KEY DATA: Confidence: +1.7 points/ Phil. Fed (NonMan.): -3.5 points/ Home Sales: +4%/ Home Prices (Over-Year): +6.3%

IN A NUTSHELL: “The economy seems to be settling into a solid but not spectacular growth pattern.”

WHAT IT MEANS: Consumers are upbeat, earnings are solid and the housing market is decent, so there is little to worry about, right? Yes, though the economy is hardly booming along. Households were more upbeat in April as the Conference Board’s Consumer Confidence Index ticked up after having declined in March. Both the Present Conditions and Expectations Indices improved a touch. Respondents thought jobs were still plentiful, though not as much as they had been. Still, they are confident that there will be more jobs in the future.

The Philadelphia Fed reported that non-manufacturing activity in the Mid-Atlantic region continued to expand solidly in April. That said, the pace of growth was down from March and the index level isn’t that high. There were some warning signs in the report. Hiring is slowing, costs are rising and prices are still going up. Pricing power is not great, but it looks like it is enough for firms to continue pushing through higher prices in the future.

New home sales continued on their upward trend in March despite a halving of sales in the Northeast. I guess people couldn’t make it to building sites in the snow. Sales boomed in the West and that made up for the drop in the Northeast and a moderate falloff in the Midwest. Despite solid sales in February and March, developers are still not going out and building like crazy. The supply of homes for supply is relatively low and that could constrain sales.

The S&P CoreLogic Case Shiller home price index rose solidly in February and the year-over-year gain showed that the price increases continue to accelerate. All of the twenty large cities in the survey posted gains of at least 0.5% over the month.

MARKETS AND FED POLICY IMPLICATIONS: The economy is moving forward, which should surprise no one. It was already in good shape and then Congress passed massive tax cuts and a huge spending bill, so there was little doubt we would have a good year. But no good economy goes unpunished and interest rates continue to rise. The 10-year Treasury note posted a 3-handle for a little while today and while that is still quite low, for many it is a bit of a shock. The rate has increased nearly three-quarters of a percentage point in the last six months and with inflation slowly accelerating and energy costs rising, there is little reason to think it will not continue to move upward. That said, 3% is hardly a high rate, historically speaking. But to the extent that the Fed will consider the fiscal stimulus, rising inflation and increasing rates as signs that the economy is getting a little hot, we should expect the FOMC to continue its rate-normalization process. As for investors, as long s there are strong earnings, the higher interest rates may not matter that much. The good but not great economic data, coupled with the higher rates, are warnings that earnings that are economy-driven, not tax cut-created, may be harder to come by in the future.

KEY DATA: PPI: +0.3%; Less Food and Energy: +0.3%; Goods (Over-Year): +3.2%; Services (Over-Year): +2.9%

IN A NUTSHELL: “Cost pressures are building at the wholesale level, but it is not clear if they will actually be passed through to consumers.”

WHAT IT MEANS: As we pin ball along the trade war path, we still need to keep our eyes on the fundamentals and inflation is key, especially for the Fed. If price pressures build, the Fed will have to move to keep them from accelerating too sharply. So, what is going on in the real world of economic data? If you believe the March Producer Price Index, costs are rising for firms. Both goods and services prices increased solidly and over the year, the gains keep accelerating. That is the case despite a backing down of energy costs. Instead, food prices jumped, with gains pretty much across the board. The same can be said when you look at the details of the non-food, non-energy categories. There are many more increases than declines, indicating that the costs of finished goods is likely to rise faster, though how much of an acceleration we will se is simply unclear.

Looking down the road, you see the same trend. Food costs are reversing and starting to rise and non-food and energy intermediate goods and services prices are showing signs of picking up steam as well. If energy prices stabilize, or as I expect, start another upward pattern, wholesale cost pressures could become a problem for retailers.

MARKETS AND FED POLICY IMPLICATIONS: There is little question that inflationary pressures are building in the economy. Delivery lead times are rising, as we have seen in the recent Institute for Supply Management’s indices. In manufacturing, the report noted that “This is the 18th straight month of slowing supplier deliveries, and that continues to be a constraint to production growth. Lead-time extensions in many areas, including steel; supplier labor shortages; and transportation delays will continue to restrict production output for the foreseeable future”. The strong economy comes with its own issues and they are starting to show up. But as I remark almost every time this report is released, the path from wholesale costs to consumer prices is hardly straight and often dead-ends. So don’t get too worried, yet. The Fed members, though, will have to consider these trends as it is likely that consumer inflation will be exceeding its 2% target soon and for an extended period. As for investors, it’s still all about trade and China’s President Xi Jinping’s comments the he intends to open up his country to more imports was good news. Of course, the cynic in me remembers that the Chinese have used, for decades, promises of action to forestall actually taking action, so we have to see real changes before we celebrate. Investors, though, have reason to relax a little, which means in this market, surge forward.

