For the second day in a row, markets began with a rough start yesterday but made steady climbs throughout the afternoon and ended on positive tones. This morning, equity futures continue looking upwards a day after Fed chairman Ben Bernanke said the recession is “very likely over.”
China’s Shanghai Index dropped 1.12% earlier this morning, but most other equity markets are enjoying a mid-week rally. In Asia, the Nikkei closed up 0.52% and the Hang Seng jumped 2.57%. In Europe, the FTSE 100 is currently up 1.44%, while the CAC-40 is up 1.38% and the DAX is trading 0.94% higher.
With renewed appetite for equities, the US dollar is weaker this morning, falling to levels not seen in almost a year. Commodity prices are mostly higher with oil as the exception, as WTI crude trades down 16 cents at $70.77 per barrel. Treasuries, contrary to trend, are rallying across the curve with the benchmark 10-year yield down two basis points at 3.45%.
It’s a busy day in terms of data so let’s get to the schedule.
8:30 ― Rising energy prices should push the Consumer Price Index up 0.4% in August, though forecasts are as low as -0.1% as lower priced vehicles sold in the cash-for-clunkers program could have a pulldown effect.
The less volatile core component is set to post a +0.1% advance, suggesting that underlying prices remain sluggish, in line with wages. Some analysts believe core prices could actually deflate in the month, which hasn’t happened in 27 years.
“Ongoing economic slack, which can be seen in the form of the high unemployment rate, low capacity utilization and declining wages, will continue to emit downward pressure on prices,” said the research team at BBVA.
Ian Shepherdson, chief US economist at High Frequency Economics, said core inflation is settling in at +0.1% monthly trend, though some temporary factors could cause it to rise above that underlying trend.
“The main upside risk for today’s core number is the used car component, which accounts for only 2.1% of the core but can swing wildly form month to month,” he said. “Used auto prices have rebounded strongly after their post-Lehman collapse, but very little of that rebound has appeared in the CPI thus far. If the core number of August tips over to 0.2%, used auto will be the first place to look for the overshoot.”
As for the headline figure, Shepherdson said rising oil prices, which caused the producer price index to jump 1.7% yesterday, won’t have an impact until on consumer prices until next year.
9:15 ― The sentiment-based ISM manufacturing survey indicated that conditions were improving in August with new orders and production each posting advanced. That should be confirmed in the Industrial Production report, which is set to jump 0.7% in the month following a 0.5% upscale in July. Two months of increases would help the third quarter see growth mode, but in the medium-term analysts remain cautious about the outlook.
“Inventories and capital spending (capex) need to show strong growth for this nascent economic recovery to gain traction, because consumer spending is expected to lag in this cycle, owing to structural headwinds—high debt service, high debt to income and low savings,” said economists at Deutsche Bank. “In the past, recovering production and a bottoming in capacity use have always been a harbinger of a pickup in capex.”
1:00 ― The Homebuilder Sentiment gets little market attention, but those in real estate will want to see if confidence improves for the fourth straight month in September. The index is currently at 18, the highest level since June 2008, but overall that’s still, well, abysmal. Not until inventories are severely cut back will homebuilders have reason to be optimistic about the larger picture.
