Dow Gains 100 Points as Data Restores Optimism; Inflation Scare to Come?

Stocks are surging today following a benign inflation reading that has helped soothe investor worries over imminent Fed rate hikes. E.I. Dupont de Nemours (DD), ExxonMobil (XOM), Home Depot (HD), International Business Machines (IBM) and Caterpillar (CAT) gained.

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The S&P 500 has gained 0.6% to 1,839.20, while the Dow Jones Industrial Average has risen 106 points, or 0.7%, to 16,146. The Dow’s been given a boost by Dupont, which has advanced 1.7% to $65.34, ExxonMobil, which has risen 1.6% to $95.47 as oil trades higher, and Home Depot, which is making back some of yesterday’s housing-related losses while gaining 1.1% to $77.28. International Business Machines has gained 1% to $184.70, while Caterpillar has risen 1.2% to $97.32 after Deutsche Bank initiated it with a Buy rating.

Yesterday, stocks fell because the Fed minutes showed its members debating when to raise interest rates. The data today, however, allayed those worries by showing that while the economy might be improving–the Markit Flash U.S. Manufacturing Purchasing Managers’ Index rose to 56.7, up from 53.7–inflation is not yet a concern–the consumer price index rose 1.6% year-over-year, below the Fed’s 2% target. Sterne Agee’s Lindsey Piegza explains:

Another benign inflation report despite a rise in fuels and utilities costs this winter, on the heels of a tepid rise in producer prices shown in yesterday’s PPI (Producer Price Index). While some Fed officials have voiced concern regarding inflation as a near-term concern, most officials are more concerned about inflation remaining considerably below the Fed’s 2% target. Although the Fed expects inflation to reverse course, nonexistent wage pressures threaten that forecast with ample slack in the labor market and minimal credit creation.

Capital Economics’ Paul Dales thinks inflation might be stronger than it looks. He writes:

January’s US CPI inflation figures were benign, but the unusually bad weather may be hiding a strengthening in underlying price pressures…This could easily explain the 0.3% m/m fall in clothing prices, 0.5% drop in used vehicles prices and 0.3% decline in new vehicle prices. Those falls could be reversed when the weather returns to seasonal norms.

In contrast, price gains in other areas are more likely to be sustained. The 0.3% m/m rise in rent of shelter was partly due to a 1.3% rise in hotel prices. Even so, low vacancy rates and rising wage growth will support rents inflation. And although the 0.3% m/m gain in medical prices was partly due to a 0.6% rebound in prescription drug prices, medical inflation will rise in April when the effects of sequester’s 2% Medicare payment cut drops out of the annual comparison. So although core inflation fell to 1.6% in January from 1.7%, we think it will rise to 2% later this year.

Marketfield’s Michael Shaoul worries that we might be witnessing the end of the Fed consensus. He explains:

In other words despite the firming of guidance towards a prolonged period of monetary laxity even as stated policy goals are reached, there is clearly a risk that the consensus within the Committee is at risk of fracturing later in 2014. This is not a risk which is adequately priced into the US yield curve, which keeps its belly close to the ground between a 2 year yield of 0.31% and a 5 year yield of 1.52%. Although the abnormal weather conditions have served to dampen a number of important economic statistics in early 2014 this actually serves to heighten the risk that a robust springtime bounce will cause a further erosion of the common ground between the various factions within the FOMC.

Now wouldn’t that be fun?