North Korea is still on the media's mind, and apparently some investors' too, but I've already moved past the issue. You should as well, as indications are already developing that the issue will fade.
In the early premarket, around 5:00 AM EDT, SP 500 Futures (NYSE: SPY) were down fractionally some 0.3%. Dow Jones Futures (NYSE: DIA) were holding up better, and at the fringe of risk, Nasdaq futures (Nasdaq: QQQ) were doing worse. The story should be the same for small caps (NYSE: IWM). Volatility stakes (NYSE: VXX) were finding support too as the concerned added protection, and as speculators took stakes toward a deterioration of the situation.
It's all because of the North Korea nightmare scenario that seemed to gain in weight over the past several days. North Korean ICBM tests and alleged progress on nuclear payload delivery to the greater 48 states, along with the usual fantastically worded threats of the North's maniacal leader, have investors' attention. Worse yet was the panic padding (to securities markets) response of our own leader when he played Winston Churchill, pretty well too. He said some things publicly that were probably better left to private one-on-one conversation with Kim Jung-Un and/or his allies.
But this too shall pass dear friends. The State Department is actively smoothing over the President's statements about "fire and fury like the world has never seen before." Before long, investors will reconsider the latest positive economic indications, though today they also have an inflation measure to trouble their tonic.
The Producer Price Index (PPI) is today's leading tangible factor for stocks, not North Korea. Inflation is more likely to develop than all-out nuclear war. PPI is a prelude to tomorrow's more important CPI data too. I covered both in detail in my economic report today, On Inflation Watch.
What you need to know today
The Producer Price Index (PPI) is expected to show producer's marked an increase in prices of 0.1% for July, not much of a move of the dial. The increase compares to the 0.1% increase seen in June. However, on a year-on-year basis, PPI was up 2.0% at last check, which is right at the Fed's target for inflation.
The yearly change in prices for producers is meaningful despite its inclusion of volatile food and energy prices, because short-term swings in prices are smoothed out over the longer term. Also, when prices change in either direction over the long-term, they can become anchored at the new level across the spectrum of goods and services. Thus, they become important despite variance to the historical norm.
In other words, if lower than average energy prices (NYSE: OIL) stuck for a few years they would get anchored into the prices of other goods and services and cause a lasting change to the economy. One example where such a long-term change could be tangible is in energy prices (NYSE: USO), if alternative energy sources continue to gain market share and as oil and gas production technology improves. So then it is wise to not exclude the headline PPI figure from your thinking, especially with regard to changes on a year-to-year basis; they may in fact be telling you something important.
When excluding changes in volatile food and energy prices, Core PPI is expected to rise by a greater than PPI rate of 0.2% for July. That would compare to the slower pace of increase for Core PPI in June of 0.1%. On a year-to-year basis, Core PPI was up 1.9%, which is also close to the Fed's target for inflation. Less food, energy and trade services, PPI is seen rising 0.2% on the month; it was up 2.0% year-to-year in June.
Inflation is a real concern for stocks because it could raise the Fed's pace and trajectory of monetary policy tightening. So, if the PPI data is hot today, or exceeds economists expectations, equities could really take cover to the bunker. Because it's only producer prices and not consumer prices, an inline reading here is probably not a problem. The Fed and investors look to the consumer data for their lead, and that comes tomorrow.
The New York Fed's William Dudley is due to speak this morning, but he is typically a voice of reason and pro-market due to his New York base. The New York Fed is literally across the street from the stock exchange.
None of the day's other data looks important to me for stocks. Several pharmaceuticals and miners are reporting today, along with major department stores and cannabis stocks. The day's highlighted earnings reports will emanate from Black Box (Nasdaq: BBOX), Brinker Int'l (NYSE: EAT), Broadridge Financial (NYSE: BR), Cord Blood America (Nasdaq: OTCPK:CBAI), DineEquity (NYSE: DIN), Everspin Technologies (Nasdaq: MRAM), General Cannabis (Nasdaq: OTCQB:CANN), Goldfield (NYSE: GV), Joint (Nasdaq: JYNT), KemPharm (Nasdaq: KMPH), Kohl's (NYSE: KSS), Macy's (NYSE: M), NVIDIA (Nasdaq: NVDA), News (Nasdaq: NWSA), Nordstrom (NYSE: JWN), and Royal Gold (Nasdaq: RGLD).
In conclusion, I look for fear to fade around the North Korea issue, and for stocks to find relief intraday for as long as the producer price data does not deter them. For more of my work on the markets, readers are welcomed to follow the column here at Seeking Alpha.
Disclosure: I am/we are long USO.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: My position is via options.