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Inflation is Picking Up as Market Grinds Higher

David Becker
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Inflation is Picking Up as Market Grinds Higher

The bond market may be getting nervous as the labor market improves, the economy continues to grow and inflationary pressures pick up. The Consumer Price Index (CPI) surged in June and the annual rate was around 2%. The Fed, however, usually focuses on the Personal Consumption Expenditures price index (PCE). Core PCE is expanding at around 1.5% annualized. Even though it is still well below the Fed’s 2% threshold, the indicator has been rising this year and further increases could put upward pressure on Treasury yields, especially if the economy and labor markets continue to improve. Keep in mind that Treasury yields and bond prices have an inverse relationship. A rise in yields translates into a decline in prices.

The 20+ YR T-Bond ETF (TLT) is forming a bearish engulfing at the trend line extending down from July 2012.The TLT formed a lower high in early 2013 and then broke a major support level last year. Treasuries firmed the rest of the year and then moved higher in 2014, along with stocks. Something may need to give here. With the bearish engulfing, TLT is showing the first signs of giving in to selling pressure. A close below 110 would confirm the bearish engulfing. The indicator window shows weekly MACD edging below its signal line last week.

A whole slew of economic indicators hit the market last week and they were all positive. Even though economic indicators may lag the forward-looking stock market, positive numbers support a long-term uptrend in the stock market. Moreover, it should be noted that the S&P 500 hit new highs in late February, early March, early April, late May, June and early July. In other words, the S&P 500 has pretty much been marching forward the entire year. First quarter economic numbers were fair, at best, yet the market hit a new high in March. Continued strength in the S&P 500 suggested that the economy and labor market were going to improve.

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