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Wednesday: Inflation Worries and the Fed

The consumer price index and the Fed's afternoon statement Wednesday will take on even more importance to markets, after producer prices hinted at a whiff of inflation Tuesday.

Ben Bernanke, Federal Reserve Chairman
AP
Ben Bernanke, Federal Reserve Chairman

The CPI is reported at 8:30 a.m., as are housing starts. The Fed wraps up its two-day meeting with a 2:15 p.m. statement.

While the Fed's final meeting of the year will be a highlight, it is unlikely to generate much, if any news, economists say.

But the fear of inflation still has traders watching to see if the Fed makes any change to its view on inflation or its intentions about when it will change its zero interest rate policy.

Tuesday's PPI report got markets fretting. Producer prices rose a higher than expected 1.8 percent in November, the largest gain in three months. The stock market came under selling pressure, while Treasury rates rose and the dollar firmed on the prospect the report signals an earlier than anticipated move by the Fed to raise rates.

Economists say the Fed has telegraphed its intentions multiple times, and even Fed Chairman Ben Bernanke has signaled there will be no change to the language in the Fed's statement on keeping rates low for an "extended period."

Joseph Brusuelas of Moody's Economy.com said he thinks the PPI shows a temporary firming in prices and not a clear trend toward rising inflation.

"There were a series of factors responsible for a hotter than expected PPI rate. Three-fourths of the move was accounted for by food and energy and underneath on the core, that was a change in the tracking model on how light trucks are priced by the government," he said.

There was a 4.2 percent increase in light truck prices, after a 5.2 percent drop in October.

He said there are seasonal factors affecting energy prices, and the comparisons will also show increases because a year ago commodity prices troughed.

"You're going to see that firming and it's probably going to continue in the early part of 2010, and I expect to see prices level off, and in some cases, fall," Brusuelas said.

If inflation does pick up, he does not expect to see it until 2011 or 2012 but by then the Fed should be hiking rates.

As for the Fed Wednesday, he expects little new. "The statement will remain essentially unchanged. There will be some tinkering around the edges on the economy," he said.

If there is a meaningful change, Brusuelas said it would more likely impact the Fed's purchase of mortgage-backed securities and agency debt. He adds the Fed could say it is drawing out the time frame of its purchases and slowing down the pace.

Brusuelas also expects CPI to come in at 0.2 percent. He sees 0.1 percent for core, which excludes food and energy.

The Dow Wednesday slipped 49 to 10,452, while the S&P 500 slid 6 to 1107, the first declines in five sessions. On Monday, both indices hit new highs for the year. As Treasury prices declined, yields moved higher and the 10-year was at 3.59 percent, its highest level since August.

Financials were the worst performing S&P sector, down 1.7 percent. Wells Fargo's issued $10.65 billion in stock to help it repay the government's TARP program, and traders are waiting for Citigroup to bring its $20 billion deal to market, now expected after Wednesday's bell.

General Electric also added some downward pressure on the market Tuesday when it told investors at an afternoon meeting that earnings and revenues would be flat in 2010. GE is the parent of CNBC.

Oil meanwhile broke out of its doldrums Tuesday, ending a nine-session losing streak to close at $70.69, a gain of 1.7 percent.

Exxon Mobil's $31 billion acquisition of XTO Energyannounced Monday, is already drawing government scrutiny. The Energy and Environment subcommittee of the House Energy and Commerce Committee plans to hold a hearing on the deal, which would create the largest natural gas producer.

Exxon's deal puts the total of takeover deals year-to-date at $600 billion plus, well below the 2006 record of $1.4 trillion. 2009 also marks the third year of decline in merger activity, according to Richard Peterson, director of markets credit and risk strategies at Standard and Poor's.

Peterson expects 2010 to be a better year for deal making. "You have an improving economy and companies recognizing that there will be slow growth, and that will mandate companies to build market share by acquisition," he said.

— Questions? Comments? marketinsider@cnbc.

  • Patti Domm

    Patti Domm is CNBC Executive Editor, News, responsible for news coverage of the markets and economy.

  • A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

  • CNBC Personal Finance Correspondent

  • JeeYeon Park is a writer for CNBC.com. Follow her on Twitter: @JeeYeonParkCNBC

  • Rick Santelli joined CNBC Business News as an on-air editor in 1999, reporting live from the floor of the Chicago Board of Trade.

  • Senior Producer at CNBC's Breaking News Desk.