The Fed Speaks And Markets Shrug At Least For Today

True to our expectations, the Fed held rates and sounded a few caution notes about the U.S. economy for the short term. It’s painting of the middle term prospects are rosier but there is evidently no call to dance around your hat and shoot your six guns in the air.

Gold traders took heart and nudged the price per ounce up gently, but the attendant decline in the dollar skimmed some of the gain off.

The opening sentences describe much of what is in the Fed’s collective mind:

Information received since the Federal Open Market Committee met in March indicates that labor market conditions have improved further even as growth in economic activity appears to have slowed. Growth in household spending has moderated, although households' real income has risen at a solid rate and consumer sentiment remains high. Since the beginning of the year, the housing sector has improved further but business fixed investment and net exports have been soft.

A range of recent indicators, including strong job gains, points to additional strengthening of the labor market. Inflation has continued to run below the Committee's 2 percent longer-run objective, partly reflecting earlier declines in energy prices and falling prices of non-energy imports. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months.

We are therefore looking at better and better employment data but also are staring down stagnant inflation. Another passage (in a way) tells us more:

The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.

Per usual, there is a statement and then there is a hedge of the statement. It is important to note, however, that the phrases “gradual increases” and “below levels that are expected to prevail in the longer run” are keystones of what investors in either precious metals or equities need to stay focused on.

As always, we question what the larger view of energy prices means for any gauge of inflation. If oil was (for argument’s sake) $100 per barrel once upon a time, then fell to $50 and then rose to $75 pb, then in the last snapshot, oil has risen 50% and will presumably factor into the price of goods, especially transport. Yet clearly oil is 25% below the snapshot taken when the price was $100 pb.

So, which is the inflation factor?

Speaking of oil in real terms, West Texas Intermediate is up more than 3.00% today and we are wondering out loud if crude is finding a longer-term level in the mid-$40 range.

Equities traders seem uncertain as to how to react to the Fed statement and so are holding prices down in New York. The three indexes are, nevertheless, off their lows.

Europe was up modestly, perhaps having anticipated the outcome of the FOMC meeting. Asian indexes were down modestly across the board.

As we consider the future of inflation, we believe that as the backlog of goods produced at low prices is drawn down and shipping contracts at low-fuel prices expire, we will see a small surge in costs and therefore overall inflation (on the consumer level).

There is a word of caution, though. Only five months ago (November 30, 2015), oil was at $45.62 and everyone thought it was a killer bargain. All of a sudden it sounds expensive? 

Wishing you as always, good trading,