KEY DATA: Payrolls: +103,000; Revisions: -50,000; Private Sector: +102,000; Unemployment Rate: 4.1% (unchanged); Wages (Month): +0.3% Over-Year: 2.7%

IN A NUTSHELL: “Despite the disappointing job gain, nothing has changed in that the labor market remains strong.”

WHAT IT MEANS: Really, now, did anyone actually believe that payroll increases in excess of 300,000 per month were sustainable? If you did, my offer of investing in a Broadway play is still open. The simple reality is that weather and a “reversion to the mean”, or a movement back to trend, combined to create wild swings in the payroll numbers over the past two months. Thus, the ridiculous 65,000 increase in construction jobs in February, which was mild, was followed by a 15,000 decline in March, which was cold and snowy. The average for the two months of 25,000 is probably reflective of the sector’s strength. And really, did retailers actually add over 47,000 workers in February? What mall opened that I didn’t know about? Thus, the 4,000 decline in March brought us to a 21,000 monthly average, which actually may be too high. And so it went down the line. In other words, sometimes conditions combine to create outsized gains or losses, which get reversed over the next couple of months. If you look at the first three months of the year, March (103,000) was too cold, February (326,00) was too hot and January (188,000) was just right.

To me, the key number in the report was hourly wages, which rose solidly. The increase over the year is accelerating but it is not that hot yet. I will start to say that wage inflation is a concern when it breaches 3%. It is likely that price inflation in March exceeded the wage gain, so real wages probably fell. So much for increases in purchasing power. Instead of paying people higher wages, firms are working people longer.

On the unemployment front, the rate remained at 4.1% for the sixth consecutive month. The last time that happened was fifty years ago. The labor force participation rate is stuck in a tight range as the strong economy is pulling people back into the market and Millennials are coming of age, but boomers continue to abandon ship.

MARKETS AND FED POLICY IMPLICATIONS: Nothing has changed. The labor market is just as strong as we thought it was before the March jobs report was released. But now we are getting a better picture of where the trend in job growth may be. It is currently in 200,000-range, which is too high given that labor force growth is well below that. We may be able to sustain the strong increases for a few more months, but not for the rest of the year. Firms are not likely to be able to find the workers they need and will probably have to start moving employees from part-time to full-time. That would add to hours worked and likely raise the average hourly wage rate, but not create any new jobs. The stability of the unemployment rate likely reflects the difficulty of those who were on the sideline but have recently re-entered the market to secure jobs. I suspect they were discouraged because of skill or background check/drug test issues. But the army or underemployed, discouraged and unemployed is shrinking rapidly, so the unemployment rate is likely to start declining again fairly soon. For now, the wage data are not so threatening that the Fed has to take any near-term action. But the acceleration in wage gains is enough to support a move in June. As for investors, there may be disappointment that more jobs weren’t created, but the not-too-hot wage number was good to see. And with the tit-for-tat between the U.S. and China on tariffs escalating, there are bigger worries than a disappointing jobs number that upon inspection wasn’t really surprising.

 

KEY DATA: ISM (Manufacturing): -1.5 points; Orders: -2.3 points; Employment: -2.4 points/ Construction: +0.1%; Private: +0.7%

IN A NUTSHELL: “The industrial sector has moved from robust to strong, which is hardly anything to worry about.”

WHAT IT MEANS: As the economy picked up steam, manufacturers benefitted greatly. The surge, though, may be ebbing. The Institute for Supply Management reported that manufacturing activity grew less robustly in March. Note, I said less robustly. The level of the index is still quite high, so we can still say the sector is in very good shape. Still, orders moderated as export demand decelerated sharply. Trade wars are never good for business, no matter what the administration may believe. They seem to be willing to accept the pain with the hopes there will be gain and that could happen. It is just that it rarely, if ever, does. There was also a slowing in the increase in production and hiring eased. Still, order books continue to fill and there is every reason to think that that the industrial heartland will continue to expand at a very good pace for an extended period.

