The equity market managed to stage a relief rally of sorts on Tuesday as participants responded in kind to better-than-feared economic data.  The S&P 500 jumped 1.3% with all ten economic sectors contributing as the growth trade was back in vogue.

The market is striking a defensive pose this morning, however. 

The lack of follow through in the early going was pinned on new signs of discord at the negotiating table for Greece's new bailout package and a Moody's announcement that it has placed major French banks on review for downgrade due to their exposure to Greece.

The latter has weighed heavily on the euro this morning (-1.0%) and has precipitated a move into the greenback that has been associated with a safety trade.  The U.S. Dollar Index is up 0.9%.

Not surprisingly, European markets are in retreat today.  Asian markets, on the other hand, traded in mixed fashion.  The Nikkei jumped 0.3% while the Shanghai Composite declined 0.9% in the first response to the latest hike in the required reserve ratio for Chinese banks.

Foreign developments cast a pall on the futures market leading up to the CPI and Empire Manufacturing reports this morning.  Prior to those releases, the S&P futures were down ten points and trading 0.6% below fair value.  Unfortunately, things did not get any better after the releases.

S&P futures slipped to new lows for the morning as headlines for both releases disappointed. 

Specifically, CPI for May was up 0.2% (Briefing.com consensus +0.1%) and core CPI, which excludes food and energy, rose 0.3% (Briefing.com consensus +0.1%).  The latter was the largest increase since July 2008 with increases in apparel, shelter, new vehicles and recreation all contributing to the jump.

There should presumably be some softening in the new vehicle (+1.1%) and used cars and trucks (+1.1%) indexes in coming months as supply disruptions form the Japan earthquake get worked out and lead to renewed promotional activity in the auto sector.  Still, that point doesn't compensate for the headline disappointment.

Notably, the energy index (-1.0%) declined in May, highlighted by the first drop in the gasoline index (-2.0%) since last June.  The pullback in energy helped contain the increase in total CPI.  This is a positive development that should help limit some of the fallout from the May report, especially since the spike in energy prices has been widely regarded as a major catalyst contributing to the soft patch of data of late.

The May figures left CPI up 3.6% year-over-year and core CPI up 1.5%.  Both figures have been trending higher in recent months, yet inflation expectations remain in check as evidenced by 5-year, 5-year forward inflation expectations.

Arguably, the bigger disappointment this morning was the Empire Manufacturing survey for June since it is a more current gauge.  It fell to -7.8 in June (Briefing.com consensus 10.0) from 11.9 in May.  A number below zero is indicative of contraction.  That is the first drop below zero since November 2010 and it was led by steep declines in the indexes for new orders (to -3.6 from 17.2), shipments (to -8.0 from 25.8), and the average employee workweek (to -2.0 from 23.7).

The slowdown in manufacturing activity apparently eased some of the price increases experienced of late as the prices paid index slipped to 56.1 from 69.9.  Nonetheless, this report will renew concerns that the soft patch of data could get softer still in coming months.

The S&P futures are down 13 points and are trading 0.8% below fair value.  If noting else, it will certainly be a soft start for the equity market today.

--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.