Quiet Hawks Enliven Stocks

Markets take off as FOMC minutes sound surprisingly optimistic.
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Traders bought the news Tuesday, diving into stocks after a retrospective look into the

Fed's

thinking on inflation from March eased concerns that rate hikes would accelerate.

At most, the minutes of the March 22 Federal Open Market Committee confirmed rising -- but mild -- concerns about inflationary pressures. Meanwhile, a record February trade deficit trimmed first-quarter growth forecasts. Together with March's weak employment figures, the data and minutes sharply lowered the chances that the Fed will tighten aggressively and risk crushing growth.

The

Dow Jones Industrial Average

rose 59.41 points to 10,507.97, while the

S&P 500

added 6.55 points to 1,187.76. Both indices earlier traded close to their lows of the year touched on Jan. 24. The

Nasdaq

gained 13.28 points, or 0.67%, to 2,005.40, after having neared its six-month low touched in late March.

Bond pits also cheered the FOMC minutes, with the benchmark 10-year Treasury note rallying 16/32 in price while the yield dipped to 4.36%, its lowest level since late February.

The minutes showed what everybody knew already -- that some Fed members were indeed more concerned with growing inflation pressures, and thought that the "measured pace" language might need to be removed to create some wiggle room.

Ahead of the release, the market's rumor mill was calling for a repeat of the February FOMC minutes, which surprised the market with their hawkish tone. Obviously, a surprise is only a surprise if it's unexpected. "

The minutes strike me as not as hawkish as the market had potentially feared," says Wachovia global economist Jay Bryson.

The minutes also revealed that Fed members were satisfied with seeing long-term rates moving higher since their last meeting. That is, they felt Alan Greenspan's "conundrum" remark about stubborn long-term bond prices in mid-February had done its job (except, of course, the 10-year yield fell below its mid-February level on Tuesday).

With inflation fears set aside for the moment, the market's attention is now returning to growth.

The February trade deficit hit a record monthly high of $61 billion, from an upwardly revised $58.5 billion in January, and above forecasts for a rise to $59 billion. Should the trade deficit remain above $60 billion in March, that could easily shave 1.5% off first-quarter GDP growth, economists say.

Together with the weaker than expected March payrolls, it's possible that if the Fed drops its "measured" vow in the near term, it will be to take a pause.

The Fed's red flags about inflation were "much ado about nothing," says Nomura Securities chief economist David Resler, a veteran Fed watcher. If anything, "the Fed's scenarios going forward are going to take more downside risks into consideration."

The impact of higher energy costs on the transportation sector also has been clearly demonstrated: Witness profit warnings from

General Motors

(GM) - Get Report

,

Ford

(F) - Get Report

and

USF

(USFC)

.

More about the impact of rising energy costs on growth may be revealed as the first-quarter earnings season unfolds.

Moody's John Lonski, another veteran Fed observer, expects that the trade numbers together with rising inventories in the economy mean that growth forecasts may have to be ratcheted down -- not only for the first quarter but also for the second. "The Fed's measured pace so far has been about right, but now they may even need to halt tightening sometime soon," he says.

A lot will depend on whether job growth resumes, assuming that weak March payrolls were affected by an early Easter holiday. "Everyone will focus keenly on what is happening on the job front," Lonski says.

Crude oil prices also remain a wild card. They certainly played a big role in raising import prices and worsening the trade picture. But Wachovia's Bryson says that if labor markets continue to tighten and oil prices remain high, employees could at some point push for higher wages.

Slowing China?

On a related note, it was interesting to see the dollar was boosted by the trade deficit figures. Why? Because the trade gap with China, while still substantial at $13.9 billion, actually shrank from January's $15.3 billion. Currency traders had expected a widening deficit with China due to the expiration of quotas on textiles and apparel products.

This might be the result of the Chinese lunar new year in February, which could have boosted domestic demand and slowed production, economists say.

At the same time, however, the International Energy Agency noted a slowdown in energy demand growth from China in the first two months of 2005, compared with the same period a year ago. That growth was 5.4% in the first two months of 2005 compared with 20.8% in the year-earlier period. Whether China's dip in demand is temporary or not, worldwide growth is slowing, the IEA said.

Crude oil futures took another hit on the news. The May futures contract closed down $1.85 to $51.86 a barrel in Nymex trading, the lowest it has been since the last week of February. Unleaded gasoline futures were selling for $1.534 a gallon, down about 2 cents.

Earners and Losers

In earnings news, shares of

Travelzoo

(TZOO) - Get Report

tumbled $8.98, or 19.4%, to close at $37.32, after the company posted below-forecast profits.

Abbott Labs

(ABT) - Get Report

shares rose after the company said first-quarter earnings from continuing operations were up 9% to 58 cents a share, matching Wall Street estimates. Worldwide sales rose 16% from a year ago to $5.38 billion, also matching forecasts. Shares added 15 cents, or 0.3%, to finish at $47.90.

Ameritrade

(AMTD) - Get Report

reported second-quarter earnings of $71 million, or 17 cents a share, compared with $81 million, or 19 cents a share, last year. The 12% decline from a year ago was blamed on lower trading volume. Revenue was $232.5 million in the quarter, compared with $246.8 million a year ago. Analysts were forecasting earnings of 16 cents a share on sales of $231.6 million in the latest quarter. Ameritrade rose 45 cents, or 4.2%, to $11.15.

In keeping with TSC's editorial policy, Godt doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send

your feedback.