Construction activity edged up minimally in February, but the headline number hides the true underlying strength. Private sector building surged led by big increases in office and educational construction. However, public sector activity was down sharply due to large declines in health care and school building. Construction spending is quite volatile and large ebbs and flows are not unusual, so don’t read too much into any one month’s data.

MARKETS AND FED POLICY IMPLICATIONS: There is little in today’s numbers that should worry investors. Manufacturing remains strong and construction activity is still solid. But on a day-to-day basis, economic fundamentals don’t necessarily drive the markets. The tweet of the day, the pronouncements of foreign leaders or the news reports of corporate mistakes often trump the economic data and frequently even the release of corporate numbers. Politics matter and we are in a world of wild and crazy statements, so expect the roller coaster ride to continue unabated. Still, there are some numbers that do make a real difference and Friday we get the March employment report. The February gain was so outsized that it is very possible we could see an extremely weak March job gain. If that turns out to be the case, and I expect it to happen, don’t worry about the headline number. Look at the quarterly job gain average. It should be really strong. Also, watch the wage increase, which in February was surprisingly modest. I expect that to jump, which could create a fear that the Fed could tighten more than expected. Indeed, I expect both of those things to happen: I anticipate a sharp increase in wages and the Fed to raise rate four times this year. So, if you think things in the markets will settle down sometime soon, you just might want to rethink your outlook.

KEY DATA: Sales: +3.0%; Over-Year: +1.1%; Prices: +5.9%; Inventory (Over-Year): -8.1%

IN A NUTSHELL: “The housing market is decent but with the supply of homes for sale low, it is hard for buyers to find the home of their dreams.”

WHAT IT MEANS: So, is the housing market improving, weakening or stagnant. The answer seems to be yes. Purchases of previously owned houses rose in February, but the level remains somewhat disappointing. Over the year, sales were up minimally and were pretty much at the same pace we averaged during 2017. In other words, it is going largely nowhere. The big problem is the low level of homes on the market, which were down sharply since February. At the current sales pace, there were only 3.4 months of supply on the market, about two months less than what would be considered to be a decent level. There has been a dearth of homes available for sale for nearly four years. In February, a surprisingly sharp drop in purchases in the Northeast restrained the gain. We had one of the warmest February’s on record in some areas, so it would have been expected that contract signings increased. They didn’t. The Midwest was down modestly, while there were strong increases in the South and Midwest. The lack of supply is pushing prices upward and they rose solidly in February.

MARKETS AND FED POLICY IMPLICATIONS: I have been traveling the past week and will be hitting the road again tomorrow (if the Philadelphia airport is open!) for another week. Over the last few days, a slew of economic numbers were released that were really inconsistent. So much so that the Atlanta Fed’s GDP Now estimate dropped below 2%. It had been close to three percent last week. Basically, we saw some better data, such as industrial production, job openings, business and consumer sentiment, but softer numbers, such as retail sales and housing starts. Today’s reading on existing home sales falls in the middle. The housing market is okay but if buyers cannot find the home they want, they tend to continue looking. That seems to be the situation with a lot of things in the economy. Right now, first quarter growth is looking a little softer than most economists, including myself, expected going into the year. But the tax cuts have not yet kicked in, so there is hope a strong 2018 will ultimately emerge. It is this somewhat unclear economy that is overhanging the Fed’s decision making. And when you add to that the uncertainties over trade, it only complicates the FOMC’s potential actions even more. That said, the Fed has embarked on a rate normalization strategy and fed funds hikes and the reduction of its balance sheet (quantitative tightening) should continue unabated unless a major crisis occurs.

 

KEY DATA: CPI: +0.2%; Over-Year: +2.2%; Less Food and Energy: +0.2%; Over-Year: +1.8%/ Hourly Earnings (Monthly): 0%; Over-Year: +0.4%/ NFIB: +0.7 point

IN A NUTSHELL: “Even with strong job gains and exuberant small business owners, inflation remains at reasonable levels.”

WHAT IT MEANS: The labor market is booming, so is that translating into higher wages and prices? It doesn’t look like that is the case. Consumer prices rose moderately in February, led by another surge in apparel costs. Despite two consecutive months of large increases, clothing prices are up only minimally over the year, so don’t make too much of the gain. Housing expenses continue to rise and it cost more to eat out, insure you vehicle and buy medical products. But food, fuel, vehicle and hospital services prices were either down or flat, so the price pressures were not that widespread. Unfortunately, feeding my passion for cakes, cupcakes and cookies continued to cost me a lot more. Excluding the more volatile food and energy components, consumer prices rose moderately as well.

