Weekly Summary

The question should really be, what’s behind many masks? Overall U.S. equity averages such as the S&P 500 have recently exhibited very low measures of volatility, but underneath the surface remains rather elevated volatility between sectors.

The latest data release could be the next determinant of financial markets’ directions. Data might confirm certain opinions while dispelling others. Any news concerning labor markets, wages, and inflation (both price increases and expectations) will be closely scrutinized.

By adopting a more hawkish posture on its monetary policies, the Fed increased the likelihood of volatility in financial markets, especially among interest rates and currencies. But not yet—predictable economic and inflation data kept interest rates and the U.S. dollar rather stable this week, and equities continued higher.

It looks like inflation matters after all—at least for one day. After its June 16 meeting, the Federal Reserve’s rhetoric turned much more hawkish.

The long-term mantra of “Don’t fight the Fed” has never been more evident judging by the reactions of most financial markets over the past few weeks. The view that any inflationary spikes will be transitory—and even if not, that the Fed has the necessary tools to deal with more persistent inflation is accepted as fact by many market participants—and perhaps the consensus. It appears that despite strong inflation data, the only data that matters now is nonfarm payrolls.

The pandemic revealed the fragility of the world’s interconnected economies and made “supply chain disruption” a buzzword. Companies now strive to have at least some supply chains more local and diversified, but a more diverse set of supply chains most likely will be inflationary at the margin.

The U.S.’s fiscal and monetary policy response has been massive, quick—and potentially fertile for unintended consequences. At the same time, cryptocurrency has been on a roller coaster, while the relatively calmer rides of equities and sector rotations remain somewhat unpredictable.

While there’s overwhelming evidence of inflation, the debate continues as to whether price increases are transitory or will prove to be persistent.

The pandemic disrupted many correlations. Financial market reactions now revolve around vaccination rates and incidences of COVID-19 around the world. Reactions to economic data have been superseded by interpretations of the progression and containment of coronavirus. Assumptions can quickly be contradicted. Perceived anomalies often indicate that something significant is happening beneath the surface.

The Week at a Glance: April 26-30, 2021Federal Reserve Chairman Jerome Powell continues to insist that recent price increases are temporary and, therefore, the Fed is content to allow U.S. inflation to run as high as 2.5% before they need to “act.” Whether Powell is...