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Retail Inflation: Headline Hot, Core Cool, Stocks Soar

In similar fashion to yesterday's wholesale inflation reading, today's CPI report from the Labor Department showed overall inflation in May outpacing expectations (0.7% actual vs. 0.6% forecast), but core inflation cooling off unexpectedly (0.1% actual vs. 0.2% forecast).  The tame inflation reports have served to unwind much of the recent spike in bond yields, which has in turn encouraged the equity markets to reclaim the ground they'd lost in recent days.

Stocks leapt out of the gate this morning, with the Dow jumping more than 100 points in the first few minutes of trading.  On the heels of strong gains Wednesday and Thursday, that puts the average back within 100 points of its all-time high.

In their ebullience, traders seem to be dismissing any gloom inferable from Fed Chairman Ben Bernanke's comments to an Atlanta Fed conference this morning, which seemed to suggest an underestimated possibility of the housing downturn spilling over into the broader economy.

[C]hanges in home values may affect household borrowing and spending by somewhat more than suggested by the conventional wealth effect because changes in homeowners' net worth also affect their external finance premiums and thus their costs of credit...

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Retail Inflation: Headline Hot, Core Cool, Stocks Soar

In similar fashion to yesterday's wholesale inflation reading, today's CPI report from the Labor Department showed overall inflation in May outpacing expectations (0.7% actual vs. 0.6% forecast), but core inflation cooling off unexpectedly (0.1% actual vs. 0.2% forecast).  The tame inflation reports have served to unwind much of the recent spike in bond yields, which has in turn encouraged the equity markets to reclaim the ground they'd lost in recent days.

Stocks leapt out of the gate this morning, with the Dow jumping more than 100 points in the first few minutes of trading.  On the heels of strong gains Wednesday and Thursday, that puts the average back within 100 points of its all-time high.

In their ebullience, traders seem to be dismissing any gloom inferable from Fed Chairman Ben Bernanke's comments to an Atlanta Fed conference this morning, which seemed to suggest an underestimated possibility of the housing downturn spilling over into the broader economy.

[C]hanges in home values may affect household borrowing and spending by somewhat more than suggested by the conventional wealth effect because changes in homeowners' net worth also affect their external finance premiums and thus their costs of credit...