Rising inflation continues to take its toll on household spending power. Hourly earnings and prices both rose at about the same pace, so inflation-adjusted or real earnings were flat in February. That is, consumer spending-power went nowhere. Over the year, household earnings gains were also nearly wiped out by inflation. Workers did make more on a weekly basis, but that was largely due to working longer hours. As I say all the time, it is hard for the economy to boom if households don’t have the money to spend, and most don’t.

Small business owners are about as happy as they have ever been. The National Federation of Independent Business’ Index of Small Business Optimism rose in February and now sits at the second highest level in its 45-year history.   Taxes are no longer a major concern. Finding qualified labor is the number one issue. Firms expect to invest and pay higher wages. Indeed, the capital spending index was the highest since 2004. In a warning to the Fed, firms are raising prices already and a growing number are planning to increase prices going forward.

MARKETS AND FED POLICY IMPLICATIONS: The Fed is meeting next week and will have to decide whether or not to continue its interest rate normalization policy. The members will be looking at a variety of factors, but they can be summarized simply: Is growth strong and is inflation moving back toward its target? The answer on both accounts seems to be yes. Clearly, the February jobs report indicates that the economy is in very good shape. Today’s consumer price data tell us that inflation is nearing the magical 2% rate, but is not accelerating sharply. The NFIB survey is the report that should catch the FOMC members’ attention. Actual and planned price increases are back into historically normal levels after being depressed for the past decade. Firms seem to feel this is a good time to expand and they expect to get higher prices as they do so. There is little reason for the FOMC to hold back on increasing interest rates at the March 20-21 meeting and I expect it to do so. As for investors, the rise in the Consumer Price Index was not so great that inflation fears were stirred up. In addition, bond rates have stabilized, though at significantly higher levels than we had at the end of last year. Until there is a reason to panic, it looks as if equity investors will stay the course. Whether that is just economy-based exuberance or irrational exuberance is something that will be determined in the months to come.

KEY DATA: Payrolls: +313,000; Private: +287,000; Revisions: +54,000; Construction: +61,000; Unemployment Rate: 4.1% (unchanged); Wages: +0.1%

IN A NUTSHELL: “Wow! That is the only way to describe the number of jobs added in February.”

WHAT IT MEANS: There is a saying that you should “watch what I do, not what I say”, and that is oh, so true when it comes to business hiring. You know all those complaints about firms not being able to find “qualified” workers, an issue I often discuss? Well, never mind. They seem to be able to get all the workers they need, at least if you believe the U.S. Bureau of Labor Statistics. Payrolls increased in February by the largest amount since July 2016 and the gain was way above expectations. Given that the December and January increases were revised upward sharply, the February hiring was even more impressive. Yes, there were some oddities in the data. A huge rise in construction was likely due to the warm February weather. For some reason unknown to anyone, retailers added workers as if the malls were being swamped. And teacher hiring was off the charts, which for February makes little sense. Still, even adjusting for those anomalies, the gains were so widespread that you have to consider this to be a strong report that makes clear firms are ready, willing and able to add lots of new workers.

Despite the outsized hiring, the unemployment remained at 4.1%. The reason was simple: People are flocking into the workforce like crazy. Earlier this week, I mocked the idea that the qualified couch potatoes were suddenly emailing resumes and getting hired. Well, maybe they are (though I still think firms are finally lowering their standards). The increase in the labor force was the largest in fifteen years! The labor force participation rate jumped. However, it is pretty much at the same level it has been for the past four years.

The only weak element of the report was wages, which rose minimally. I am just not certain why the wage increase was so modest. There were strong increases in high-paying jobs, with thirty percent of the total job gain in manufacturing and construction. Meanwhile, restaurants, which typically have low pay, added few new workers. Employees did work longer, so we should see a solid rise in personal income.

MARKETS AND FED POLICY IMPLICATIONS: This was a big report. No, it was a HUGE report. While investors may be comforted by the limited wage increase, that may not be the driving force for the FOMC. The Fed members are likely to read this as saying the economy is accelerating. That should be good enough to trigger a rate hike at the March 20,21 meeting, especially if trade war fears ease. And the pace of hiring is enough for the statement to reflect stronger growth and the likelihood that the Fed will continue normalizing rates. The risks right now are that wage and price inflation will accelerate as we go through the year to a pace well above the Fed’s 2% target. We have yet to see the tax cuts, either business or personal, really kick in. That should happen over the next six months. If we are getting this level of hiring now, what will the demand for workers be in the summer or fall? There just are not enough workers around to meet the demand. Indeed, It looks as if part of the corporate tax cuts are being used to fund desperately needed worker retention and attraction strategies. Larger firms now have the wherewithal to offer higher wages, bonuses, 401K subsidies and/or better benefits, and they are starting to do that. It is just that most small and mid-sized companies cannot match those increases, which is likely the reason the wage increases remain limited.

