Wednesday's FOMC statement provided enough of a change to allow a rally in stocks. No one was looking for a rate change at March's FOMC meeting, but traders were hoping for a change in the Fed's take on economic growth. There was enough evidence in the committee's statement to convince the bulls that a rate cut is feasible in the near future.
The FOMC statement didn't change much from prior statements, but enough to convince the Street that the Fed is concerned more with economic growth now than they have been in the recent past. It nearly takes a magnifying glass to see the differences in the statement, but the fact the committee no longer noted that "additional firming may be needed" kept the faith in a rate cut alive.
Interestingly, the bulls overlooking the fact that the Fed stated its concern about inflation, noting that recent readings on inflation of showed that inflation remains elevated. In fact, the committee stated that "the high level of resource utilization" is keeping their focus on inflation pressures. We need to remember that the Fed's mandate is first to keep pricing pressures in check, thus they look to the long-term and in the long-term, the Fed feels that the economy will strengthen without the need for rate cuts at the moment.
One of the worries traders have is that subprime lending problems will carry over to other areas of the economy. The housing sector has been a concern, but the feeling was that a soft landing was in store. Now that subprime lending problems have arisen, it could lead to a greater fall for housing and this could create problems for consumer spending as well.
In related news, the weekly mortgage applications index saw only a modest movement to a level of 410.6. This is above the four-week moving average, supported in part by favorable mortgage rates. The 30-year mortgage rate averaged 6.06 percent this past week. This data followed mixed news Tuesday when housing starts rose, but building permits fell.
Following the FOMC statement, Fed fund futures priced in slightly higher odds of rate cuts this year. However, the general feeling from economists is that the Fed will be on hold indefinitely until mixed signals are cleared up. Nonetheless, the fact is that traders were comfortable with the statement and the news provided a reason to buy. This being the case, future economic data could have a major impact on stocks, especially if upcoming reports do not support the view that the Fed is getting closer to cutting rates.
Oil prices rose 36-cents Wednesday to close at $59.61. Today was the first session with the May contract as the front month contract. Crude inventory levels rose by 3.9 million barrels for the week ending March 16. However, the fact that distillates and gasoline reserves fell provide some upward pressure on oil prices.
There aren't a lot of reports left this week, although data on leading indicators and existing home sales will get some attention. Thursday will also see Fed Chairman Bernanke speak, although without a question and answer session, Mr. Bernanke might avoid talking about monetary policy and the economy.
Senior Staff Writer & Options Strategist
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