Curiously Dovish FOMC Minutes Pushed From The Headlines By Topical Events

Apparently the world didn’t end when the NYSE stopped trading for four hours yesterday. Today, China’s Shanghai index moved higher, recovering by almost 6%. Greece is Greece and we shall see what happens, but the crisis, such as it is, is declining in influence.

The minutes of the June 16-17 FOMC cited Greece and China as risks but reaffirmed that the U.S. is moving towards conditions that would support a rate hike. However, since the middle of June, the news from the global economy has changed toward the negative and those factors – like China and Greece – will have to be factored in.

While the United States labor outlook still remains fairly rosy, June’s labor data fell flat, although it did not mash its face. The top-line non-farm payroll number failed to meet experts’ expectations and wage data showed zero growth, a more troubling facet of the report than flat-lining employment figures. No pay increases and no big leap in employment mean no inflation.

Softer than anticipated inflation may also be inferred from the recent softness of oil and other commodity prices. Underlying fundamentals are putting downward pressure on crude, among them overproduction, high inventories and big producers waiting to pounce once prices recover to the $62 to $65 range. Oil is up today on gasoline demand and the one-day rally in China stocks. The gasoline demand factor is always odd because gas prices are a function of refinery capacity, particularly when there is a crude glut.

Regardless, overall commodity demand is down across the board for 2015.

Gold is struggling again today, even if it managed a slight up-move. It is swimming against the tide of a strengthening dollar.

The dollar was up on the euro and the yen by about 0.50% today. The greenback was unchanged against the British pound. Dollar and yen strength is currently based on their safe-haven allure.

As we noted yesterday, the minutes of the FOMC June meeting were more dovish than expected. It’s best to go right to the horse’s mouth to see what was said instead of relying on pundits and other interpreters. Key passages are in bold:

“To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. Based on its current assessment, the Committee judges that it can be patient in beginning to normalize the stance of monetary policy. The Committee sees this guidance as consistent with its previous statement that it likely will be appropriate to maintain the 0 to 1/4 percent target range for the federal funds rate for a considerable time following the end of its asset purchase program in October, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored. However, if incoming information indicates faster progress toward the Committee's employment and inflation objectives than the Committee now expects, then increases in the target range for the federal funds rate are likely to occur sooner than currently anticipated. Conversely, if progress proves slower than expected, then increases in the target range are likely to occur later than currently anticipated.”

Read the minutes in their entirety here: http://www.federalreserve.gov/newsevents/press/monetary/20141217a.htm

From our vantage point, given the China troubles, Greek instability and low fuel and commodities pricing, we simply don’t see inflation jumping to 2% or above very soon.

Moreover, the IMF downgraded world economic to 3.3% versus the previous 3.5% for the full 2015 calendar year.

None of the above seems symptomatic of increasing inflation so it seems unlikely the doctors at the Fed will have to prescribe a dose of interest-rate-hike medicine very soon.

Wishing you as always, good trading,