New data on inflation at the consumer level and oil inventory numbers are two reports that will have a hold on Wednesday's markets.
The consumer price index is released at 8:30 a.m. CPI is expected to rise 0.3 percent, or 0.2 percent excluding food and energy. Oil and gasoline inventory data is released at 10:30 a.m., and is expected to show supply of oil at about 2.3 million barrels.
Deutsche Bank chief U.S. economist Joseph LaVorgna says April CPI is not likely to be as important as May or June, which may show the increased pressure of rising energy prices.
"If tomorrow's number turns out to be weak ....people won't care," he said. "They're just going to treat it as the calm before the storm. But if you get a stronger-than-expected number, people are going to really freak out."
Lehman, in a note said it expects CPI to rise 0.2 percent. It notes that gasoline prices fell in April and that could be a factor. But we know those gasoline prices have been on the rise again, and oil is being watched very closely.
Boiling Oil
Oil again bubbled up Tuesday, gaining 1.3 percent to finish at $125.80 per barrel. According to Dow Jones, oil is now $21.65 or 20.8 percent above its inflation adjusted record high U.S. price of $104.15, set in April, 1980. Oil is up 11 percent since the beginning of May and is up 31 percent from January 1.
The stock market turned in a mixed performance Tuesday with financials giving up the most ground. The Dow slipped 44 to 12,832, while Nasdaq rose 6.63 points to 2495.12. The S&P 500 was close to flat, down 0.54 points at 1403.04. The dollar moved up 0.39 percent to a level of $1.5478 per euro. The yield on the 10-year rose to 3.909 percent as selling hit Treasurys. The two -year is yielding 2.477 percent.
Delayed Reaction
CNBC's global energy analyst Dan Yergin, chairman of Cambridge Energy Research, says we are still not seeing the real impact of $125 oil, and that it will take a while for those prices to filter down and move through the economy. "It's just beginning to unfold," he said.
Yergin says he spends a lot of time speaking with CEOs and right now energy is their top concern. "This cost factor is now front and center for CEOs, no matter what kind of company. Whether it's an energy intensive company or whether it's a company worried about whether consumers are coming into their stores."
"Energy efficiency has a priority now that I've never seen before, and CEOs and senior managers really want to discuss it in a serious way. It's affecting investment decisions and their purchasing decisions as well as their concern about what their customers are doing," he said.
Yergin says the high price of oil is gradually affecting decision making, and high prices are not now having the impact of oil shock of the 1970s. Yet, he says if prices remain high and go higher, there's likely to be an almost oozing type of oil shock.
"It may be demand shock, dollar shock. It is an oil shock . ..and anything over $110 really is a shock," he said.
LaVorgna says he thinks demand destruction will ultimately stop the rise. Yet, "people aren't going to be sure what this energy price rise does," he said. Does it kill the consumer and lead to a deeper economic downturn? "Or does it unleash inflation and cause the Fed to raise rates?" he said.
LaVorgna shared an interesting chart he created. He looked at how oil prices compared to the share of household spending on energy in the GDP.
For first quarter, "you can see that the ratio is 4.7. That tells you we're probably going to go up to something roughly like a 6 percent ratio right now," he said, noting the price of oil was just about $98 per barrel for first quarter. The ratio interestingly stayed just below six percent when oil prices were at highs in the early 1980s.
In a move that could impact oil prices, both the House and Senate Tuesday voted to suspend crude deliveries to the Strategic Petroleum Reserve while fuel prices are high. The House voted to stop adding to the emergency stock pile if oil is above $75 per barrel. The votes in favor of the legislation were apparently large enough to override a presidential veto.
Earnings Central
Some important earnings are on the calendar Wednesday morning, including Deere, Freddie Mac and Macy's.
Corporates
We've been watching the explosion in new corporate debt issues in the last couple of weeks, and Tuesday was very active. "Just today, more than $10 billion in corporates were on deck to price -- from two names AIG and Philip Morris," said CNBC's Rick Santelli. The AIG issue was an unusual hybrid with a 50-year maturity.
"Investors are getting more comfortable taking on more risk and are reaching for better yields," said Santelli.
Stocks to Watch
Speaking of AIG, its 11 a.m. annual meeting promises to be eventful after former CEO Hank Greenberg's campaign calling for change at the company. CEO Martin Sullivan will no doubt also feel the heat from other shareholders after two large quarterly losses. Comcast also holds its annual meeting Wednesday.
Yahoo! Carl Icahn has zoned in on that company and may launch a proxy fight, according to CNBC's David Faber, who was first to report on Icahn's interest. Icahn should make up his mind before Thursday's filing deadline. There's been plenty of speculation that Yahoo would face a proxy fight after it snubbed Microsoft's takeover offer and the software giant walked away. You can bet that Icahn is itching for a battle with Yahoo management even if he doesn't start a proxy fight.
Investors meanwhile punished Hewlett-Packard in Tuesday trading for its $13.9 planned acquisition of EDS for $13.9 billion, as analysts questioned the efficiencies of the deal.
In after the bell activity, Applied Materials beat earnings estimates but had a cautious outlook. The stock fell. Electronic Arts did much better than expected and said its revenues would be than better than expected, but its earnings per share guidance for the year was well below estimates.
Fed Circuit
Fed speakers are again out in force. Boston Fed resident Eric Rosengren speaks at a Boston Fed conference at 8:30 a.m. Fed Governor Randall Kroszner speaks at the same conference on risk management and Basel II at 9:15 a.m. San Francisco Fed President Janet Yellen gives "an introduction to the FOMC" in Washington state at 4:40 p.m.
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