"This bear flattening really is noteworthy here. It could mean a few things. It could mean you have the short end rising in yield on the thinking the Fed is going to raise rates sooner rather than later," he said. While the two-year yield rises, the 10-year has been holding in a range around 2.70.
"On the other hand, the 10-year yield is telling me maybe the two-year is right. They think a rise in rates or a tapering is going to have a negative impact on the economy. The two-year could be responding to better economic numbers but it may also be reacting to this move in the CRB." The two-year was yielding 0.42 percent Wednesday afternoon.
Boockvar also said the expectations are for continued low inflation, so it poses more of a market risk if costs start rising more rapidly and broadly. "There's been a consensus viewpoint out there that there's no inflation, and the view from the Fed is that there's no inflation," he said.
But rising inflation expectations may be a ways off, says Deutsche Bank's chief U.S. economist, Joseph LaVorgna. For now, the outlook is for continued very low inflation, despite slightly higher CPI and PPI increases last month.
"I think as of right now, it's something you should be watching but it's too soon for any meaningful shift in inflation expectations. It is really going to be about the nonfood and energy inflation. Wage pressure will happen over time, but I don't see much evidence of wage pressure now," he said. "You don't need higher wages to get inflation. Often inflation goes up first." He did say compensation costs could be rising because of increased health-care costs.
On its earnings call, McDonald's management discussed the increase in hourly minimum wage costs that took effect in 13 states at the beginning the year.
"I think inherent in that is you do see franchisees generally around the industry, not just McDonald's, anticipating some of these higher input costs. So they've got what the states have already enacted today. They've got the discussion about a potential at the federal level. For a lot of them, the health-care mandate kicks in, in 2015 so they have to be mindful of that. So these cost pressures are definitely on everyone's mind as you think about pricing, yet ... you have to strike that right balance between everyday affordability and providing them premium products that will drive them into the restaurant," said McDonald's CFO Peter Bensen.
Oppenheimer Asset Management strategist Andrew Burkly said the stock market has already been signaling a change in expectations. He said consumer discretionary stocks—retailers and restaurants—are now the market laggards after being the market leaders last year. When that sector passes leadership to the materials sector, he says it signals a shift that margins could come under pressure.
"We've had some pretty vicious shifts in sector relative performance this year," said Adams. "I think the market is trying to price in the first fed funds hike. It's mostly in the massive breakdown in consumer discretionary ... I never want to draw any conclusions from these short-term moves but discretionary breaking down does not bode well for the market. The market typically trends sideways for six to 12 months, at best ... maybe the market is sniffing out something that we're not."
Adams said energy is also outperforming, possibly implying better pricing ahead for the sector. The S&P energy sector, as well as the industrial sector, hit an all-time high Wednesday. Oil prices have risen on concerns about tensions in Ukraine, and West Texas Intermediate was off only slightly even though a government report said oil supplies were at the highest level in 83 years.
LPL Financial's chief market strategist, Jeff Kleintop, says history shows a little inflation is good for stocks.
"Examining periods since 1950, the valuation of the stock market measured by the S&P 500 trailing price-to-earnings ratio (PR) tends to be higher when the Consumer Price Index rises above the current 1.5 percent," he wrote in a note.
"In fact, S&P 500 PEs tend to be a whole point higher than the current 16.8 when inflation is between 1.5 and 2.5 percent, a range some signs are pointing for the coming year. Only as inflation rises above 3.5 percent has it corresponded with lower PEs."