The Day Ahead: Stocks and Bonds Rally Before Inflation Data

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Happy Quadruple Witching Day.

Both interest rates and equity futures are improving this morning as investor spirits got a bump from better-than-anticipated earnings from Oracle and RIM last night. Key events today include the Consumer Price Index for August and Consumer Sentiment for September.

Ninety minutes before the opening bell, S&P 500 futures are up 1.75 points to 1,124.25. S&Ps printed a high of 1132.75 overnight, so stocks have backed away from their best levels. The 2s/10s curve is 4bps flatter at 224bps wide. The 10 year TSY note is +14/32 at 99-07 yielding 2.715% (-4.9bps). The FNCL 4.0 is +0-05 at 102-10.

In addition to new data, Wall Street expects President Obama to name Harvard professor and bankruptcy expert Elizabeth Warren to lead a new consumer financial protection agency. The controversial choice could stir up some emotions among investors.

Also, at 11:30, Federal Reserve Governor Daniel Tarullo will speak in Washington about regulating the $16 trillion shadow banking system.

Key Events Today:

8:30 ― The Consumer Price Index is expected to rise 0.3% for the second straight month in August, while core prices are set to tick up once again by 0.1%. The annual inflation rate is currently just +1.2%. 

“A downside surprise in this report could shift the pendulum towards additional Fed easing next week, or at least at the November 2-3 meeting,” said economists at BMO Capital Markets. “While fading double-dip chatter likely precludes new stimulus measures next week, expected slow growth should keep unemployment high and weigh towards renewed Treasury purchases in the months ahead.”

Markets have been watching consumer prices more closely recently because of an increased risk of deflation, according to economists at BBVA. 

“We expect both core and headline inflation would continue to increase moderately in August,” BBVA analysts said. “The minutes combined with Bernanke’s recent speeches in August imply that the Fed will remain in its wait-and-see mode in the near term before shifting its policy orientation and stands ready to act aggressively if conditions warrant. Therefore, we expect both inflation rates to remain stable and positive but low in the near term.”

10:00 ― Economists believe Consumer Sentiment will rise moderately to 70.0 in September from 68.9 a month before. Such a gain wouldn’t add much insight to economic growth, but a surprise in either direction could. 

“This level is usually seen at the tail-end of recessions, not one year into a recovery,” said analysts at BMO.

Economists at Nomura noted that sentiment is historically low and will likely be held back from “a tepid recovery in the labor market and the volatile stock market.”

Analysts at IHS Global Insight, however, believe the recent stabilization in the stock market should cement a slight improvement. 

“The plunge in sentiment in July was followed by a modest bounce in August, and we expect the consumer psyche to show another slight improvement this month.”

Issuance

  • Suzano, $500-$750m 10-year [guidance 6.25% area]; Bradesco/Itau/JPM
  • KEPCO, $500-750m 5 or 5.5-year; BAML/BARC/CS/GS/MS
  • Gerdau, benchmark offering expected next week; HSBC/Santander
  • CBA, potential benchmark deal; JPM