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by John Nyaradi

The unmistakable smell of inflationary smoke wafted across world markets yesterday as inflationary numbers sprang up in economic reports and global bond markets, spooking investors across the globe.

Starting in China, the red hot economy grew 9.8% in the 4th Quarter, faster than expected, and registered a 4.6% inflation rate, prompting fears of further tightening measures to slow growth and rising prices in that country.

The Shanghai Composite (SSEC) (NYSEARCA:FXI) continued to respond, dropping -2.9% yesterday and bringing its total decline since early November to approximately -15%.

Food prices (NYSEARCA:DBA) have been skyrocketing around the world as inflationary pressures grow, particularly in the emerging world where a higher percentage of discretionary spending goes to food and energy than for us in the developed world.

Food riots and inflationary protests have broken out across North Africa.

Yesterday’s Philly Fed report was lackluster on the growth front, coming in at 19.3 versus expected of 20 and prior of 20.8 but it, too, signaled higher prices ahead.

Price increases for inputs as well as firms’ own manufactured goods are more widespread this month. Fifty-four percent of the firms reported higher prices for inputs, compared with 52 percent in the previous month. The prices paid index, which increased 6 points in January, has increased 42 points over the past four months. (Philadelphia Federal Reserve)

The bond market declined sharply yesterday, particularly on the long end, (NYSEARCA:TLT) with the 30 year rate rising to 4.6%.

Yesterday’s TIPS (Treasury Inflation Protected Securities) auction was lackluster, at best, with the lowest bid to cover ration (demand) in nearly two years.

However, not all was doom and gloom as the tech sector continued showing strength as Google (NASDAQ:GOOG) and Advanced Micro Devices (NASDAQ:AMD) beat earnings expectations.

New unemployment claims declined, leading economic indicators advanced 1% and existing home sales improved, although they’re still living in a deep, dark basement of deflationary pricing.

Just take a look around your neighborhood for confirmation.

So as of yesterday we find ourselves entering a treacherous zone where the Federal Reserve continues its bond buying program in an effort to lower interest rates but instead we see interest rates rising both at home and around the world.

The acrid smell of inflation is starting to spread around the world and likely is behind these rate increases as the “bond vigilantes” flex their muscles.

Combined with a still extremely fragile recovery, at least in the developed world, one can smell the whiff of smoke in the overcrowded theatre of global equities markets. We all know that inflation is bad news for equities and for economic growth, and one can only hope that nobody yells “fire” in this overcrowded and nervous room.

Disclosure: Wall Street Sector Selector actively trades a wide range of exchange traded funds and positions can change at any time.