Inflation: Not entirely tame

Modest headline inflation is good news for consumers, but under the surface rising rent and groceries bills have taken a bite.

Robert Johnson, CFA 25 October, 2014 | 6:00PM

This week, world equities rallied sharply, bond rates, though still depressed, moved up, while commodities continued to trudge ever downward. U.S. markets were by far the strongest, with the S&P 500 up over 4% in just one week. Meanwhile, emerging markets, suffering from low commodity prices and a still-faltering China, managed a much smaller 0.7% gain. Europe split the difference with a gain of over 2%.

I am at a loss to explain the gains, except maybe the sellers just got tired or that selling the previous week was overdone. The economic data was about as advertised, with few surprises and limited but nevertheless improving data sets. Earnings news was generally disappointing, especially for the blue chips, with   Coca-Cola  KO,   IBM  IBM,   Amazon  AMZN, and   McDonald's  MCD all delivering negative surprises.

Meanwhile, the 10-year U.S. Treasury bond moved up from 2.2% to 2.27%, which is not generally well-received by markets of any kind (well, except the U.S. dollar). Certainly the strength of the U.S. economy relative to any other market is beginning to show through to all but hermits living in a cave. That may be part of what this week's market activity was all about. Still, being the best of a relatively bad lot doesn't make for a great investment thesis.

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Robert Johnson, CFA

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