Hawkish Fed spooks global markets

A year ago, many major stockmarket indices hit new all-time highs. Since then, however, they have struggled, sliding sharply last summer and in early 2016 before finding their feet. It has been 21 years since a US bull market has gone a full year without making a new high, according to Bianco Research.

And the bulls may have to be patient. Earnings and valuations are unappealing, while another headwind is an increasingly hawkish central bank. Nor does the calendar bode well. As Royal London Asset Management's Trevor Greetham told the FT, world stockmarkets have returned an average of 10% a year in US dollar terms, including dividends. But in May to September, the mean return has been around zero.

"The tortured dance" between markets and the Fed had been suspended in recent months, says the FT's Michael Mackenzie. The Fed made soothing noises after investors reacted stroppily to its December interest-rate hike. A June rate hike was widely deemed off the table. But last April's minutes, along with a series of recent pronouncements, madeit clear this could not be taken for granted.

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Talk about confirmation bias, says Deutsche Bank. Since Janet Yellen "delivered her dovish coos" in April, investors have focused on weak April payrolls, an uptick in jobless claims and lacklustre housing data "to justify their complacency" about rate hikes. They could instead have taken into account a jump in retail sales and strong industrial production. Investors have been in denial about the strengthening economy.

Whether or not the Fed does actually hike this summer, or finds another reason to sit on its hands and thus tacitly encourage the stockmarket rally to keep going it may have to stop faffing about like this much sooner than it thinks. It "will be forced to raise rates much more aggressively than markets expect", predicts Capital Economics. Inflation is making a comeback, and the central bank is in danger of falling behind the curve.

The surge in the dollar and the fall in oil prices, two key trends that kept a lid on prices in 2015, are fading quickly. Inflation posted its biggest month-on-month jump in three years in April. The commodity bounce implies an annual rate of 2% by the second half of 2016, and 3% early next year. Core inflation is already above 2% year-on-year, close to a four-year high. It looks as though global stocks are in for a nasty surprise.