More Benign Inflation Data
The market is getting a boost at the open, on the heels of a better-than-expected inflation report. The year/year core CPI rate fell to +2.3% in April from +2.5% in March. This is within the Fed's "comfort zone", and improves the outlook for inflation expectations.
The Dow is also up this morning, despite both Home Depot (HD) and Wal-Mart (WMT) being lower after reporting earnings. Earnings season is winding down, and for another quater, the S&P 500 earnings growth looks like it will come in much higher than initial analyst forecasts.
Bond yields are steady after the CPI report (4.67%). Asian markets were lower overnight, and the Yen is lower again vs. the dollar.
This morning, we will get the NAR metropolitan home sales report, which will be very interesting. We all know that the housing market is weak, but this report will tell us if the formerly hottest regions continue to deteriorate, and if the regions that have been strong lately continue to show resilience.
posted by J. Kahn @ 6:48 AM
1 comments
1 Comments:
WMT(consumer stock) will not do well when the PPI/CPI ratio is increasing.
Today’s report on CPI came at .4% . PPI(all commodities ) was .9%
In the last few years ,the PPI has been accelerating more rapidly than CPI.
The implication is for an overall stock market P/E contraction.
Ex-Fed Chairman Greenspan’s favorite way of measuring relative valuation
between Stocks and Bond is the Earnings-Yield to Bond-Yield ratio.
This ratio oscillates around one.
When should this ratio be above one?
The answer is: in an environment of PPI relative out-performance to CPI.
That is the environment we are in. This is due to the P/E contraction that
results when the PPI/CPI ratio goes up over time.
To see this behavior historically go to:
http://wrahal.blogspot.com/2007/05/earnings-yield-to-bond-yield-vs-cpi-to.html
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