US consumer prices jumped for the second month in a row to reach 5%, a level not seen since mid-2008, during the financial crisis. Then the Federal Reserve delivered a hawkish surprise, signalling earlier tapering and rate hikes as data continues to point to a strong global recovery. Employment is what appears to matter most to the Fed and Chairman Powell sees a strong labour market developing.

Inflation-higher-than-expected and the Fed turning hawkish should mean higher bond yields and a steeper yield curve. But it quickly emerged that that was something of a consensus view and a brief increase in rates was quickly reversed to leave bond yields lower in all the major centres and a rush to reverse ‘reflation’ trades in the equity markets.

Overall, the US equity market was little changed along with World indices, but this concealed sharp falls for a number of the banks and financials (banks are supposed to like higher rates), Citigroup fell 12% and JPMorgan by 8%, European and other banks suffered a similar fate. Tech stocks rose along with many of the media and consumer discretionary stocks. Oil stocks did not fit the pattern, generally showing good gains in the wake of a rising oil price. Volatility was fading overall by the end of this period, the Swiss stock market putting in the strongest performance thanks to continued strength in Nestlé and, particularly to an 11% gain for the second-largest index constituent, Roche Holding.

The US dollar was a beneficiary of the Fed’s revised tone with the DXY (US dollar Index) up around 2.5%, the euro the weakest and sterling down around 2%. Gold did not react well to the strength in the dollar and more hawkish Fed, the bullion price fell 6%.

Central banks continue to maintain that this is a temporary blip in inflation as we work through comparisons with last year. We suspect that higher rates are coming and that the Federal Reserve will commence tapering action in Q4. This will be the real test.