JOE KERNEN, CNBC ANCHOR: Well, we continue to track energy market moves, just talking about it again with our guest hosts, with the reaction to all of this Middle East tension. Investors are going to pay close attention to whether it is getting passed through or how it -- whether it shows up in the PPI. That is 8:30 this morning. The CNBC/Dow Jones survey calls for an increase of 0.3 percent in the overall PPI, and 0.2 percent in the core component. If you saw 0.3 in the core, it might be a problem. Let`s get a look at the environment, we are turning to Michelle Girard, senior economist with RBS Greenwich Capital. Is that.
(LAUGHTER)
MICHELLE GIRARD, SENIOR ECONOMIST, RBS GREENWICH CAPITAL: Joe.
KERNEN: Could it happen?
GIRARD: Well, you know, we are looking for a 0.3 core, although, you know, the big number is going to be tomorrow`s CPI. You know, even within the PPI, the PPI is an interesting report. It is producer prices, but what makes it interesting is that you can see not only the change in prices at the finished goods level, which is that headlines number you were talking about, but prices further back in the production MBT Shoes process. And there, I mean, if you think a 0.3 core rate is scary on the finished goods level, the gains in the core intermediate and core crude or raw materials prices have been much scarier. You know, we are running on a year-over-year basis in the raw materials number up like 3 percent. So the good news, and this kind of carries all the way through, is that at every level of production, smaller and smaller price increases are getting passed through. And even now getting to the PPI, that 0.3 core rate number, it is not a great number, but if you look to the CPI, you know, still, the pass-through has been -- you know, has versace handbag been relatively limited. And so, you know, that is where the -- you know, sort of the rubber hits the road in terms of the Fed.
KERNEN: Is there anything that can come out in the PPI in some of the -- if you parse the details that could really hit the bond market or really, you know, set to fire inflationary expectations today, or is it all about tomorrow?
GIRARD: Well, I think it is about tomorrow. And there is not a lot you can take away from the PPI that has a whole lot of relevance for the CPI . For example, the correlation between the core PPI number what we will get tomorrow on the core CPI is relatively low. But, you know, any kind of upside surprise would increase the jitters about what we will see tomorrow. And I have to tell you, I mean, I think in terms of the Fed and what we are going to see at the August meeting, it really is about all tomorrow`s CPI print (ph). I mean, if we get another 0.3 increase, excluding food and energy, on the CPI, even with some signs of moderation in the economy, the Fed is probably going to be forced to react to that and raise rates again in August.
KERNEN: So if you see a 0.3 tomorrow on the CPI, you expect Fed futures for August to climb back up to, what, 80 percent or so?
GIRARD: Yes. Exactly. I mean, I would say that we would probably -- you know, our odds, which are now favoring a pause in August, would climb back above 50 towards a, you know, 60 or 70 percent level. And, of course, we will have an opportunity to hear what the Fed chairman himself and the Fed thinks about the CPI. They will have the number this afternoon. And while most of the speech has to already be written, he will have the opportunity to perhaps change a sentence or two, or in the question and answer period, address what the CPI did. So I think when w
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