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Five Things You Need to Know: FOMC Minutes Rehash; Importing Inflation; Where's the Oil?; Slowdown? What Slowdown?; Organic Wal-Mart? Maybe Not


What you need to know (and what it means)!


Minyanville's daily Five Things You Need to Know to stay ahead of the pack on Wall Street:

1. FOMC Minutes Rehash

The markets didn't exactly appreciate the FOMC Minutes "clarification" yesterday. It was so much more fun pretending the Fed is actually in control of inflation and closely watching economic data to determine monetary policy. The reality is far more worrisome.

  • Here is a link to the text of the FOMC March 20-21 Minutes.
  • But here is perhaps the key paragraph:

    "The FOMC's decision at its January meeting was in accord with market expectations, but the accompanying statement reportedly was read as a sign that the Committee was more sanguine about inflation prospects than in December, and the expected path for monetary policy beyond 2007 edged lower. Policy expectations declined a bit more in the wake of the Chairman's semiannual monetary policy testimony, which apparently reinforced investors' beliefs that the FOMC anticipated gradually diminishing inflation pressures. Economic data releases were somewhat weaker than expected on balance over the first few weeks of the intermeeting period, and policy expectations moved appreciably lower on net by mid-February. Financial market volatility increased sharply in the second half of the intermeeting period amid an apparent pullback from risk-taking that was reportedly spurred by mixed news on domestic economic activity, mounting concerns about the subprime mortgage sector, and significant declines in foreign equity prices. On net over the intermeeting period, investors tilted their anticipated path for monetary policy beyond mid-2007 down substantially, and yields on two- and ten-year nominal Treasury securities fell 30 to 40 basis points. Yields on inflation-indexed Treasury securities generally declined somewhat less than their nominal counterparts, leaving inflation compensation slightly lower across the term structure. Broad stock price indexes dropped several percent on net over the period. Yields on investment-grade corporate bonds fell about in line with those on Treasury securities of comparable maturity. In contrast, yields on speculative-grade bonds declined only modestly, leaving risk spreads noticeably wider, albeit still narrow by historical standards."
  • This paragraph is key because it shows what market-based and market expectations-based evidence the Fed considered in finding it necessary to make changes to its policy statement, despite all economic evidence to the contrary.
  • Confused? Don't be.
  • It's not the economy itself that matters to the Fed, it's the market's expectations about what the Fed will do next that matters to the Fed.

2. Importing Inflation

Prices of goods imported into the U.S. rose last month by the most since May 2006, according to the Labor Department.

  • Led by higher costs for petroleum and natural gas, prices of imported goods rose by 1.7% in March, the Labor Department said.
  • Expectations were far lower at 0.6%.
  • The price of imported petroleum and petroleum products jumped 9% in March after gaining 0.6% the prior month.
  • Apart from energy price increases, imported inflation was a more muted 0.2%.
  • Imported agriculture prices actually fell in March. Foods, feeds and beverages declined 0.1%, the first decline since 2006.
  • U.S. exported agriculture exports rose 2.1%, however, which means we're doing our part to export our inflation elsewhere.

3. Where's the Oil?

The International Energy Agency warned yesterday that output by the Organization of Petroleum Exporting Countries (OPEC) as it the lowest level in more than two years, the Wall Street Journal reported.

  • The IAE in its monthly report on the oil market noted what it called "astonishing" demand growth in China and blamed the decline in global oil stocks largely on production outages and OPEC cuts.
  • OPEC's daily output in March fell to a little more than 30 million barrels, the lowest since January 2005, due largely to production outages in Nigeria and maintenance issues in Saudi Arabia.
  • OPEC agreed in principle to reduced output production quotas by 1.7 million barrels a day last November.
  • According to the Journal, Lawrence Eagles, the IAE report's editor, said: "Product stocks are falling largely because of seasonal refinery maintenance, but also we are not seeing the normal seasonal build in crude inventories that we typically see at this time of year."
  • Meanwhile, the IAE highlighted a 12.3% burst in demand in China in February - mostly due to transportation increases during the Chinese New Year holiday.
  • Here's an interesting kicker at the end of the piece, however: "China, [the IAE said], wouldn't be significantly affected by a U.S. economic slowdown because its economic growth is built on internal investment and not primarily goods and services consumption.
  • Which leads us to today's Number Four.

4. Slowdown? What Slowdown?

The International Monetary Fund yesterday predicted the world economy will grow at a heady 4.9% pace this year and next year.

  • If the IMF forecasts come true, it would extend the world economy's streak of consecutive years of 4%-plus expansion to a six years - a feat which hasn't occurred since the 1960s, according to the Wall Street Journal.
  • As goes the U.S. economy, so goes the world? Not anymore.
  • As the IAE note on China's ability withstand a U.S. economic slowdown in its report on oil stocks, the U.S. economy is no longer the global economic engine it once was.
  • At least not according to IMF projections.
  • The IMF predicts the U.S. economy will grow at a slowing 2.2% this year, down from last year's 3.3%.
  • The 2.2% projection is a sharp downgrade from the IMF's previous forecast for 2.9% growth.
  • For those keeping track at home, that puts the U.S. on par with two other aging economies; Japan and the Euro-Zone.

5. Organic Wal-Mart? Maybe Not

After mapping out an aggressive plan to offer organic food items last year, Wal-Mart appears to be slowly backing away from it according to farmers.

  • A number of organic farmers across the country say that Wal-Mart has backed off of aggressive plans to offer more organic foods, according to BusinessWeek.
  • After placing large orders for organic apples and juices last year, the retailer is cutting back or stopping orders altogether, farmers say.
  • BusinessWeek says Wade Groetsch, president at the Florida juice producer Blue Lake Citrus Products, stopped shipping his organic orange-tangerine blend to Wal-Mart after a few months.
  • "The sales there just weren't enough to justify our costs of packing and shipping," he told the magazine.
  • Last year Wal-Mart made headlines by announcing an aggressive push into selling organic items, boldly claiming they would offer them at "Wal-Mart prices."
  • However, the retailer soon ran into trouble from organic watchdog The Cornucopia Institute, which claimed Wal-Mart was defrauding its customers by mislabeling non-organic products as organic.
  • The reality for Wal-Mart, however, may simply be that the retailer's customer base is too price-sensitive to make organic product offerings attractive.
  • BusinessWeek notes that consumers who go to stores like Whole Foods Market (WFMI) and Wild Oats (OATS) are less price-sensitive, willing to pay more for perceived quality.

No positions in stocks mentioned.

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