Inflation shocker may force the Fed's hand

If the Fed stands true to its word, it really does need to act now based on this week's surprising PCE inflation data.

Robert Johnson, CFA 29 February, 2016 | 6:00PM

World equity markets diverged a bit this week, with emerging markets led by China. Emerging-markets indexes were down about 0.5%, as was Europe, while U.S. markets were up about 1.5%. Stabilizing oil prices, fewer recession worries because of stronger U.S. economic data, and the winding down of a lacklustre earnings season as well as tired sellers could all be explanations for the stronger U.S. results.

While the single-week U.S. data was nothing special, it follows a week of more than 3% price appreciation. Over the period, U.S. stocks are up over 5%, the best two-week run of 2016. That is up about 4% from the Feb. 11 low. Commodities also did well, gaining 1.2% for the week, the second-place performance rank for the week.

Surprising inflation data embedded in the January consumption report, along with the inflation revision for the fourth quarter, helped to push bond prices down sharply on Friday, though for the full week the U.S. 10-year bond rate increased just modestly from 1.75% to 1.76%. Dovish statements from a couple of Fed governors early in the week helped calm the bond market. Apparently they didn't get the memo about an improved U.S. economy and the accelerating inflation rate lurking in the background.

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Robert Johnson, CFA

Robert Johnson, CFA  Robert Johnson, CFA, is director of economic analysis for Morningstar.

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