As expected, yesterday was pretty much a wash for the major averages as the specter of today's economic reports sucked the conviction out of the market.  The early indication this morning, however, is that buyers will be showing some conviction at the start of trading.

Helped by some appeasing economic data out of China and Japan overnight, and some appeasing economic data in the U.S. this morning, the S&P futures are trading 1.1% above fair value.  Additional support has been provided by better-than-expected earnings results and reassuring guidance from Best Buy (BBY), as well as the underlying sense the market is due for a bounce after recent declines.

Briefly, China reported its CPI rose 5.5% year-over-year in May.  That was above expectations for a 5.3% increase and the strongest pace of increase in nearly three years.  

With some estimates placing Chinese CPI as high as 6.0%, the 5.5% increase registered as better than feared and helped lift the Chinese market along with solid readings for industrial production, retail sales, and urban fixed-asset investment that fit the mold of a soft landing in China.

On a related note, the People's Bank of China raised its required reserve ratio for banks by 50 bps to 21.5%.  That announcement was made after the market closed and could create a headwind on Wednesday that blows back a portion of Tuesday's 1.1% gain in the Shanghai Composite.

In Japan, the Bank of Japan left its key interest rate unchanged at the zero bound and announced a new 500 bln yen special lending facility to help spur growth.  This news was joined by some better-than-expected industrial production data for April and a perspective from the Bank of Japan that growth is starting to pick up again after the earthquake and tsunami.

Turning to the U.S., the Producer Price Index for May increased 0.2% overall and excluding food and energy.  The Briefing.com consensus estimates for total PPI and core PPI were pegged at 0.1% and 0.2%, respectively.

The May readings left total PPI up 7.3% year-over-year, which is the highest rate of increase since September 2008 and core PPI up 2.1%.

The silver lining in the PPI data is that growth in May decelerated from April, and with energy prices backing down of late, there is reason to think June readings will also bring signs of deceleration in PPI growth. 

The month-to-month growth in total PPI was the slowest it has been since September 2010 while core PPI growth was less quick than the 0.3% increase seen in April and March.  Higher prices for plastics products led the core PPI advance while a 1.4% decline in finished consumer foods helped mitigate the increase in total PPI. 

Turning to retail sales, they declined 0.2% in May (Briefing.com consensus -0.7%) and were up 0.3% excluding autos (Briefing.com consensus +0.2%).

The futures market responded favorably to the better-than-expected results, advancing to new highs for the morning after the data were released.  That is not to say the retail sales results are strong, but rather that there is an appreciation that they were better than feared.

Sales growth at miscellaneous store retailers (+2.1%) and nonstore retailers (+1.2%) helped drive the ex-auto number, along with growth at building materials (+1.2%), health and personal care stores (+0.8%), food services and drinking places (+0.6%), gasoline stations (+0.3%) and clothing and clothing accessories stores (+0.2%).

The largest pockets of weakness were in motor vehicle and parts (-2.9%), electronics and appliance stores (-1.3%), and furniture and home furnishings stores (-0.7%).

Core retail sales, which exclude auto, gasoline station, and building material sales, rose 0.2%.  That is a positive indication insomuch as it relates to the PCE component for Q2 GDP.

In sum then, an oversold market has received enough headline material from which to stage a rebound effort.  How the market closes, though, will be the better determinant of the market's prevailing thought process.  From our vantage point, today's data from abroad and at home is consistent with the soft patch view as opposed to the rumblings of a global economy moving toward another recession.

--Patrick J. O'Hare, Briefing.com

Patrick J. O'Hare is the Chief Market Analyst for Briefing Research, Briefing.com's institutional research service. To request a free trial please email researchsales@briefing.com.