14:54 ET ******
Consumer Price Index : Everyone is talking about HWP, DELL, AMAT, and LCOS -- all of which report earnings after the close today (HWP) or tomorrow (the rest). But the three capital letters you should be watching are CPI. The Consumer Price Index report to be released tomorrow morning will have broader market implications than any of these releases. The good news is that another friendly report is an excellent bet. Since February 1996, we have seen the core rate exceed 0.2% just five times. Three of those occasions were in the last three Aprils, which clearly argues for a seasonal adjustment problem. Of the other two, one was due entirely to a tobacco price spike after legislation with the states was settled, and the other was due in part to a smaller tobacco price spike. The recent trend has been even more encouraging -- the core rate has risen just one tenth of a percent in every month so far this year with the exception of the April spike. With the market expecting a 0.2% core rate, it's much more likely that we'll see a downside surprise of 0.1% than an upside surprise of 0.3%. While there was some evidence of upward pressure on "pipeline" inflation in the PPI report, it is important to note that the correlation between the PPI crude and intermediate components and consumer prices is not good at all. In the mid-90s, we saw core crude PPI rising at nearly a 20% pace, but CPI continued to decelerate. So don't expect to see the CPI trend deteriorate just because sheetrock prices are headed higher. Unfortunately, a good number tomorrow will not prevent another Fed tightening next Tuesday, as the Fed believes that future inflation will rise even though the current evidence doesn't support that view. The market should nevertheless benefit short-term from the hope (and that might be all it is) that policy makers will someday recognize that they have overestimated the inflation threat. - GJ |