KEY DATA: ADP: +235,000/ HWOL: -185,7000/ Deficit: $2.7 billion wider

A NUTSHELL: “The labor market is strong, maybe too strong.”

WHAT IT MEANS: One of the risks of the tax cuts and added government spending is that a stronger economy could put great pressure on wages. Well, it looks like that may already be happening. Friday we get the February employment report. Today, ADP released its estimate of private sector job gains for February and it looks like businesses hired like crazy. The gains were across the board, with robust payroll increases in every size of business and in just about every sector. The only decline was in information services, which has been soft for quite some time now. Meanwhile, construction was up big-time. The mild February may have played a major role in the strong hiring.

The strong payroll gains may be cutting into the backlog of open positions as the Conference Board’s Help Wanted OnLine measure was down sharply in February. Maybe. It is hardly clear why the number of want ads dropped, but they did, and the declines were widespread. Seven of the ten major occupational groupings followed showed fewer ad postings while declines were seen in every region, most states and three-quarters of the major metropolitan areas. There is still strong need for computer and math specialists, which is not a surprise given there are few people with those skills who are actually unemployed.

With tariffs and trade wars in the news, the focus is likely to shift to the trade data and today’s deficit is not likely to make the White House happy. The trade deficit widened sharply in January as exports fell while imports were largely flat. Oil was the prime driver of the deficit as rising prices led to a significant increase in the value of oil imports. Excluding oil, imports would have been down, as the major components, such as consumer goods and food, were lower. Interestingly, our purchases of foreign aluminum and most steel products declined. On the export side, we sold more vehicles and consumer goods, but less of most other goods. As for the country issue, the deficit with China surged, narrowed with the EU and Mexico but widened with Canada. That is just a one-month snapshot, but it’s today’s number, which is likely to matter to some.  

MARKETS AND FED POLICY IMPLICATIONS: The ADP estimate of private sector payroll changes is a good guide, but it can differ quite widely from the month’s government numbers. The trends are similar, though, and ADP is indicating that job gains are still quite strong. That is happening despite the fact that companies have been complaining for years that they cannot find “qualified” workers. Either tons of “qualified” workers are suddenly deciding to get off their couches, stop eating cereal and enter the workforce or the definition of “qualified” just may be changing. I opt for the second explanation. Businesses had failed to adjust to the fact that there just wasn’t the massive oversupply of labor they benefitted from in the first years after the end of the Great Recession. Reality may have finally settled in. But there are implications of hiring less qualified workers; the biggest is that productivity is likely to remain weak. The revised 2017 productivity numbers were released today and an increase of 1.2% is hardly something to celebrate. And since growth can only come from either productivity or added labor, the modest productivity increase implies that strengthening growth could put pressure not just on wages but prices as well. As for the markets, trade wars are bad and anyone who thinks otherwise has been smoking too much medical marijuana. There is reason to be concerned and until we actually see what tariff plan is implemented – and the reaction – uncertainty and wild equity price swings are likely to continue. In addition, a trade war would likely cause the Fed to rethink its interest rate normalization strategy. I still expect a rate hike at the March 20-21 FOMC meeting, but going forward, the pathway of rates will depend upon the actual, not tweeted, trade proposals.

KEY DATA: Sales: -7.8%; Over-year: -1.0%; Median Prices (Over-Year): +2.4%

IN A NUTSHELL: “Builders may be exuberant, but sales don’t seem to be supporting that attitude.”

WHAT IT MEANS: If you believe the National Association of Homebuilders, happy days are here again. The NAHB index is at a level that was exceeded only during the peak of the dot.com era. It was not even this high during the best times of the housing bubble. Housing starts were fifty percent higher than they are now. Yet in January, sales of new homes declined for the second consecutive month. There were sharp drops in sales in both the Northeast and the South. I can almost understand the 33% fall off in the Northeast. There was exceptionally cold weather, at least early in the month. However, I am not sure why demand fell by double-digits in the South. On the other hand, sales soared by over 15% in the Midwest, but rose minimally in the West. In other words, this is a report that shows no real pattern. Meanwhile, prices rose only modestly over the year. Builders are bringing more homes on to the market. Indeed, the number of homes for sale is the largest in nearly nine years. However, when adjusted for the sales pace, inventory is still not high, even with the recent backing off of contract signings.

