For the day ahead, May 10, 2017, I expect traders will take their lead from several inflation indicators. Five data points look to me to give direction, including PPI and CPI data from China, discussion from two Federal Reserve men, plus inflation expectation data from the Atlanta Fed's business survey and import/export price data. Tomorrow, the Bank of England (NYSE:BOE) will weigh in with its monetary policy statement and the rest of the week is in fact full of similar data.
A fiery price outlook could temper enthusiasm given it could raise investor expectations for the Fed's rate hike route, though some inflation is historically good for stock holders; a tempered perspective would serve stocks by simply easing concern about the Fed's rate hike plans. Currently, a rate hike is priced in for June and two look to be indicated by the Fed's dot plot projections, though the Fed tells us these are not guidelines nor are they set in stone.
Inflation concern is intensifying, in my view, and so stocks seem more likely to me to drift downward today from relative high levels. Seasonal folk tales do not help the situation, with the "sell in May" hound dogs howling away despite decent corporate earnings growth being reported, though against relatively high P/E ratios versus the historical norm.
Stocks were down in Europe today well ahead of the U.S. market open as I started scribbling away at the ungodly 4:00 AM hour for you, 11:00 AM for me here in Greece. U.S. equity index futures were lower even into 7:30 AM but it is still too early to draw reference for the U.S. open. Much can still happen to guide the U.S. open at 9:30 AM EDT. Nonetheless, because of the data that is on tap and the market's current level (highs), I expect fear to dictate trade.
Five important inflation indicators arrive today to scare stock market enthusiasts away. The first is already market history, with Producer and Consumer Price Index data having been reported in China. While producer prices increased less than expected at just 6.4%, the Consumer Price Index (NYSEARCA:CPI) rose 1.2% in April, year-to-year, marking a 3-month high that was also above economists' expectations for 1.1%.
At 8:30 AM EDT, import/export data will be reported for the month of April. Economists expect import prices will mark a 0.1% month-to-month gain, versus the 0.2% decrease reported in March. Export prices are also expected to increase by 0.1%, versus the prior month increase of 0.2%. It is important to note that monthly changes in agricultural and petroleum goods influence month-to-month changes. Investors are wise to take that into account and to also study year-over-year changes in industrial metals and basic materials with this in mind. On a year-to-year basis, import prices rose 4.2% in March while export prices rose 3.6%; in other words, not mild increases for inflation watchers, and certainly influenced by higher industrial materials and petroleum prices this year. Higher producer prices, which we have, drive higher consumer prices, along with demand for consumer goods, which could be better globally.
At 10:00 AM EDT, look for the Atlanta Fed Business Inflation Expectations Survey. Last month, the data marked a 1.9% expectation for 1-year forward inflation. It will be interesting to see how businessmen feel now considering the President's tax reform announcement and the stimulus it should provide the economy. I expect upticks over coming months.
Boston Fed Bank President Rosengren speaks today for the second straight day, so his message should be unchanged with regard to inflation if the topic comes up. Yesterday he said there is risk of the economy heating up with sharp drop in unemployment. It does not seem to matter that Rosengren is not a voting member of the FOMC currently. However, Minneapolis Fed Bank President Kashkari is a voting member, and he addresses a group today as well. Three more Fed speakers are upcoming this week, and I expect inflation to be a matter of discussion. The Bank of England might have something to say on the matter as well tomorrow when it issues its statement. It all overhangs stocks.
Ahead of the market open here at 7:30 AM EDT, the SPDR S&P 500 (NYSE: SPY) was off fractionally by 0.1%, the SPDR Dow Jones Industrials (NYSE: DIA) was down 0.3% and the PowerShares QQQ (NASDAQ: QQQ) was hanging in there on solid earnings reports from tech stars. I expect the S&P 500 and the SPY to drift today off their recent highs mainly on the inflation question and how it might alter the Fed's rate hike plans should prices heat up. While inflation tends to serve stocks, investors are more likely to worry near-term about a faster possible pace of Fed rate hikes than currently anticipated, which serves to stymie growth. For my regular work on markets I welcome readers to follow my longstanding column.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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