggested that the economic outlook likely would not call for lift-off until 2016.”
Now we know for certain that rates will either begin to rise in June or they won’t. Simple, eh? What I sort of enjoyed was a line in the earlier part of the minutes which stated calmly: “Participants pointed to a number of risks to the international economic outlook, including the slowdown in growth in China, fiscal and financial problems in Greece, and geopolitical tensions.”
Cannon fodder left in rates darkness
This, in its own basic way reminds us that even the mighty members of the FOMC don’t know much more that we, the humble cannon fodder of everyday markets, do and have to make our daily calls on.
Although I continue to stand by my call that rates will not move before the end of 2015, I would also like to repeat my warning not to place too much store in the non-farm payroll report of last Friday which could easily prove to be an aberration which could either be heavily revised next time round or be met by a rebound in the April numbers.
That said, it had been noted than a significant proportion of the new jobs which had been created in 2014 and 2015 in the US economy had come from the shale gas sector which is now struggling and where net jobs growth across the economy as a whole will be offset by lay-offs in the energy space.
The inflation thing is also distorted by weak energy prices but while jobs will not necessarily grow back when the price settles, the basis effect on headline CPI will begin to fade by June which is when the decline in oil prices began. WTI settled last night at US$50.42pbb which is just around US$3.00pbb below where it closed out at year-end 2014. In fact, on Tuesday it hit US$54.13 in intraday trading which is its highest since early day action on January 2nd. I wonder whether the wizards at Goldman Sachs have revised their call for US$40.00pbb yet?
Back to more mundane matters such as US corporate earnings. Alcoa took up its traditional role and kicked off with its Q1 interims, beating expectations by reporting an EPS of 26c versus the consensus of 24c. Don’t you just love it? First the company gives guidance of what it thinks it might earn which the analysts faithfully parrot to the world and then, as if by magic, the number comes up better.
Four times a year we watch this ritual performed for thousands of listed companies and still we hear middle aged men breathlessly shouting with excited voices at CNBC microphones about the miracle of American corporate power. Digging down just ½ inch we find once again that the strong bottom line defies a less than sparkling top line, a recurrent feature of US earnings over the past few years. The results, nevertheless, gives equities a good tone as a decent “beat” to open the reporting season provides the dividend boys with a warm and fuzzy feeling.
Dimon’s warning
Finally, I see that Jamie Dimon has come out of the closet and has warned regulators that their tinkering with the way markets work might lead to significant volatility if, as and when the next crisis hits. Banks’ inability to make markets led to the bungee jump in Treasuries in October and Dimon warns that if things are like that for no great reason, what if there is a proper run?
Bob Diamond, former CEO of Barclays, might have become the #1 hate figure but he was the first of the really senior bankers to stand up and to plead for politicians and regulators to stop pratting around for the sake of show trials and populism and to begin to realise the damage they have been doing to a system which had grown organically over generations and which was not, simply because it failed once, inherently wrong. I raise my hat to Mr Dimon and welcome him on board.
