Sunday, May 13, 2012

The Week Ahead: Inflation

This is inflation week. The consumer price index will be released on Tuesday at 8:30 a.m. Eastern.

Inflation in March rose by 0.3%, down from a gain of 0.4% in February. Inflation after food and energy costs are subtracted rose 0.2% in each of the two months.

The consumer price index is a major component of the Federal Reserve's decision-making. Falling inflation gives allows for greater stimulus in monetary policy.

The issue is heavily political, however, with rightists, fearful of inflation, advocating a tightening of the money supply through higher interest rates and people from the center to the left advocating greater stimulus.

Put more simply, the lower the inflation, the more the Fed can do to encourage the economy to grow. Less inflation = more jobs.

Also Tuesday, the government's retail sales report will be out at 8:30 a.m.

Wednesday sees three major events: Housing starts at 8:30 a.m., Industrial production at 9:15 a.m. and the Federal Open Market Committee minutes at 2 p.m.

And on Thursday, look for jobless claims at 8:30 a.m. and the Philadelphia Federal Reserve Bank's survey of its district at 10 a.m.

Also of note,

Monday: The Empire State manufacturing survey -- that's New York -- at 8:30 a.m., Treasury's report on foreign investment in the U.S. at 9 a.m., and business inventories and the Homebuilders' housing market index at 10 a.m.

Tuesday: Petroleum inventories at 10:30 a.m.

There are no economic reports on Friday, but for traders, it is still an important day: The last opportunity to trade May options before they expire on the weekend.

Expiration week is a big deal for people who play covered calls and diagonals. It means buying back the May short calls that we've sold against our long shares and options, and selling June short calls to replace them. I'll be doing that for my own holdings, which are diagonal spreads, on Monday and Tuesday.

My major project this weekend was doing the analysis to for rolling over the short options, and also for identifying opportunities for new diagonal spreads.

Hidden among the flashier reports is a player often ignored, except by us who are its fans. The leading economic indicators index is no longer considered to be a major forecasting tool. Although it has fallen on hard times, there are those of us who love it.

Leading economic indicators is sort of a meta-indicator. It combines 10 components into a single index that is intended to forecast the future course of the economic cycle.

The leading economic indicators index for April will be released by the Conference Board on Thursday at 10 a.m. In March, the LEI was up 0.3% from the prior month, following a 0.7% rise in February and 0.2% rise in January.

Big picture, the LEI began rising from a recession low in early 2009, and has been rising ever since, with the exception of a decline in mid-2011. The index has since topped the prior high. It is setting higher highs and therefore is in an uptrend.

The LEI in many ways tells us what we already know: The economy stumbled, but then quickly recovered and continues to grow, albeit at a moderate pace. Still, it's good to hear it from a source that takes into account a wide variety of data.

The ten components of leading economic indicators are average weekly manufacturing hours,
average weekly initial claims for unemployment insurance, manufacturers’ new orders for consumer goods and materials, Institute of Supply Management index of new orders, manufacturers' new orders for non-defense capital goods excluding aircraft orders, building permits of new private housing units, stock prices of 500 common stocks, leading credit index, interest rate spread of 10-year Treasury bonds less federal funds, and average consumer expectations for business conditions

Practical trading:

By my rules, as of Monday I can trade June calendar, butterfly and vertical spreads, covered calls and diagonal spreads and iron condors, and August single options and straddles. Of course, shares are good at any time.

Good trading!

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