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The fuss over the FOMC minutes has brought several issues to the fore, some more obvious than others. An excuse to take some profits from an over-extended rally is at the top of everyone's list. It was also a useful reminder that the dominant guide in the market is still central bank accommodation. Nearly all of 2012's gains could be attributed to days surrounding market-friendly statements from the European Central Bank and the Federal Reserve. In the absence of bank action, the default is to trade the calendar.

Another point that emerged from the minutes is that the Fed is, in effect, feeling its way through the current economy (viz. Mohammed El-Erian's latest on the central banks - "pursuing too many objectives using tools that are too few, too indirect and too imperfect"). No one knows how all of this is going to turn out, the Fed governors included. As El-Erian and many others have pointed out, this writer included, the central bank accommodation has also had the drawback of allowing elected leaders both here and abroad to duck hard decisions.

If the Fed is going to move this year - which is by no means obvious at this point - I don't think it will be because of an improving economy. The latest batch of news has been on the weak side, ranging from last week's weak result for January industrial production to the latest weekly jobless claims number.

It wasn't the jump in the seasonal claims number that caught my eye, as that had been anticipated due to the scheduled drop in the adjustment factor. Rather, it was the fact that unadjusted claims for the 2/16/13 week were 346,428, compared to 346,659 for the year-ago week of 2/18/12. In short, no difference.

Many states did estimate claims, but the tendency has been for the number to be revised up, not down. The year-ago difference in claims started narrowing several months ago and has tightened up considerably. One clear implication is that the job market is not getting better, though it doesn't seem to be getting worse either. The move to 7.5% may take longer than people think.

The Philadelphia Fed survey certainly surprised the market, with a reading of (-12.5) that was sharply at odds with what appeared to me to be a lowball estimate of +1.1. Apparently it wasn't lowball enough.

I had thought the estimate to be conservative because of the seasonal adjustment factors, but the folks at the Philly Fed are in earnest. They revised their factors again (they updated them last year as well) to try to eliminate the recession bias (particularly from 2009) that leads to overstating the first third of the year, understating the middle, and so on. It's worth looking at the revisions here.

That said, manufacturing and the economy do have certain rhythms, and it is most unusual for the survey to report a negative February result. Out of curiosity, I constructed a rolling three-month average for the unadjusted new orders index.

(click to enlarge)

As you can see, the three-month average is not in the best of neighborhoods right now. Nothing is cast in stone yet, but a negative reading in February for the business activity number - unadjusted or not - is a rarity. The bad news is that they nearly always come during recessions, but the good news is that the readings during the recessions have always been (-20) or below, and the current reading, while low (-12.5), has some cushion before getting that far. There are extenuating circumstances from the budget battles, but those have nothing to do with the damage brought on by the European recession and little to do with the generalized global slowdown in trade.

Like El-Erian, I doubt that the Fed is going to tighten this year. However, it also seems a more than reasonable inference that this time the bank is concerned with a repeat of 2007's lax credit conditions that helped destabilize the system further after Lehman failed. I'm certainly not alone in this observation, as the Wall Street Journal ran an article to the same effect, and Mexico's central banker Agustin Carstens, among others. worried about bubbles openly earlier in the month.

Some are making the dubious claim that the minutes showed that the Fed isn't afraid of the financial markets. I honestly cannot recall anything since the Lehman collapse that suggests either the Fed or the ECB has decided not to worry about market reactions - if anything, it has been the exact opposite. This was a tentative wave of the staff.

The next two key events for the markets are likely to be the March meetings of the ECB and the Fed. The ECB meeting is first, in two weeks, and ECB President Mario Draghi made an interesting signal that some change may be in the air.

Last year, Draghi carefully laid the groundwork for sovereign bond-buying and euro defense not on financial rescue grounds that might have provoked German ire (or their courts), but by stressing the necessity of effective transmission of monetary policy. Without naming country names, Dr. Mario spent some time talking loud enough for everyone to hear that if there were inconsistencies in certain country yields, the bank might have to buy their bonds in order to see that policy was being maintained across the zone.

The strategy was clever. It circumvented German bailout objections, and took a page from Fed Chairman Bernanke's book. Dr. Ben, you may recall, spent some time giving worried speeches about the Fed's responsibility for employment (the Humphrey-Hawkes act) before moving on the last two programs of quantitative easing. It would appear that Draghi is also preparing a second trip to the well, because he talked on Monday of the need to "assess...whether the exchange rate has had an impact on our inflationary profile."

In other words, it won't be the latest recession data out of Europe that moves the ECB to a rate cut that weakens the currency - the German elites wouldn't like that talk, for their Deutschemark youth has left them irrationally attached to being currency kings. No, it will be done in the name of preserving the inflationary profile - a test that is part of the bank's legal charter. Draghi may only talk of it at the March meeting, and that alone may suffice to rally markets again. However, if European data doesn't pick up soon, expect him to lay the final preparation two weeks from now for a rate cut.

Indeed, it's quite possible that the March central bank meetings will lead the flock back to an April high - particularly if the current pullback is able to develop any further.

Historically, the stock market is generally down the week after February options expiration, and indeed the month is traditionally a weak one. However, 2012 breezed through the month with nary a qualm, and we may well have repeated the performance this year with either silence from the Fed or another assist from the weather.

That said, large corrections at this time of year are quite unusual and usually part of a crash, as in 2009. Even the 5% pullback in 2011, albeit brief, was an ill omen of the year to come. Should we have gotten that far by mid-March, I would expect the central banks to adopt a conciliatory stance. The economic data this year hasn't been supportive of tightening, except for the haze thrown over it by the tape (which can affect the Fed staff too, it ought to be said).

One benefit of the fuss over the minutes was to finally arrest, even if only temporarily, the relentless march upwards in the futures betting markets, of which oil is the number one favorite. All the irritating talk about refinery problems is very reminiscent of 2008, when the momentum bubble in oil led to an array of threadbare cover stories about how the threat of some refinery worker catching cold somewhere might lead to another shutdown and tighten the awful supply situation. It's all rubbish. The price of gasoline has tracked Brent crude, and the price of Brent crude has tracked bull momentum fever. Period.

Should stock prices decline much further, the tape haze will disappear and the media will suddenly wake up to the fact that job growth is lower than last year, that US growth hasn't taken off at all, that Japanese GDP is down three quarters in a row, that Europe is going to be in recession for another year, that the sequester is going to happen and that most publicly traded corporations are more interested in borrowing money to buy back stock and pay dividends than they are in labor and capital investment. What does the last bit suggest about demand?

The current thinking on the floor is that 1490 on the S&P 500 is a support level, and there is no shortage of strategists calling the current 2% pullback a buying opportunity. If it pulls back much further, my guess is that the central banks will sing soothing songs in March and by mid-April at latest we will be bleating at the all-time highs again.

Doug Kass is perfectly correct when he says that the "rising stock market is not consistent with the underlying economic and profit data." I've been making that point for weeks. But central bank policy is still king, the calendar is queen, and mundane matters like earnings are for the pawns..

Source: Central Banks Are The Shepherds, Markets Are The Sheep