Stocks closed higher yesterday led by strong gains from the S&P 500 and the Nasdaq which were up 1.07% and 2.17% respectively.

The indexes opened mostly lower and soon hit their worst levels of the day. The S&P was down as much as -1.61% at its worst.

But by mid-morning they began turning around. And by mid-afternoon they were in the green.

Yesterday morning's Consumer Price Index (CPI) retail inflation report came in slightly better than expected. The headline number was up 0.2% m/m vs. last month's 0.2% and views for the same. The y/y rate came in at 2.5%, which was down from last month's 2.9% and estimates for 2.6%. The core rate (ex-food & energy) was up 0.3% m/m vs. last month's 0.2% and views for 0.2%. The y/y rate came in at 3.2%, which was in line with last month and the consensus.

The inflation report, at first, appeared to be misinterpreted as somehow being bad. But as the day wore on, the market smartly recognized the report as being fine. A bit of progress on the headline number. And no real regression on the core rate. That was really all that was needed. There was no backsliding. Nor did inflation turn sharply lower, which would've called into question our economic health.

But we'll get another look at inflation this morning with the Producer Price Index (PPI) wholesale inflation report. The headline number is expected to be up 0.2% vs. last month's 0.1%, while the y/y rate is expected to be up 1.8% vs. last month's 2.2%. The core rate is expected to be up 0.2% m/m vs. last month's 0.0%. The y/y core rate last month was at 2.4%. The PPI report comes out at 8:30 AM ET.

Assuming no dramatic surprises with the PPI, the Fed is likely to cut interest rates by 25 basis points when they meet next week on 9/17-18. In fact, that's what the Fed Funds traders appear to be predicting as they have an 85% probability that the Fed cuts by a quarter point, and just 15% for a half point.

Of course, the bigger debate will be what happens next in November and December? And what is their terminal rate forecast? We'll know more next week.

In other news, yesterday's MBA Mortgage Applications rose by 1.4% w/w, with purchases up 1.8%, and refi's up 0.9%.

The Quarterly Services Survey was up as well with Selected Services Revenue up 1.5% q/q vs. last quarter's 1.4%. On a y/y basis it was up 6.5% vs. 6.4% last time. Information Revenue was up 2.5% q/q vs. last quarter's 2.4% pace. On a yearly basis it was up 6.5% vs. the last report's 6.3%.

In addition to today's PPI report, we'll also get Weekly Jobless Claims, the Treasury Statement, Treasury Buyback Results, and the Fed Balance Sheet.

And we'll see if the markets can build upon yesterday's solid gains.

See you tomorrow,