U.S. equities are firmly in rebound mode, enjoying a string of five straight days of rising stock prices and the Dow Jones industrials even closing 200 points above 25,000 on Thursday. This came after a duo of reports on inflation trends showing prices are climbing at a tepid pace -- following worries about higher prices that sparked the market's recent correction from its late January highs.
The producer price index for January showed core inflation, less food and energy, rising at a 2.5 percent annual rate (up a bit from 2.3 the previous month). are rising at just a 1.8 percent annual rate. Headline measures have been climbing a bit faster, thanks to a rebound in energy prices, but not yet enough to justify a shift in the Federal Reserve's current outlook for three quarter-point rate hikes for 2018.
But buried in the details is evidence of higher prices that could well rattle markets again. This, along with fiscal largess in Washington and weakness in the U.S. dollar, has contributed to an upward push in the 10-year Treasury yield, which now stands at 2.9 percent, up from a low of 2.05 percent in September.
Here are three specific inflationary trends that bear watching:
The job market could hardly be tighter. The unemployment rate is just 4.1 percent, payroll growth is steady and survey data show businesses are having an increasingly hard time finding good, qualified workers without resorting to higher pay.
The market was spooked by the rise in average hourly earnings on Feb. 2, which increased to a 2.9 percent annual rate vs. the 2.6 percent rise expected and 2.5 percent reported last month. This number is somewhat "dirty" though, given a drop in the average workweek (on a scale that has been seen only seven times since March 2006).
Philippa Dunne at the Liscio Report believes some seasonal factors are in play that overestimated seasonal layoffs in the retail sector and could thus be masking underlying wage strength. Economists at Commonwealth believe "all signs indicate that wage growth is headed even higher later this year."
Higher take home pay will be great news for Main Street Americans and could bolster consumer spending. But Wall Street will need to contend with the downsides, including pressure on the Fed to expedite its rate hike pace, higher labor costs for businesses and the risk of a 1960s-style "wage-inflation push," in which rising wages fuel an inflationary spiral.
The U.S. dollar has been hammered lately, down more than 6 percent from its October high and 13 percent lower from January 2017. The Trump administration has been quietly (and sometimes publicly) condoning the fall for its positive affects on U.S. export competitiveness. That has attracted the ire of trading partners in Asia and Europe.
But a downside of a weaker dollar is an upward lift to import prices. Capital Economics noted that producer prices are near a six-year high reflecting this dynamic, "which should soon start to feed into consumer prices too." Otherwise, retailers run the risk of pinched profit margins.
Another consequence of the weaker dollar is higher commodity prices because the greenback is the most common currency for global transactions. It's not coincidental that as the dollar weakened in recent months, crude oil has pushed from below $50 a barrel to hit a high above $66 earlier this month.
Caught in the whirlwind of broad market selling in recent weeks, crude prices mended Thursday, pushing back over the $60-a-barrel threshold. On a year-over-year basis, oil prices are up about 11 percent, and comparisons are growing easier as the market laps last summer's energy price swoon.
Watch for energy inflation to creep higher as the peak summer driving season approaches.