MarketWatch: February 14-17, 2011

Markets so far this week have reacted to mixed news on the growth front in the US plus new concerns on inflation. As things start to wind up for the weekend, traders are also nervously watching news from various parts of the world.

On the U.S. economic front, this week’s data suggested to market participants that the recovery was continuing to make its way – but very slowly. Bond prices eased off (prices move in the opposite direction of yields) when a weaker unemployment claims report for the week suggested that labor market improvements might be slower than expected after the large drop in January’s unemployment rate, reported a few weeks ago.

Inflation concerns reared up after poor reports on the consumer and producer price sides appeared. For the time being, investors are watching warily. However, there may have been special factors in the reports (food, energy, and pharmaceuticals in the CPI) and firms may not be able to pass through higher prices to their customers in today’s competitive business climate. The U.S. economy still has large unused capacity in labor and product markets, which suggests that inflationary pressures will not be a problem for awhile. Still, if these factors continue long enough to reshape expectations, government borrowing will cost more because investors will seek to offset their higher risk by demanding higher interest rates to purchase our debt.

On the international front, worries abound that could increase safe haven demand for U.S. debt instruments based on past market behavior – but are so far lurking in the background. As of this writing, reports from Europe are that very high levels of overnight borrowing from the European Central Bank have continued for the second night. Initially, the elevated borrowing was widely attributed to a “fat finger” (or error), but it is not clear what is going on. In addition, continuing turmoil in the Middle East, with possible implications for oil prices and other commerce moving through the Suez Canal, is being watched very closely.