Wall Street is on inflation watch Tuesday. In fact, it is beginning to be on inflation watch everyday. The producer price index, the measure of inflation at the producer level, is released at 8:30 a.m. and is the only item on the economic calendar for Tuesday.
"I think I'm pretty much on consensus which is 0.4 percent on the headline (PPI) and 0.2 percent on core ... It should not be hugely market moving," said Michael Darda, chief economist and director of research at MKM Partners.
But Darda says when looking at the PPI, along with some other measures, there's a clear pickup in inflation. "I'm very bullish on stocks and the economy for the next six to 12 months, but I think the inflation threat is real," he said.
"There are different levels of inflation expectations that are starting to send warning signals," he said. For one, the survey measures of inflation expectations jumped last month. The University of Michigan Consumer Sentiment data showed that year ahead inflation expectations rose to 5.2 percent in May, its highest level since 1982.
"The five-year inflation expectations survey jumped to the highest level since 1996," he said. The Cleveland Fed's 10-year TIPS spread, adjusted to correct for illiquidity in the TIPS market has been hovering in a range well above 300 basis points since February and remains close to an all time high.
"If you add it all up, and we have headline CPI and PPI inflation that's way outside historical ranges, I think there's a significant threat from the inflation side. I don't think it's going to to take the stock market down but it is going to be a problem going forward and the Fed's going to have to respond to it," he said.
That last comment was a theme in Citigroup chief U.S. strategist Tobias Levkovich's Monday note.
Levkovich said there's growing worry in the investment community that inflationary expectations could become "unanchored."
"Such a breakdown in expected inflation could force the Fed to reverse its accommodative monetary policy actions and thereby cause equity market problems," he wrote.
Levkovich says, however, there are trends that indicate prices could be contained. He said because of slowing business conditions in the U.S., Europe and Japan, commodity price pressures should abate. Also companies are not easily able to pass through cost increases and they continue to discount.
What to Watch
There are a few earnings of note Tuesday, including Home Depot and Target before the bell. Staples, which launched a $2.3 billion hostile bid for Dutch Corporate Express NV, also reports Tuesday ahead of the market open. Hewlett-Packard reports after the bell.
Fed Vice Chairman Donald Kohn speaks at 9 a.m. on the economic outlook. The U.S. Senate will vote on housing legislation. The Senate Committee on Homeland Security and Governmental Affairs, meanwhile, holds a hearing on financial speculation in the commodities markets with a focus on whether hedge funds are contributing to food and energy inflation.
J.P. Morgan holds its annual meeting Tuesday at 10 a.m. The NCTA cable show continues in New Orleans.
The Dow scored triple digit gains early in the day but finished up just 41. The Dow closed above the magic 13,000 mark, at 13,028. The S&P 500 was up 1.28 or 0.1 percent at 1,426, above the bottom rung (1,420) of the level watched by some traders and just below the top of the range (1,430). Nasdaq was down 12.76 percent or 0.5 percent, after cautious comments from SanDisk reversed some early bullishness on tech.
Andrew Burkly, a technical analyst with Brown Brothers Harriman wrote today that the move across the S&P 500's 200-day moving average ignites the debate about whether we are in a bull market or a bear market rally. "In our view, a period of backing and filling appears likely at this stage of the advance as stocks digest recent gains," he wrote. He also notes that the market is more overbought than not, but after a period of consolidation, stocks should continue "their bull market advance."
The Dow Transports pushed to a record high Monday on the strength of rail stocks and are more than 20 percent above the March low. "Transport stocks are moving up which is a signal of stronger growth," said Darda.
"The yield curve is getting very steep now, and commodities prices are rising. That's' the message of stronger growth and higher inflation ... so growthflation, as opposed to stagflation or deflation. That's what the transports are telling us," he said.
Oil closed at a new record, above $127 a barrel. Gasoline prices at the pump meanwhile rose to a new high, with Americans now paying $3.79 per gallon for regular gas, according to the American Automobile Association.
Gold ended higher Monday as did wheat, but other commodities - corn, aluminum, copper - all closed lower. Gold gained $6 per troy ounce to $905.
Who to Watch
There are some important energy-related interviews on CNBC Tuesday. Boone Pickens will join Becky Quick in Dallas on "Squawk Box." Then top officials of Brazil's Petrobras and Russia's Gazprom will appear on "Closing Bell" with Maria Bartiromo.
And Warren Buffett continues his European tour, stopping in Lausanne, Switzerland. The CEO
Some Things to Consider
- The Vix fell early Monday to its lowest level since July, passing its October low for the first time on an intraday basis. Bob Pisani's producer Robert Hum points out that when the .VIX bottomed in July and October, the S&P was at its highs.
- The sector bid up the most Monday was the safe haven, high yielding utility sector. This was after a tech rally failed. That tech rally was pushed Monday morning by some heavy weight Wall Street firms -- both J.P. Morgan and Goldman Sachs analysts were positive on tech Monday. Tech was the worst performer on the day, down 0.54 per cent.
- The stock market volume remains light. Birinyi Associates, in a note today, says volume has not been above average since April 1.
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