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.