Well the usual breed of Wall Streeters having tough time this morning spinning last nights FOMC minutes in a positive light.
What was most significant in the statement was the lack of discussion about changing the bias to neutral. A subject which was strongly discussed in the prior meeting. Bottom line is clear: Fed has no intention of leaving neutral mode anytime soon.
What's more interesting is how the FOMC now is in clear INFLATION ALERT risk mode. This is no surprise to us, but it's not something the stock market was even willing to discuss less than two weeks ago.
Embedded in the FOMC Minutes there was some interesting forward looking forecasts from FED staffers:
- Fed staff reduced Q1 growth forecast........
- Fed increased inflation projections.....'inflation is projected to be higher in the first half than the prior forecast'.... though 'would still edge down in rest of 2007 and 2008'
Fed governors on the speaking circuit reiterated the inflation scare.......they all put confidence in the fact that inflation expectations remains subdued. This is only matter of time with food and energy again on the rise.
Break-even rates 5years US... (or inflation expectations - CLICK ON CHART for better view)
As seen by the above chart the expected inflation is on the rise, so is the ultimate inflation benchmark Gold...so maybe FOMC should either pray some more or start to do something about the problem, but here comes the issue.
If... the US economy was growing at trend or even above it would be the easiest thing in the world to continue hiking, but alas the growth is risking to collapse.
The lack of consumer spending should according to people far more smart than me be substituted by CAPEX spending (Capital Exenditure) as the corporate balance sheets are stronger than ever....but... whats this then?
http://tinyurl.com/2gkefh (full reference/ CLICK ON CHART FOR BETTER VIEW)
Yes, Houston we got problems! The US been fortunate in the last two decades that every time one sector cyclically ran into trouble another took over. Some of it was technology driven, some of it monetary, but whats different this time (and yes I have been around for more than 20 years trading!) is that the substitute bench is empty, there are no more players to put on the pitch:
- Yield still low historically
- Monetary policy has only just started globally to be normalised (Agg. Mone. growht in January was ALL TIME high still!)
- The consumer is tired. Six in ten Americans looking for recession, and they seem better at predicting markets than Greenspan and his cohorts!
- Corporate US will rather buy back stocks and do M&A to reflect globalisation
- Energy & commodities are in long-term upcycle due to distorted supply and demand
So... I am NOT impressed! Mr. Bernanke bet his integrity on the pause move last year and as any rookie playing in the real world, he looked good for a while...now he looks was he is an academic pursuing a political career in Washington........
Conclusion: FOMC is caught out, they can only wait and pray, as friend said to me on another subject; "...When you are in hole, stop digging".. (Sorry I can't reveal the conversation this arised from .....:-).
Best think FOMC and FED can do now is to stop commenting on the markets, they are in other word even more confused than I am....
Positions:
Foreign Exchange: We are long EURUSD, GBPUSD and short EURCHF & EURGBP
Fixed Income: Short 5 y notes, long 2-10 spread
Equity: Short NASDAQ and Dax Futures, Long Dax puts...
Commodities: Long Wheat
Overall looking to add: NOK, Gold, Crude......
Disclaimer: As always above is meant to provoke you to think outside the box, the likelyhood of me being right is smaller than me playing for Man. U in Champions League Final....
Good Luck into ECB meeting today
Steen Jakobsen
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