The Day Ahead: Jobless Claims, PPI, Retail Sales, Auction, Fed Speak

Interest rates continue to wait in limbo as risk markets weigh the economic impact of expensive food & energy costs in an environment that offers little wage growth (cost push inflation requires wage growth or you end up with one big margin squeeze and stagflation!)

This sentiment is reflected via rapidly falling commodities prices. Light crude oil prices fell back into double-digit territory on Wednesday and sold off an another 2.35% overnight to $95.88 (about $8 less than 24 hours ago). Meanwhile gold prices are down another 0.97% to $1,486.90.

Struggling commodities prices are weighing on equities this morning following a broad sell-off Wednesday that led stocks lower by more than 1%. S&P 500 futures are -7.00 points 1,331.75 and Dow futures are 52 points off at 12,539. The two indexes closed 15.1 points and 130.3 points lower on Wednesday, respectively (-1.11% and -1.02%)

"The market's appetite for risk has waned considerably over the past week or so and this morning is no exception," said economists at BMO Capital Markets, who noted the sell-off continued after China, in another effort to halt inflation, raised reserve requirements by another 50 basis points.

The sell-off in stocks is providing support to fixed income assets. After a strong auction yesterday, the 10-year Treasury note yield shot like a rocket from 3.215% to 3.153%, helping lead the June delivery FNCL 4.0 to almost a full-recovery from the monthly roll. This allowed lenders to reprice for the better. The new 3.125% coupon bearing 10yr note is currently yielding 3.175% and the FNCL 4.0 is +2/32 at 100-06. 

Investors are awaiting key retail sales data, weekly unemployment claims, and an afternoon 30-year bond auction.

Key Events Today:

8:30 - Headline inflation is expected to remain worrisome due to soaring energy prices but core costs should be contained in the Producer Price Index. April's report is expected to produce a 0.6% headline climb in the month, following a 0.7% advance in March and a 1.6% gain in February. Nine consecutive advances have brought the annual rate to 5.8% (as gas prices have jumped nearly one-third).

The more closely-watched core index - which strips out volatile energy and food prices - is expected to inch forward just 0.2% in April, following a more-than-forecast 0.3% uptick. Core prices are currently up 1.9% for the year - the fastest pace since August 2009.

"Producer prices probably jumped again in April, on sharply higher energy prices, especially gasoline," said economists at Citigroup, who noted that gas prices surged 25% in the past two months but that rise has been muted by seasonal adjustments. "Rising seasonal factors have held the two-month increase in gasoline prices to just 11%. Seasonal adjustment will dampen May gasoline prices as well. Those factors, combined with the sudden drop in oil prices this week, could produce a sharp turn in PPI next month."

Energy costs make up one-fifth of the headline index, according to economists at Janney Montgomery Scott.

8:30 - Retail Sales have posted average monthly gains of 0.8% in the last three quarters, so the Street's +0.6% forecast for April is a bit below trend even if it's higher than March's 0.4% gain. Some of the gain also reflects high gas prices, so gains may not be widespread. But economists are impressed with how the consumer has held up despite rising energy costs. 

Analysts at Citigroup, for instance, note that motor vehicle sales were roughly unchanged and large retail chains reported healthy gains.

"The extra household income from an improving labor market and the temporary payroll tax cut has been helping consumers cope with higher gasoline and food prices," said economists at IHS Global Insight, who note that in April there was a strong increase in private payrolls and an uptick in average hourly earnings.

8:30 - Economists at Deutsche Bank said the weekly Initial Jobless Claims report would be "the most important labor market indicator between now and the next employment report." The reasoning is simple: the nonfarm payrolls survey suggested 268k private jobs were created last month - the strongest month since February 2006. But reaction to the report was appropriately mixed, as unemployment rose to 9% and the previous day's jobless claims report jumped 43k to 474k, its highest weekly reading since August. 

Economists believe the first week of May could provide some much-needed correction. The last report also suggested temporary distortions that could have driven the claims figure higher. Still, the median forecast of 430k is far from inspiring; nor is the range of forecasts: from 415k to 465k. 

"We expect that the surge in New York and Oregon filings, which added nearly 28,000 to unadjusted claims in the previous week, will reverse," said economists at Citibank, who anticipate a weekly decline of 60k.

"However, shutdowns among certain auto manufactures may place some upward pressure on the figure. We also note that storm- related filings may be more apparent during the reference period, introducing the risk that claims could exceed our estimate." 

8:30 - Charles Plosser, Philadelphia Fed President, speaks on the economic outlook in Florida.

10:00 - Few comments were available for March's Business Inventories. The consensus expects a 0.8% increase following a 0.5% uptick a month before, but economists said little beyond that inventories would post increases in line with previous reports. 

"The March business inventory report will reveal how much retailers added to stocks in March," said analysts at Nomura. "If the pace of stockpiling topped the BEA's assumptions (+0.6% for March), the report would add a few tenths to our Q1 GDP tracking estimate."

10:00 - Ben Bernanke, Fed Chairman, testifies on the financial reform act

Treasury Auctions:
1:00 - 30-Year Bonds ($16 billion)