- Indices opened at or near session highs as better-than-expected April retail sales figures helped futures go higher. WMT -1.68% was trading down this morning after beating top line estimates handily. The company did provide some earnings guidance for the next quarter that was slightly below consensus expectations, which the CFO called "appropriately conservative." TJX is off 4% after meeting estimates but is guiding slightly lower for the coming quarter. JPM C BAC and especially STT were trading down on fresh concerns regarding the credit crisis fallout, after Fed Chairman Bernanke said that financial firms would have to raise more capital. EDS +1.28% was continuing to gain ground after jumping more than 25% yesterday in the wake of HP's confirmation that it was acquiring the technology services giant. Before the open HP confirmed its offer for the name at $25/shr, noting that it expected the transaction to be accretive in 2009. HP was trading down more than 5% in morning trading after loosing a similar amount in late trading yesterday. In other M&A news, a USNA shareholder Gull Holdings offered to buy out the company for $26/shr, a 25% premium over Monday's closing price. Solar names CSUN +7.5% FSLR +3.3% JASO +4% ENER +3.3% were all trading up after some positive comments at Citigroup and very strong results from CSIQ +27%. Indices have moved steadily lower since the open giving back any gains. Not surprisingly the equity softness has again coincided with an up move in the energy complex. The front month heating oil future is again leading the way at a new all time high up another 3.5%. June crude has rallied more than $3 from overnight lows to trade back above $126.50.

- Inflation talk made its way to the forefront this morning, affecting Treasury prices. Overnight a substantially hotter-than-expected UK CPI reading got the ball rolling, while before the open April US retail sales ex-autos were up a fairly robust 0.5%, beating expectations. Government bond yields have been seen pushing higher around the world. The US two-year has climbed back to 2.40% and the 10-year has back to 3.85%. Fed fund futures have seen the expectations the Fed may start withdrawing liquidity from the system by this fall start to creep in. The July contract is pricing in less than 10% odds of another cut while the October contract is projecting better than a 10% chance of a 25 basis point hike. It is also worth noting that though equity markets have headed lower since the open, a better risk appetite has been seen by investors. The TED spread slipped below 80 basis points early on which is the lowest level seen since the start of the credit crunch. Bernanke noted that bond markets are far from normal and that it will take some time to address fundamental strains. He added that the Treasury repo market conditions have improved substantially, but financial strains have shaken critical economic foundations.

- Currencies also exhibited volatility through the session as commentary from central bankers debated monetary policy issues, inflationary expectations and growth objectives, as well as how quickly interest rates should be cut if growth sputters while inflationary expectations are threatening to flare out of control. The Fed's Pianalto noted that monetary policy should focus on trends, not price shocks, while the ECB's Noyer stressed that short-term inflationary volatility should be ignored and the focus should remain on medium-term stability. Overall, the tone among central bankers seemed to stress the battle against inflation first, followed by a focus on growth. Meanwhile, US import prices for April were reported to have risen at their highest annual pace since records began in 1983. And despite the negative short-term impact on equities, some saw April's ex auto retail sales data as easing imminent concerns regarding any possible US recession. The Philly Fed quarterly survey suggested that the Q2 GDP would be 0.2% v 1.3% prior forecast.

- The dollar is firmer against the majors as the probability of a Fed rate pause strategy seems likely with an uptick in odds of a rate hike by the Oct time period. As discussed in Europe, the Market is having trouble focusing on the underlying theme as risk aversion, sector rotation and stagflation concerns continue to joist for positions among global trading desks. EUR/USD Dealers still looking at the spread between German and US two-year notes for trend direction but the consensus remains for USD consilidation in the 1.5350-1.5650 range. JPY and CHF weakened as carry-related crosses moved higher in conjunction with equities post US retail sales data. The losses endured by JPY and CHF did not retrace much despite the reversal in US equities gains as the morning wore on. Commodity currencies were mixed as CAD firmed toward parity while AUD was lower on budget and GDP comments from Australia Treasurer Swan just prior to the US open.