Tuesday, March 13, 2012

Upcoming CPI data ...

Friday's CPI data will be analyzed in great detail as it may force the Fed to delay QE3 even if QE3 will be the "sterilized" version.

We estimate the CPI data to come in slightly above expectations, driven by increase in the labor force as indicated in last week’s employment report. We expect overall CPI M/M change of 0.53% versus the consensus of 0.4%. This also represents a 3.02% increase over the last 12 months. Core CPI, which excludes food & energy prices, will likely show a 0.26% M/M change versus a consensus of 0.20%. Core CPI Y/Y change, we estimate, will be approx. 2.30%, ahead of the Fed's 2.00% target.

If our estimates turn out to be correct and/or if the annual change comes in above 2.00%, then we could see the market react negatively as it may hint that potential risk of too much inflation could force the Fed to re-think its overall QE policy.

Regarding the market's performance today, S&P 500's near 1% move up is driven by slightly better than expected retail sales data. We note that those figures were positively impacted by higher gasoline prices. We are getting closer and closer to the CY '12 1.0 PEG that we discussed last week, which basically indicates where S&P 500 would be at fair value plus a QE premium.


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