FOMC Minutes Swing Markets Around As Oil Leaps Up

Despite an impressive surge in oil of almost 5.00%, today saw only a mild risk-on sentiment in other markets.

The positive mood brought on by oil’s rise was tempered by the release of the March 2016 Federal Open Market Committee’s meeting minutes. As they used to say when newspapering was an honorable profession, the Fed doesn’t make the news; it simply reports it. It also reacts to it, naturally.

But the news was so muddled, so contradictory, that the only valid reaction was to stand pat on rates. For every yin there was a yang – manufacturing, employment, government spending, exports, durables and other measurements had within them bright and dark spots.

That left some hawks saying that it was better to err on the side of caution and go ahead and raise interest rates. Esther George of the Kansas City Fed was the only member who voted against leaving rates the same, but apparently – and the names aren’t named in the minutes – others felt strongly that it was time to raise rates again.

Why those people feel such a way escapes us. Here is an excerpt from the minutes.

The staff's forecast for inflation over the first half of the year was revised up somewhat, reflecting recent increases in the price of crude oil as well as stronger-than-expected data on core consumer prices early in the year. The staff continued to project that inflation would increase gradually over the next several years, as energy prices and the prices of non-energy imported goods were expected to begin steadily rising later this year. Beyond 2016, the forecast was a bit lower than the previous projection, primarily reflecting a flatter expected path for crude oil prices. As a result, inflation was projected still to be slightly below the Committee's longer-run objective of 2 percent in 2018.

(Read the full minutes HERE)

Two things should be noted about the statement and attendant factors. First, for the 12 months previous to the FOMC meeting, the rate of inflation was 1.25%. Second, inflation we might see now that is associated with oil is simply a recovery price change and therefore somewhat artificial in nature. If something costs a dollar, then declines to 90 cents, then subsequently goes to 99 cents, the 99-cent price does not equal 10% inflation.

Gold took today’s news the hardest, down about $9 as of 3:45 in New York in spite of an upward shove by a weaker dollar. (That was the story for the entire precious metals complex.)

The dollar was down about 0.20% against the euro and was hammered again by the yen, which rose against the greenback by almost 0.60%. The yen is considered a haven currency, but the lack of growth in the Japanese economy is (counter-intuitively) pushing the yen up.

The 10-year U.S. bond yield jumped from yesterday’s/overnight’s rate of 1.73% to 1.756%, an indication that the bond was looking hard for buyers. (Yield and face price move in opposite directions.)

Equities started out the day strong, then dipped when the FOMC minutes were released but have since been recovering.

NASDAQ is up well over 1.00% on the day, led by its biotech sector. The S&P rose on the strength of healthcare issues and the oil surge.

On the Dow Jones, questions and perils of mergers and acquisition drove stocks. Halliburton and Baker Hughes, which are now fighting a Department of Justice lawsuit blocking the merger of the two machinery and services giants, saw their stock prices rise 6% and 9% respectively. Pfizer and Allergan, which were thwarted in their marriage by new Treasury Department rules, both rose 3%.

The lower dollar should return the U.S. to a more competitive footing in the world of imports and exports. We’re sure it will further hurt the Japanese.

The Japanese just can’t seem to buy enough of their own goods to make the country’s economy hum. A lesson to be learned…

Wishing you as always, good trading,