- The morning's disappointing inflation and unemployment news pulled equity futures down before the open, but indices have rallied in early trading and are well into positive territory. The headline July CPI reading showed prices climbing at twice the rate expected, with core CPI (ex food and energy) coming in closer to estimates up 0.3% m/m. The annual inflation rate hit 5.6%, its highest level since 1991. Initial jobless claims declined a bit from last week's number, but still came in well ahead of estimates; continuing claims were also above estimates. Oil has retreated to the low end of the $115.50-117.50 band in which is has been trading all night. Wal-Mart and two other consumer-oriented stocks released earnings reports that showed excellent results for the past quarter. WMT is around even after reporting respectable earnings this morning, coming in just above EPS estimates and just below revenue expectations. The retailer guided in-line with estimates, and boosted its FY08 outlook over its prior view. WMT's CEO called the forecast "appropriately conservative," while the CFO said that its Q3 sales outlook is weaker than market expectations. RDEN+15% cranked up its full-year guidance and reported mostly in-line with analysts for the quarter. EL+7.5% beat both revenue and EPS estimates, and guided ranges for the next quarter and FY09 that were more or less in-line with analysts' expectations. The firm noted that FX gains added 5% to quarterly revenues. SJM+7.5% came in ahead of the Street on earnings and revenue and reaffirmed its full-year outlook, although the firm excluded restructuring and merger costs from EPS. Elsewhere in earnings, the view was not so rosy. Engine manufacturer BGG-7% reported a significant loss (ex a sizable gain from a plant closure), declining revenue and lower full-year guidance this morning, surprising investors, who are punishing the stock. The company noted significant declines in both its engine and power products divisions. Bakery products firm FLO-14% came in slightly below estimates but guided in line for the year, earning itself a spot on Deutsche Bank's short-term buy list. In other news, the Wall Street Journal reported that BKS is unlikely to attempt a Borders acquisition. PMI is up more than 60% after announcing that it will sell Asian and Australian operations to an Australian insurance firm, helping RDN and MTG jump more than 10% a piece in early trading.

- Treasury markets appear to be focusing on possible growth concerns stemming from this morning's data rather than the higher headline inflation number. In addition, there was some chatter yesterday that bond yields moved up in anticipation of a higher-than-expected CPI figure, so not surprisingly yields moved modestly lower after the news was announced. The ten-year is up less than a quarter of a point yielding 3.90% while the long bond yield has fallen back towards 4.5%. European fixed-income trading was mostly negative and choppy, with curve flattening seen in today's session. Sept Bunds are at 114.00, down three ticks, while the Sept Gilts lost 26 ticks to trade around the 108.73.

- In currencies, the market returned to a two-way factor as the USD consolidated from its recent gains over the last week. The much hyped European Union GDP data ended up as a side show this morning as the euro price action dominated traders' attention, while the price action itself was more about a "sell the rumor buy the fact" play ahead of the New York morning. US inflation registered its higher reading in 17 years while the jobless claims and continuing claims maintained their disturbing trend, entering a "red zone" just above potential recession territory. Given the current weakness of the US economy, dealers are questioning whether the Fed can even think about tightening rates any time soon. Central banks in both Europe and the US imply that the slowing growth scenario it the answer to containing inflationary fear.

- The EUR/USD cross has hovered around the 1.49 area for the bulk of the European and US session. Dealers are noting that the current spread between US-German two-year notes (currently at 156bps) should continue to narrow given the recent batch of inflation data. Dealers are noting that sovereign bids are suspected on the approach of 1.4850 but warn of large euro sell stops building below 1.4830, with 1.44 mentioned as a potential target, particularly if 1.4730 fails to provide any significant support. The GBP/USD recovered from fresh 22-month lows seen in the Asian session at the 1.8620 level to regain a footing above 1.87. The USD/JPY is at 109.50.