Markets are on inflation watch Thursday.
CPI is reported at 8:30 a.m., at the same time weekly jobless claims are reported. The Philadelphia Fed survey and leading indicators are both at 10 a.m. The Treasury also auctions $9 billion in new 30-year inflation-protected securities, known as TIPS.
But investors' obsession with inflation puts the spotlight on CPI ahead of the opening bell. Core CPI, excluding food and energy, is expected to increase 0.1 percent, and the headline number is expected to rise 0.3 percent.
A surprise increase in PPI Wednesday sparked speculation that consumer prices may be rising faster than economists expect. Producer prices rose 0.8 percent in January. The core reading of 0.5 percent, excluding food and energy, increased at the fastest rate in more than two years. Economists had expected a gain of 0.2 percent.
Stocks Wednesday continued their march higher with the Dow up 61, at 12,288. The S&P 500 gained 8 points to 1336, now more than double the intraday low of 666 it hit in March, 2009. Treasurys were lower, with the yield on the 10-year rising to 3.625 percent. Gold finished at a one month high of $1374.70, up $1.10 per troy ounce.
The dollar weakened, down 0.7 percent against the euro, which was at 1.3570.
The Fed has worried more about deflation than inflation, and it reported a constrained outlook for inflation Wednesday. The Fed expects its favored personal core expenditures (PCE) index, excluding food and energy, to increase 1 to 1.3 percent in 2011. That compares to its previous estimate of 0.9 percent to 1.6 percent for the year.
"I have a high 0.1 for the core (CPI), but I could easily see a 0.2. Obviously 0.2 would be a real shot across the bow, particularly in light of these FOMC projections today which I thought were pretty surprising. They narrowed and lowered the range for the year," said Stephen Stanley, chief economist at Pierpont Securities.
"They're putting a lot of faith in the whole output gap framework and the notion that with the slack in the system, inflation is not going to pick up. As I see it, there is just accumulating evidence to the contrary."
Stanley said the PPI was concerning in that the increases were broad based, as opposed to jumps in one or two categories. "Whether that translates to the consumer level is yet to be seen," he said.
Nomura Americas Treasury Strategist George Goncalves does not believe the ramp up in commodities inflation will end up in a big hike in consumer prices. "We are of the view that there's a growing breakdown between CPI vs PPI, and that corporations are not passing on inflation to consumers. That means they are absorbing the costs, and we think tomorrow shouldn't break that trend," he said. "It's still too early in the trend to see pass through of inflation from the commodities side to the consumer."
Even without CPI, markets will have plenty to focus on Thursday. "I think tomorrow's action-packed regardless. We were going to say it's pretty much everything but the kitchen sink between the Fed speakers, the CPI and the TIPS auction," he said.
"We need to see claims continue to improve, like it did last week, which would help ease the minds of people that the non farm payrolls number won't be another horrendous one like it was last time. It's come down to job creation and the pass through on inflation to determine the next leg of where the bond market goes," he said.
Traders are also watching regulators as they appear before the Senate Banking Committee at 10 a.m. to discuss the progress they are making on implementing the Dodd-Frank Act. Fed Chairman Ben Bernanke, FDIC Chair Sheila Bair, SEC chair Mary Schapiro, and John Walsh, acting Comptroller of the Currency, are among the speakers.
Treasury Secretary Tim Geithner testifies again on the federal budget before the Senate Budget committee, at 10 a.m. The House Financial Services Committee holds a hearing on the Fed's plan on interchange fees. Fed Gov. Sarah Raskin testifies.
The House of Representatives is expected to vote late Thursday afternoon on the continuing budget resolution which basically keeps the government funded. The legislation includes billions in cuts to hundreds of programs for the remaining seven months of the federal fiscal year.
Earnings are expected from Apache, Barrick Gold, Dr. Pepper Snapple, Duke Energy, Nestle, PG&E, Waste Management, and Williams Cos, which announced plans to split in two. Nordstrom, Clearwire and CF Industries report after the bell.
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