Do Producer Prices Raise The Question of Deflation Again?

Sorry for the late post. I came into the office early this morning only to find the Internet connection was down. For me, nothing is more frustrating. No quotes, no Internet, no email, and no CNBC (since I stream it). At least the phones were working so I could hop on the Goldman Sachs conference call (more on that in a later post).

The market is lower this morning on the heels of a weak retail sales report, a big decline in producer prices, and likely some good ol' profit taking. Of course, the market has been lower in early trading several times recently only to see the declines erased by the end of the day. This occurred again yesterday. I'm not saying it will happen again today, but anything is possible.

The Producer Price Index for March fell -1.2% (economists expected it to be flat), and decreased -3.5% yr/yr. Those are pretty sharp declines, and are causing concerns of deflationary pressure to surface again. Funny how quickly folks can go back and forth from worrying about inflation to deflation with just one report.

Advance retail sales came out also, and showed a decrease of -1.1% for March, a far cry from the +0.3% increase economists expected. I'm not sure where the discrepancy comes in, but I'm surprised this figure was so weak. It will be interesting to see if there are upward revisions to it going forward.

In corporate news, JNJ topped earnings expectations and reaffirmed its 2009 outlook. That is helping the stock bounce +2% in a down tape. Goldman Sachs also crushed its estimates ($3.39 vs. $1.60 consensus) on both the top and bottom line. That stock would be up big, except the company issued a stock offering at $123 to raise $5 billion. The proceeds, along with savings from a lower dividend, are expected to be used to repay the TARP funds to the govt. as soon as possible.

Asian markets rose overnight, with Hong Kong spiking +4.6%. Reports out of China showed new monthly loans in China increased almost +30% yr/yr to record levels as the money supply in the country surged.

The dollar is mixed today; oil is higher, while gold is trading lower; the 10-year yield is lower to 2.80%; and oddly the VIX is lower by -1.6% to 37.19, despite the decline in stocks. Go figure.

Trading comment: I didn't take any profits yesterday, as the market continues to hang in there well. I may be getting too cute in looking for SPX 875, considering we got to 860 yesterday. But as long as we close above 850, I can see another push higher. I am a bit concerned by the increasing levels of bullishness showing up in the put/call ratios. But let's see how today unfolds.