The Federal Reserve released its inner musings from its April 26-27 meeting yesterday, May 18.

No surprises in these minutes.

Ben Bernanke’s Fed continues to worry about the strength of the recovery in the U.S. economy, and would prefer to do nothing to unwind its balance sheet until it sees signs that the recovery is more solid than it looks right now.

Members spent as much time discussing how to communicate any eventual sale of its holdings and the first increase in short-term rates as they did debating the timing of those moves.

As Bernanke has said repeatedly recently, the first move to reduce the Fed’s huge balance sheet—totally some $2.7 trillion as a result of buying mortgage-backed securities and Treasuries as part of its two programs of quantitative easing—will be allowing some of the Fed’s $900 billion in mortgage-backed securities to mature without reinvesting the cash in new Treasuries. (Right now the Fed is reinvesting the proceeds in new debt instruments as holdings mature.) That would begin to shrink the Feds balance sheet.

The second move would be a decision to let the Fed’s $1.5 billion in Treasuries mature without reinvesting the proceeds. Read more

April’s 1.3% annual core inflation says the Fed will stick to its current course

No reason for the Federal Reserve to change course in this data.

This morning, before the markets opened, the Bureau of Labor Statistics released April inflation numbers for the U.S. economy. The headline Consumer Price Index climbed 0.4% for the month. That was a slight deceleration from the 0.5% increase in March. The core inflation rate, which excludes food and energy prices on the grounds that they’re so volatile (which is totally logical because consumers, scared of volatility, don’t eat or drive), rose 0.2% in April after climbing 0.1% in March.

The headline inflation number was exactly what economists were expecting, according to Briefing.com. The consensus among economists had called for a 0.1% increase in core inflation.

Even the categories adding the most to inflation showed a deceleration in price increases in April. Read more

Plotting the bottom for emerging market stocks

So where’s the bottom in emerging markets stocks? Or if picking the absolute bottom is too hard (and it is most of the time) when is enough risk out of these stocks to justify some serious bargain hunting?

Emerging market stocks have had the “emerging” beaten out of them in the last month. Brazil’s Bovespa index is down 7.8% from the April 5 local high to the close on May 6. India’s Sensex 30 index is down 6% from its April 4 local high to the close on May 6. China’s Shanghai Composite index is down 6.3% from its local high on April 18 to the close on May 6.

But this recent drop is just an accelerated version of the decline that most of these markets have suffered since they peaked back in the first half of November. From those November highs the Bovespa is down 10.4%; the Sensex is down 11.2%, and the Shanghai Composite is down 9.0%.

Since the beginning of the year I’ve been saying that the U.S. market will be the best performing stock market in the world in the first half of 2011. And it has been with the Standard & Poor’s 500 index up 5.3% even after the carnage of the last week.

But I’ve also been saying that investors should rotate into emerging market stocks, beginning slowly in May or so, because they would outperform in the second half. On current performance you’re entitled to ask “Oh, yeah? When?”

In the last few weeks I’ve been writing that “May or so” should definitely emphasize the “or so.” Today’s post is my attempt to explain why the timetable for rotating into emerging markets has slipped but remains fundamentally intact. And to give you some concrete guidelines for planning your rotation into emerging market stocks.

First, a quick summary of everything that was going to fall into place to make emerging markets outperform. Read more

Sinking euro and rising dollar turn commodities retreat into a rout

Just what commodities and commodity stocks didn’t need today: A drop in the euro has produced a stronger dollar, which is, in turn, pressing commodity prices lower. Much lower. Gold fell by $50 an ounce today. Oil broke below $100 a barrel for the first time since March. Silver fell by another 10%.

The drop in the euro is a result of the European Central Bank’s decision not to raise interest rates at today’s meeting but instead to instead wait until at least June.

A delay until June shouldn’t have come as a surprise to anyone since I think bank President Jean-Claude Trichet signaled that June was the likely next stop on the interest rate train when the European Central Bank raised its benchmark interest rate to 1.25% on April 7.

That was the first interest rate increase from the European Central Bank since 2008. And the markets saw it as the first of a series of increases to fight inflation that hit 2.8% in April, well above the bank’s target of close to but below 2%.

On that conviction, markets bid up the euro against the U.S. dollar. The Federal Reserve seems unlikely to raise U.S. interest rates until late in 2011 at the earliest and that meant euro interest rates would be climbing while U.S. rates were sitting still for six months or more. And that increased the attractiveness of the euro against the dollar.

Today’s lack of action by the European Central Bank disappointed not only those who had read the bank’s April move as a promise of another increase in May, but also worried those who are counting on the bank to move strongly against inflation even if with a delay. In today’s statement Trichet didn’t use the phrase “strong vigilance” that has come to be the bank’s signal of an impending rate increase. Instead he said only that the bank will monitor inflation risks “very closely.” Some investors have concluded from that the bank doesn’t intend to raise rates in June either but will instead wait for July.

That worries the financial markets since it might indicate that the bank is so concerned about the debt crisis in Greece, Ireland, and Portugal that it is willing to tolerate more inflation in order not to further stress those economies. With no end to the economic difficulties in sight that possibility suggests that the European Central Bank might be less than its usual inflation-fighting self for the foreseeable future.

I don’t know how the central bank disproves that worry except by raising interest rates in June or July. Until then, the euro is going to have quite a few days like today. Which, of course, would be good for the dollar and not so good for commodities.

U.S. stocks are on hold until the Fed and Bernanke speak on interest rates at 2:15 ET

Today the Federal Reserve tries something new.

After the Fed’s Open Market Committee meets and issues its usual 150-word cryptic explanation of its view on the economy at 12:30—Roman augurs reading the entrails of the daily sacrifice had it easy—Federal Reserve chairman Ben Bernanke will give a press conference.

I expect him to dance around all the questions that the Fed doesn’t want to answer: When will the Fed start to raise interest rates? How is the Fed planning to reduce its balance sheet after it ends its QE2 program of buying Treasuries in June?

But I do expect that he will explain his reasons for thinking that inflation is less of a danger in the United States than the financial markets do. Read more