What happens to US rates and shares, US rates in particular, will heavily influence what happens in bond, equity and currency markets – and economies -- around the world. Those who had adopted the Fed’s sanguine view of the outlook for inflation would have been taken aback by last Friday’s US unemployment data, which showed a bigger than expected fall in the US unemployment.

The US economy added 943,000 jobs in July, well above expectations, and the unemployment rate fell from 5.9 per cent to 5.4 per cent. Participation rates were up and, significantly, so were average hourly earnings, which rose 4 per cent from July last year.

While the total number of jobs remains about 5.7 million less than pre-pandemic levels, employers are reporting shortages of available labour.

It may be that the extraordinary performance of sharemarkets in the past year has incentivised large-scale early retirements (on some estimates more than two million people have left the workforce because of the big boost to their retirement funds, or that the impact of the enhanced unemployment benefits (which are still in place) is deterring people from rejoining the workforce.

The Delta mutation of the coronavirus, which has caused a new surge in infections and hospitalisations in the US, might also be a factor and adds another layer of uncertainty to debates about the condition of the US economy and whether or not it is now experiencing a sustainable post-pandemic growth phase.

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It was the emergence of the virulent Delta strain and its threat to global economic recovery that caused bond markets to ignore the spiralling US inflation numbers and buy into the Fed’s argument that they were transitory.

Friday’s job numbers, however, resulted in an abrupt hike in yields, with the 10-year bond yield ending the week at 1.3 per cent after starting it below 1.2 per cent as the (still small) risk of an earlier-than-expected taper and rate rise started to be factored in.

The Fed and its peers elsewhere are likely to remain cautious because of the host of uncertainties that could disrupt what have been relatively quick and strong recoveries on most of the major economies.

Delta and potentially other mutations of the virus are the most obvious risk to continued growth, as Josh Frydenberg could testify, but the long-term impacts of COVID-19 on workforces and work patterns, on property markets and on investment and consumption remain uncertain. Some changes to supply chains and the increased input costs associated with them will be permanent.

In the US the Biden $US1 trillion infrastructure bill is winding its way through Congress with surprising (given Donald Trump’s strident efforts to encourage them to oppose it) levels of Republican support. Biden is also drawing up a $US3.5 trillion budget plan.

Will the administration be pouring oil onto an economy already -- if the inflation numbers are any guide -- overheating or will its spending counter the impact of the new COVID-19 outbreaks?

There’s a fierce debate on that question in the US.

A better sense of the Fed’s assessment, and its plans, may become available later this month when Powell speaks at the annual Jackson Hole meeting of central bankers and economists in Wyoming.

That conference, from the 26th to the 28th, is when the markets expect Powell to provide more detail on when and how the Fed will start tapering its bond and mortgage purchases and its most current assessment of when the first rate rise in this cycle might occur. Whatever he might have planned to say will be affected by last week’s employment data and this week’s inflation readings.

If the inflation data surprises on the high side and the timetable for the shift in monetary policy is brought forward, expect some ructions in markets that have bought into the “transitory” view of inflation and are pricing in ultra-low interest rates almost in perpetuity.

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