The market had a literally almost unbelievable week. It surged on FOMC minutes that in fact brought little new and it ignored oil going over $75 a barrel.
The S&P was down 4 points on Monday as oil went over $70 a barrel. Then, the momentum returned in a big way.
The S&P surged 22 points on Tuesday as the Fed released the minutes of the March 10 FOMC policy committee meeting. The market was up sharply even ahead of the afternoon release, anticipating good news. It got it, or at least found it.
The focus was on the statement that "most members thought the tightening process was likely to be near the end as some expressed concerns about the dangers of tightening too much." This was considered a positive statement even though virtually all market participants already thought the end was near - it is simply a matter of how near. There had also already been public statements from some members about the risk of going too far.
Further noted was the statement that members were concerned that the policy statement "could be misconstrued as suggesting the Committee thought that several further tightening steps were necessary." Several means "three" in any dictionary. Virtually no one expected three more rates. So, this really isn't anything new. Yet, it was widely quoted as showing a conciliatory tone.
The fed funds futures reacted rationally. Previous to the minutes, the implied expectations were that a rate hike on May 10 was likely. A second rate hike after that was considered about 60% likely. After the minutes, that dipped to a bit below 40%. In other words, there was only a modest change in expectations.
The stock market rally based on the minutes was perhaps fueled by the elimination of fears that "several" more rate hikes would be likely, or that the Fed showed concern about economic growth slowing too much. In any case, it was an impressive reaction that reflected just how sensitive the stock market is to the interest rate outlook. It also reflected a continuing underlying bullishness.
The momentum continued on Wednesday and Thursday as the S&P managed further small gains. The S&P lost all of 0.18 points on Friday even though on that day oil shot above $75 a barrel. That showed amazing (unbelievable?) resilience.
It was a busy week for earnings. About one-third of the S&P 500 companies reported. Almost 70% of companies reported better than expected earnings. That figure typically runs about 65%. Aggregate earnings are on track for about 12% growth. That is a bit above the 10% growth expected as the quarter started. It is also normal for the total gain to run several percent above expectations.
Strong reports came across many sectors and included Google, Citigroup, Amgen, IBM, Coca-Cola, General Dynamics, ETrade, and 3M. Even the pharmaceutical sector produced good reports. Not so the automotive sector, as General Motors and Ford continue to struggle.
The economic reports were mixed. March core PPI was up just 0.1%, but the March core CPI was up 0.3%. The core CPI is up at a 2.8% annual rate the past three months compared to a 2.1% year-over-year gain. The market seemed not to care about this possible uptick in inflation. March housing starts dipped, but unemployment claims showed the labor market remains strong.
The market tone was clearly upbeat this week. It might even be called pollyannaish. The March core CPI at 0.3% and oil surging through $75 a barrel caused virtually no concern at all. Neither did the fact that the 10-year yield remained above 5%. Instead, the market is hoping that the Fed won't raise rates so much as to significantly curtail the continuing strong earnings gains.