U.S. stocks rallied after the Fed released the minutes from the latest meeting (after spending the morning session flat-to-down) and rallied some more after the Bernanke press conference – apparently the market viewed his comments as dovish (meaning policy will remain very easy), which would make sense considering no matter how fast and hard commodity prices rise the Chairman continues to say it’s only temporary.   That said, there were some comments in the text that I believe point to some mild tightening (or at this point less easing) bias…more on that below. 

Responding to each question on inflation (which was the focus of nearly all of the questioning) he continued the refrain that higher commodity prices are “transitory,” along with the erroneous statement that inflation expectations are anchored. You see, to Bernanke the substantial rise in commodity prices since August is not a problem because it’s temporary.  That is, if the price of gasoline goes from $2.40 to $3.90 in a matter of six months but then falls back to $3.75, then inflation has decelerated.  Of course, you’re still stuck with a high price. 

Telecoms, health care, consumer discretionary and utilities outperformed.  Strangely, energy and basic materials were the biggest losers.

Bernanke’s comments stomped the dollar, as it slid nearly a full point to close at 73.13 on the Dollar Index (DXY) – that’s within two points of the all-time low of 71.35 (y/o/y import prices averaged 15% the last time the Dollar Index spent time below the 74 handle.   This morning the DXY slipped to the 72 handle. 

The price of crude rose even as the latest Energy Department report showed inventories jumped 6.16 million barrels last week (forecast to rise just 1.7 million) – this leaves supplies 15% above the five-year average.  The price of oil would never be this high (even with increased MENA tensions) without the Fed’s wildly aggressive monetary policy.   Wholesale gasoline rallied eight cents to $3.44, so don’t be surprised when you see $4.10 at the pump. 

Market Activity for April 27, 2011

Sector Activity for April 27, 2011

Mortgage Apps

The Mortgage Bankers Association reported that their mortgage application index fell 5.6% for the week ended April 22 after rising 5.3% in the prior week.  The decline was the fourth of the last five weeks. 

Both refinancing and purchase activity declined, but it was a 13.6% slide on the purchases side that pushed the overall index lower (FHA apps slid 25% last week as the increased insurance premium went into effect).  Total purchase applications are down 38% since the tax credit was goosing sales a year ago.  Apps to refinance a mortgage slipped 0.6%.  The average contract interest rate on the 30-year fixed mortgage fell three basis points to 4.80%.

Durable Goods Orders

The Commerce Department reported that durable goods orders rose 2.5% in March (expected to come at 2.3%) after the 0.7% increase in February.  But take out transportation, which is an important way to look at this data as commercial aircraft orders are often times crazy volatile, and orders rose just 1.3% (expected to rise 1.9%). 

The best news of the report was a much needed 3.7% increase in non-defense capital goods ex-aircraft orders (proxy for business spending on equipment), which followed a 0.5% increase in February; these orders still fell 7.9% at an annual rate for the quarter due to the 5.9% slide in January.  Now, it is the shipments not the orders that affect the current reporting quarter for GDP.  Those shipments were flat for the first quarter so durable goods orders shouldn’t weigh on Q1 GDP but it won’t help either. 

Format Change – The Bernank Takes Questions

The only changes in the statement that follows the end of FOMC meetings were on the inflation front.   The Committee noted that increases in energy and other commodity prices have “pushed up inflation in recent months.”  (The March statement stated that commodity prices are putting “upward pressure on inflation.”) 

Also, the Committee stated that they were prepared (seems like an important word in Fed speak) to adjust securities holding as needed to best foster maximum employment and inflation.  (The March statement stated they will adjust the overall size of the asset program as needed.)  But now we know that the asset program (QE2) will end on June 30, so the asset-purchase program is out of the equation for now.  And since the change in the Fed’s statement was on the inflation side and not the employment side, then one has to assume that the change in the wording has a slight tightening bent to it.  Not saying tightening is coming anytime soon, but this is a change in the wording that catches one’s eye – which is probably a main reason for the decision to begin the press conference following this meeting. 

Even with the change to the traditional format, I was still very interested to see the traditional statement text.  The reason being was I wanted to find if self-described dissenters Richard Fischer and Charles Plosser would actually vote against keeping the “extended period” phrase (which pertains to the zero interest-rate policy) in the text or show that they’re merely full of hot air – both have been quite effusive over the past couple of months in stating the FOMC needs to begin taking away at least some of this aggressive accommodation.  The vote to keep policy unchanged and the “extended period” phrase nicely ensconced in the statement was unanimous, so that answers that question – comments from Fischer and Plosser are vacuous.  

During the much anticipated press conference, the chairman explained that the Fed lowered its economic estimates (which normally isn’t reveiled until the minutes are released three weeks later).   The central tendency is now 3.1%-3.3% for 2011, down from 3.4%-3.9% -- they’ll be revising that lower yet again in my opinion.  

In terms of the questioning, they were pretty much boring, almost all focusing on the rise in commodity prices and inflation.  But this doesn’t evoke a meaningful answer as Bernanke continually states that he believes the rise in commodity prices to be transitory and inflation expectations stable.  (I wonder if the inflation is transitory phrase has yet to eclipse the number of occasions in which Mr. Bernanke used his favorite refrain back in 2006/2007, that subprime mortgage defaults are contained.)

What should have been asked, if the room wasn’t filled with a bunch of sycophants:

- Why does the FOMC feel the need to keep policy extremely aggressive when the Fed estimates that economic growth will trend 3.5%-4.2% in 2012?  Or does that forecast depend on ultra-low rates?  (That’s what Ryan Craft would have asked.)

- Are you concerned with the current path of policy in that it has conditioned the economy to ultra-low rates?  How do you expect housing, stock prices and debt-servicing ratios to respond when the policy turns to normalize interest rates?  

- How can you say that oil prices are a function of supply and demand, and not the Fed’s policy stance over the past decade, when global demand has outpaced supply by only about four percentage points over the past decade (demand up 15%, production up 11%) yet the price of oil has skyrocketed 330%?

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