We have read that inflation jumped to about 5% annualized and have experienced a jump in food and fuel prices. The Federal Reserve dismisses the current increase in inflation as transitory that will fade when the economy gets back to "normal". Alarms should be going off in the bond market given the rise in inflation, yet interest rates fell after the release of consumer price data last week. Seems the Market, so far, has bought the Fed's mantra that inflation is transitory and not to worry.
One conclusion is that all of the negatives for bonds, e.g., huge fiscal and monetary stimulus, strong economic growth, widespread wage increases (which are sticky, unlike materials), planned infrastructure spending, etc., have been priced in by the Market. If correct, what can be coming in the 2nd half is an economic slowdown. Already we are seeing reports that housing sales and new permits have slid since April and auto sales have declined. If the economy is in great shape, how can the performance of the S&P's Consumer Discretionary sector be ranked among the laggards?
On the other hand, our indicators are showing that interest rates have fallen too far, too fast in the near term while their longer-term trends are still rising. (When in doubt, get strategic direction from the longer-term trend).
This means inflation has at least an even chance of getting stronger and for longer as the services sector is just reopening and aggregate demand and wage pressure increase. See note about foreign currencies and US Dollar below.
For now, with rates falling, tech and large cap growth stocks rose in response. We will see what the Fed says or does not say at their FOMC meeting this Wednesday.
S&P large, mid, small cap and Europe indices remain strategically Bullish; China and Emerging Markets weak.
Equity Styles (one week rank): Value weakened vs. Growth. Small cap index weakened vs. S&P 500. Equal Weight S&P 500 weakened vs. S&P 500 cap weight.
Ranked Sectors: Trend Leaders - Energy, Real Estate, Financial, Communication Services; Laggards - Health Care, Consumer Discretionary, Consumer Staples, Utilities.
Trends of 30-year US Treasury Bond and 10-year Note Yields continued weakening and is nearing Long Term uptrend line that may stop decline. Yield curve is positive but spread declined to -3 level oversold, Long Term trend still up, may provide support.
Australian Dollar, Euro and British Pound moving sideways with slight weakening. The Yen is Bearish. Gold is Bullish but fell dramatically in last two days. The US Dollar, while strategically Bearish, made a triple bottom (!) and has strengthened; this a negative for Foreign Currencies, Emerging Markets, Materials, Metals; US interest rates may rise in sync with US Dollar.