Creeping credit worries and fears of inflation were pushed aside Wednesday afternoon, but those issues will continue to dog markets Thursday.

Weekly jobless claims data is released at 8:30 a.m. The Philadelphia Fed survey and leading indicators are reported at 10 a.m.

There are a few earnings reports Thursday including J.C. Penney

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[JCP  Loading...      ()   ], Williams Cos, Safeway

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[SWY  Loading...      ()   ], MGM Mirage

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[MGM  Loading...      ()   ], Newmont Mining

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[NEM  Loading...      ()   ] and Barrick Gold

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Credit Crunch, Crunch, Crunch

CNBC senior economic correspondent Steve Liesman was the first to report Wednesday morning that investors who put money into certain closed end funds are having a tough time getting their money out. Those funds invested in auction-rate preferred securities, one of the latest casualties of the credit crises. The market for those securities has become highly illiquid as major players stepped aside.

Morgan Stanley late Wednesday joined Gabelli and Blackrock in saying it was attempting to work out a solution with other market participants to return liquidity to the market. It acknowledged that some of its funds were affected by the failed auctions in that market.

John Sprow, senior portfolio manager with Smith Breeden, who follows credit markets, said the credit crisis continues to spread from its origin as a subprime problem. "Specifically, things are not as bad or as volatile as they were in August, but if you look at what someone thought in August -- that this was a subprime problem and we might be through this in six months -- here we are six months later, and it's not gone. It's spread," he said.

"The commercial mortgage backed market has just been destroyed. it's impaired," he said. "There we're more toward early innings."

"We're seeing early round protection buying in corporates," he said. "That's been a lot of the action in the last couple of days."

Sprow said he does not follow the auction rate securities market, a short term market of mostly municipal and student loan issues. But he says the problems with liquidity in that market are another sign of the constriction. "We've gotten through some of these things, but new ones crop up," he said.

Stagflation

It's the new favorite fear word - stagflation. So anything showing inflation rising and growth slowing are immediately read as evidence supporting that trend.

Wednesday's CPI inflation data fed into that formula. It was disappointing, with higher than expected readings for January. The CPI rose by 0.4 percent, above the 0.3 percent expected. St. Louis Fed President William Poole was a bit comforting in his comments to reporters. He said inflation is going in the wrong direction "but it is creeping in the wrong direction, not galloping."

The Fed also flagged rising inflation in the FOMC minutes for its January meeting. As part of its report, the Fed also disclosed that it lowered its 2008 growth rate to between 1.3 percent and 2 percent, from its previous forecast of 1.8 percent to 2.5 percent in November. It also raised its expectations for inflation. It now expects core PCE of 2.0 to 2.2 percent, up from 1.7 to 1.9 percent.

In the minutes, the Fed also said there is risk to growth on the downside. Traders took that to mean the Fed will cut interest rates as necessary, but there were also indications that it will be ready to battle inflation when things improve.

Market Mayhem

Stocks started Wednesday on a negative note, after the disappointing consumer price data. But by midafternoon, stocks were rising and rallied into the close. The Dow was up 90 at 12,427 but not before moving in a more than 230 point range. The S&P 500 was up 11 at 1360, and the Nasdaq was up 20.90 at 2327.10.

Among the worst performers for a second day were telecom shares, off 2.9 percent after a 5 percent decline Tuesday. The stocks are under pressure on concerns a price war among wireless carriers will bite into profits. Of the S&P sectors, tech stocks, boosted by Hewlett-Packard, were the best performers, up 1.7 percent. Energy shares were up 1.5 percent and financials were up 1.6 percent.

Oil prices shattered another record, crossing above $101 per barrel for the first time. Crude hit a record $101.32 before settling to close at $100.74 per barrel. Grains were mixed but some commodities continued to move higher, including gold, up $8 per troy ounce, up 0.9 percent at $934.60.

Treasurys were also on the move, with the 10-year falling 10/32, raising its yield to 3.913 percent, its highest level since Dec. 31. The two year fell 5/32 and is yielding 2.129 percent.

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