Interesting Market Wiggles
Jude Wanniski
April 29, 2005


We almost never comment on a few wiggles in the stock market, although we watch them all. But the movements of the futures market last night after midnight into the opening this morning are just too interesting to pass up. S&P futures were down from the close in the evening hours last night, flat at midnight, then shooting straight up 10 points in the following hour. DJIA futures followed the same track and were up 57 points this morning for a few minutes before sliding back into red ink. What was going on?

The midnight move was clearly triggered by the vote in the U.S. Senate at midnight to approve the Budget Resolution the House had approved earlier in the day. As the NYTimes reported: "The House and Senate broke a lengthy impasse over federal spending Thursday night, narrowly adopting a $2.56 trillion federal budget for 2006 that aims to trim the growth of Medicaid by $10 billion over five years, add $106 billion in tax cuts and clear the way for oil drilling in an Alaskan wildlife refuge. The back-to-back votes - 214 to 211 in the House and 52 to 47 in the Senate -- ran mostly along party lines." The market would not have jumped if it had been clear the resolution would pass, but Vice President Cheney was on hand in case he had to break a tie vote. The resolution now clears the way for the extension of the 2003 tax cuts in capital gains and dividend income, which otherwise could not have cleared the Senate without a three-fifths supermajority.

That was the good news. The bad news greeted investors on page one of the WSJournal by its Fed correspondent Greg Ip, who strung together several quotes from Fed officials in recent speeches indicating "Fed Sees Inflation As Bigger Threat Than a Slowdown."  The NYT ran a piece by Eduardo Porter on its business page that more or less said the same thing but was not as conspicuous or definite as Ip`s. His last graph: "Fed officials have said a neutral funds rate is somewhere between 3% and 5%, and by next week, the rate is expected to be in that range. But no Fed official has yet suggested that rates are close to neutral, which would imply the Fed was almost finished raising them."

Given the dismal report yesterday that first quarter GDP grew at only 3.1%, well below expectations going into the quarter, with the NASDAQ hitting its low for the year, we might expect there to be more division inside the FOMC when it meets next week. The markets continue to tell the Fed that they are not happy with the interest-rate hikes, which inevitably lead to slower growth and more inflation, not less. "Stagflation Fear Puts a Chill Into Blue Chips," reads the headline on the front page of the WSJ "Market & Investing" page C-1, with E.S. Browning writing: "The bears are closing in on Goldilocks."

My guess is that one of the FOMC members will take the lead in making the suggestion that perhaps 2.75% is enough. Fed Chairman Alan Greenspan would not be the first out of the box, but would lay back and see what the rest of the crew says. The Greg Ip piece indicates the voting will be to fight "flation" instead of "stag," a course that will bring more "flation" and more "stag." The most likely break would have come from Governor Ben Bernanke, who has already publicly indicated the neutral ff rate might be below 3.5%. But he has recused himself from the vote because he has been nominated to be chairman of the President`s Council of Economic Advisers and is awaiting confirmation hearings. I`d also think that the new Dallas Fed President, Richard Fisher, would raise the question at least, but as the new kid on the block (as of April 1) he would not break ranks the first time out. I certainly would not expect a vote to pause at 2.75%, but a vote or two against raising it to 3% might set the stage for a pause in June.