The great unanswered question from the aftermath of the financial crash, recession and the nine year equity rally is where would stocks be under a normal interest rate regime?
Inflation concerns have been at the forefront of the equity plunge this month, and January's price surge reported Wednesday sent equities and Treasuries tumbling.
U.S. consumer prices rose 0.5 percent last month, almost doubling the 0.3 percent forecast, as clothing jumped 1.7 percent, the most in close to 30 years, according to the Labor Department. Annual inflation remained at 2.1 percent beating the 1.9 percent median prediction.
The core rate of price changes, which eliminates food and energy costs, increased 0.3 percent, ahead of the 0.2 percent estimate and the same as in December. The yearly pace continued at 1.8 percent, also besting the 1.7 percent prediction.
Equities opened lower with the Dow and the S&P considerably below Tuesday's close. Initially the Dow shed just over 100 points and the S&P 500 lost almost 12. The yield on the 10-year Treasury rose as high as 2.8839 percent.
Stocks recovered sharply after their opening plunge with the Dow and the S&P returning to the positive about 45 minutes after the open. At 11:15 am the Dow was off 3 points at 24,636 and the S&P was trading at 2,673, ahead 11 points. The 10-year yield was 2.8785 percent.
The CPI data comes after annual hourly wages in January rose 2.9 percent, the strongest gain in eight years, suggesting that the Fed's long-anticipated pick-up in compensation may be underway.
At the last FOMC meeting in December the central bank projected that the Fed Funds rate would rise to 2.1 percent in 2018, or 0.6 percent from its current 1.5 percent rate, meaning between two and three 0.25 percent increases this year. If inflation, particularly wage inflation speeds up as the year progresses, market speculation will move to three or more increases by December.
Chief Market Strategist
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