MARKETS AND FED POLICY IMPLICATIONS: There are always strange housing numbers that pop up because extreme weather conditions occur randomly. A blizzard that hits in January could have easily happened in February. Bitter cold weather or massive rain, as we have had this year, changes the ability to get shovels in the ground or for buyers to visit sites. So don’t take the two consecutive months of declines in purchases as a clear signal the housing market is faltering. That said, both new and existing home sales did decline in both December and January and now we are facing rising mortgage rates. Yes, they are still relatively low, but they are the highest in four years. An upward trend in rates should be forcing some buyers to jump off the fence. I guess the increase has not been enough to cause any great stampede. I suspect that we will see a very strong rebound when the February numbers come out, especially since the weather, at least in the Northeast, has been incredibly mild. Even though that report will not be released before the next FOMC meeting, I don’t expect this report to deter any Fed member from voting in favor of a rate hike. As for investors, it appears it will take a push to above 3% in the 10-year Treasury note to create any real anxiety – if it actually does do anything to the exuberance currently in the equity markets. Right now, we have fifteen basis points to go to get there. If 2.85% is the new normal, it shows that an acceptable long-term rate is a moveable target. Don’t be surprised if 3% comes and goes in a similar manner. And we could get there fairly soon.

KEY DATA: Imports: +1%; Nonfuel: +0.4%; Exports: +0.8%; Farm: -0.1%/ Starts: +9.7%; 1-Family: +3.7%; Permits: +7.4%; 1-Family: -1.7%

IN A NUTSHELL: “Inflation pressures are building not just because domestic firms are raising prices but also because import costs increases are accelerating.”

WHAT IT MEANS: Another day of numbers, another sign that inflation is on the rise. This time it is from imports. The cost of foreign goods surged in January. Yes, energy prices jumped, but that was not the only reason the index was up so much. Excluding fuel, prices still rose rapidly. There was a surge in food, vehicles and a variety of industrial materials. On the positive side, consumer goods import prices were flat and capital goods costs went up modestly. Excluding fuel and even excluding food and fuel, import prices are up nearly 2%, the highest in nearly six years. On the export side, the only major sector that didn’t post a solid increase was agriculture. This sector has been struggling to find some pricing power and it just isn’t there.

Meanwhile, the December slowdown in home construction was probably due to weather issues. It is tough to seasonally adjust the data during the winter as deep-freezes and blizzards tend to come at random times. The rebound, though, in housing starts and permits in January was good to see. Both permit requests and housing starts were the highest in over nine years. Much of the gain, though, came from big jumps in the multi-family segment, which is always volatile. Regionally, construction fell in the Midwest but surged in the Northeast, South and West. While the number of homes under construction did increase, the level of activity was not a whole lot above what was going on in January 2017. It doesn’t look as if the shortage of inventory will be eased anytime soon.

One other key number came out today. The University of Michigan’s mid-month reading of consumer sentiment rebounded sharply in the early part of February. Consumers were more optimistic about the future and thought the economy was improving.

MARKETS AND FED POLICY IMPLICATIONS: Do interest rates matter? And if so, to whom do they matter? Despite rising inflation and an increase in the 10-year note of about 50 basis points and a 30 basis point jump in the 2-year note, investors don’t appear to be that concerned. The one-week retreat seems to have been shrugged off. But the inflation pressures are real and we haven’t seen any major economic acceleration from the tax cuts yet that could push up wage costs. Of course, businesses are probably looking forward to stronger, possibly excess demand, as that would give them the pricing power they have lacked for over a decade. And the ability to raise prices holds out hopes that earnings growth can be sustained at a decent level even after the post-tax cut base is put in place. But there is a downside to this thinking as the Fed will be free to raise interest rates back to more normal rates at just about any pace deemed necessary. Unfortunately, the discussion about what are “normal” rates hasn’t really begun. It needs to and soon. In two weeks the next PCE price index comes out and it could be hot. And three weeks later the FOMC meets. If the inflation data are as worrisome as I think is possible, look for the Fed to indicate it is putting inflation on the closely watched list.