Stocks Finish Mixed After Confusing Fed Minutes

Investors have learned to wait with bated breadth for the tiniest change in the Federal Reserve’s policy language. It’s all pretty ridiculous that phrases like “extended period” and words like “patient” carry such weight for the capital markets — but I guess that’s to be expected after eight years of 0% rates and trillions in stimulus. Markets are addicted to the monetary morphine.

On Wednesday, stocks finished mixed after the latest Fed meeting minutes left many scratching their heads in confusion. In the end, the Dow Jones Industrial Average lost 0.1%, the S&P 500 lost a fraction, the Nasdaq gained 0.1%, and the Russell 2000 gained 0.2%.

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That’s because the minutes were spiked with a mix of asset bubble warnings and unclear language surrounding its intention to keep rates lower for longer.

Over the last few months, the Fed was growing increasingly confident in the health of the economy and its need to raise rates. In December, the median estimate from individual Fed policymakers put interest rates at more than 1% at the end of the year, at 2.5% at the end of 2016 and 3.6% at the end of 2017.

But the futures market didn’t expect any action until the fourth quarter. And even then, they believed rates would end the year at just 0.5%.

Now, the divergence is closing somewhat as the Fed grows concerned about potential downside risks to the economy, including the drag on energy investment and employment from the collapse in oil prices as well as the recent collapse in inflation expectations.

Paul Ashworth at Capital Economics noted as much as traders focused on the following passage from the minutes:

“Many participants indicated that their assessment of the balance of risks associated with the timing of the beginning of policy normalization had inclined them toward keeping the federal funds rate at its effective lower bound for a longer time.”

The trouble, according to Ashworth, is that this could be interpreted two ways. It could be talking about the present, in which case the June rate hike timing is probably off the table. Or it could be a past tense reminder that the reason the Fed has waited so long in this economic cycle is because of the fragility of the recovery — something that isn’t really news.

Economists at Societe Generale focused on the meaning of the word “longer,” noting that it could equal five months — in which case a June rate hike is still a possibility.

The correct interpretation should be revealed, and any confusion ameliorated, when Chairman Janet Yellen presents her semi-annual testimony to Congress starting Feb. 24.

Back to reality: Crude oil collapsed to a $50 handle after the close after the American Petroleum Institute reported a larger-than-expected build in crude oil inventories — reminding investors that despite a recent drop in oil rig counts, production continues to rise to record highs as shown in the chart above. Prices need to move lower to encourage actual production cuts, with Citigroup warning that prices could briefly trade as low as $20 a barrel.

I think the bounce in crude oil, which has helped stocks rally for gains of 5%-plus this month, is set for a reversal as this becomes clear. In response, I’ve recommended the UltraShort Bloomberg Crude Oil (NYSEARCA:SCO) to Edge subscribers — which jumped 5.6% today — as well as put option positions against the United States Oil Fund LP (ETF) (NYSEARCA:USO) to Edge Pro subscribers.

Anthony Mirhaydari is founder of the Edge, an investment advisory newsletter, and Edge Pro, options newsletter.

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