The major Wall Street indices ended the week (10 - 14 May) lower with both the Dow and the S&P 500 down by more than 1% while the Nasdaq Composite fell back by over 2.3% – despite bouncing back on Thursday and Friday from steep losses earlier in a rollercoaster week which saw the Dow dip by nearly 1,200 points from Monday to Wednesday with the S&P 500 and the Nasdaq sliding by 4% and 5% over the period.

Much of the volatility had stemmed from market concerns of the Fed underestimating the trajectory of inflation on the back of the latest producer price (PPI) and consumers price index (CPI) as well as news of hotel and restaurant chains such as McDonald’s having to raise wages in their hiring drives. Then, there was also the matter of a steep 10% increase in used cars and truck prices.

It’s such developments that unnerve investors who fear that a more sustained pace in inflation may prompt the Fed to tighten monetary policy sooner than indicated in their official projections.

Investors who place their bet on techs tend to be more jittery as growth in the sector are seen to be more likely to be impaired compared to cyclicals in light of the Center for Disease Control (CDC) announcement on Friday that vaccinated individuals do not need to wear masks – which will also make it harder for tech firms to sustain their current levels of earnings growth as lockdowns ease. The Nasdaq is currently 6% down from its peak a month ago.

On the other hand, it is the oft-view of the Fed that it expects spikes in inflation will be transitory due to reopening bottlenecks in areas such as supply chains, wages, housing and rentals which was in part justified by flat on-month retail sales for April and declines in both iron ore and copper prices by nearly 2% for the week.

Other economists are also of the view that the spike in inflation for April was due to the low base a year ago when prices collapsed from the onset of the virus and subsequent lockdowns.

In short, despite the current tantrums in equities, the US central bank does not see any spiral or broad-based inflation looming on the horizon – other than idiosyncratic cases of rising prices due to reopening challenges such as those stemming from shifts in labour market and supply squeezes ranging from shipping containers and bulk freight to semiconductor chips and lumber for housing.

Fed governor Lael Brainard had tried to assuage the market saying that production-related wrinkles would be ironed out over time and that “supply-demand imbalances” in the in-person services sector would also be resolved as vaccination rollouts continue – which will reduce “virus-related impediments” facing businesses due to lingering concerns over workplace health and safety, gaps in childcare and public mobility.

Whether reflation will be benign and orderly or will it hit some unexpected overheating and prolonged bumps that could become disorderly for markets, investors will be looking at clues and cues this coming week from US housing data and earnings of major retailers, Walmart and Home Depot as well as minutes from the last FOMC meeting and comments from Fed policy makers. Other data include Markit manufacturing and services PMIs and initial job claims. Investors will be watching to see if the inflationary trend is also taking hold in Europe from price data on Wednesday.

In the meantime, the rotation to emerging markets continued to face headwinds amid the resurgent waves of virus made worse by more infectious variants which have triggered renewed restrictions and lockdowns with the World Health Organisation (WHO) warning of a more deadly pandemic if safeguards and expanded vaccination programmes are not in place leading to more disruptions.