Last week, the Dow hit a new record high of 14,865, as did the S&P 500 at 1593. For the week, both indexes were up over 2%. Year to date, they are up over 13% and 11%, respectively. Much of that increase has been fueled by continual monetary pump-priming in the U.S. and Japan, but some of the market's rise also comes from last-minute funding of pension plans before today's tax deadline. Historically, the market then tends to correct in late April or May, so I continue to advise more selectivity in stocks.
The FOMC's Premature Minutes Reveal a War of Words at the Fed
The big news last week was the accidental early release of minutes from the Fed's most recent Federal Open Market Committee (FOMC) meeting. Quite often, these notes are dense and boring, not worthy of any big headline news. But I must give Fed Chairman Ben Bernanke credit for greater transparency these days, since the last few FOMC meeting minutes have been juicy, and they keep getting better and better.
Essentially, the notes from the latest FOMC meeting on March 19-20 reveal that the gloves finally came off between the "doves" (money-pump proponents) and "hawks" (fiscal conservatives). Specifically, the hawks insulted the doves by saying that all this Fed pumping, along with 0% interest rates, is making the rich richer, while giving the masses near-zero income on their cash savings and fewer low-interest loans.
Ever since the Humphrey-Hawkins bill in 1978, the Fed has had a dual mandate of promoting full employment and keeping inflation low. Essentially, the hawks fight inflation, while the doves attack unemployment. Since the doves currently dominate the FOMC and inflation seems to be under control, the hawks (and a few moderates) are essentially advocating a reduction of the $85 billion per month in quantitative easing "later in the year."
After the minutes came out, outspoken hawk Philadelphia Fed President Charles Plosser said in Hong Kong that the Fed should start scaling back its bond buying, due to "sufficient" improvement in the job market. Plosser said that private payrolls have improved to an average of 202,000 net new jobs per month over the last six months vs. 129,000 per month in the preceding six months. Plosser also said he expects 3% annual GDP growth in 2013 and 2014, so the Fed should cease its bond buying this year, not next.
Despite these arguments at the Fed, the stock market is not rattled: The market reached new record highs, partly because the doves still control the votes at the FOMC, and those doves are stubbornly waiting for "an improvement in the overall outlook for labor market conditions." Translated from Fedspeak, as long as the jobless rate stays above 6.5%, the Fed will likely keep fueling its seemingly eternal "QE4-ever."
The Growing Mandate for "Coordinated" Global Pump Priming
The U.S. is not alone in its seemingly eternal pump priming. The financial news media is increasingly reporting that the Bank of Japan and the Fed have coordinated a one-two monetary punch to help inflate the global economy. Japan is inflating faster than the U.S. these days, as part of an attempt to fight deflation.
Bill Gross, PIMCO's bond guru, now expects 10-year U.S. Treasury bond prices to rally (and yields to fall) due to Tokyo's aggressive plan to buy Japanese government bonds. According to Gross, the Bank of Japan's aggressive intervention will cause Japanese investors to seek higher returns overseas, driving the dollar's rate lower, thus causing U.S. Treasury bonds to rally. After all, 10-year Treasuries yield 1.25% more than Japanese government bonds, and the dollar is rallying to the yen, delivering capital gains to Japanese investors. Gross concluded that the Bank of Japan's bond buying is contributing to the stock market's rally, likening Japanese monetary inflation to the energy drink, calling it "Monetary Red Bull."
Last week, President Obama announced another reason to expect U.S. bond rates to fall further. In his latest budget proposal, released last Wednesday, the president proposed replacing the Consumer Price Index (CPI) with a "chain-weighted" CPI. Essentially, the chain-weighted CPI takes into account how consumers alter their buying habits as prices change. For example, if gas prices rise, consumers will drive less or switch to public transportation, or if beef prices rise, consumers will buy more Hamburger Helper.
Frankly, the chain-weighted CPI is mostly a clever way to understate inflation, allowing the government to reduce its annual "cost of living allowance" (COLA) for Social Security payments and other inflation-indexed benefits. In other words, rather than admitting that inflation is rising, the government will argue that there is no "real" inflation, since more consumers are riding buses or opting for cheaper cuts of meat. Speaking of inflation, the Labor Department announced on Friday that the Producer Price Index (PPI) declined by 0.6% in March, due largely to a 3.4% decline in energy prices. Due largely to a stronger U.S. dollar, commodity prices remain under downward pressure, so wholesale prices will likely remain well-behaved as long as the U.S. dollar rises. Excluding food and energy, however, the core PPI rose 0.2%.
Stat of the Week: Retail Sales Fell 0.4% in March
On Friday, the Commerce Department announced that March retail sales fell 0.4%, the biggest decline in nine months and much worse than economists' consensus estimates of a 0.1% decline. Cold weather and lower gasoline prices were blamed, since gasoline prices dropped 2.2% in March, but consumers would normally have taken some of those savings and spent the money elsewhere. That did not happen this time.
In addition, several major retailers released their March same-store sales numbers last week. Some posted falling sales. The 11 major retailers tracked by Thomson Reuters are expected to post the slowest same-store sales rise since September 2009. Consumers are still spending, but they are more cautious.
On the job front, the Labor Department reported on Tuesday that worker confidence (based on how many workers are quitting the workforce) remains at its highest level since October 2008. Also helping boost worker confidence is the fact that there were 3.93 million job openings in February, the highest total since May 2008 and up 11% in the past 12 months. Finally, new claims for unemployment benefits fell by 42,000 to 346,000 in the latest week, but the four-week moving average rose 3,000 to 358,000.
Tomorrow, we'll get a clearer picture of the U.S. economy with the release of the March CPI, housing starts and industrial production, followed by the March index of Leading Indicators, released Thursday.
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