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Traders work on the floor of the New York Stock Exchange (NYSE) shortly after the opening bell in New York, U.S.

It’s a maxim that’s been a mainstay of Wall Street for generations.

“Sell in May and go away.”

It was coined back in the day when communications technology was fairly rudimentary.

Instead of getting caught out by an unexpected turn of events while on Summer holidays, big investors reckoned the safest option was to sell your stocks, park the cash and drink Manhattans by the beach undisturbed.

Smartphones and Wi-Fi may have changed all that but, for whatever reason, May still tends to be a poor month for stocks.

This May in particular. The battle for domination between the US Federal Reserve and money markets roared back to life this week after a titanic struggle in February that left the globe’s biggest central banks shaken and stirred.

The spark, once again, is inflation.

Is it about to roar back to life with a vengeance? Or is it merely a temporary bounce, as economies recover from the debilitating economic meltdown caused by COVID?

Central banks, led by the US Federal Reserve, are convinced that the recovery is being driven by the huge stimulus being injected by governments and monetary authorities and, if prematurely withdrawn, we’ll see employment, growth and markets reverse.

Money market traders disagree. They reckon the stimulus is fuelling a much stronger recovery than the authorities acknowledge and that, if maintained, will see inflation soar.

Central banks, they argue, won’t be able to maintain near zero rates for three years.

Wednesday night was a watershed moment in the stand-off.

America’s inflation reading for April was a whopping 0.8 per cent, the highest since 2009, and about double what most pundits had anticipated.

The yields, or interest rates, on market traded US government debt securities soared, Wall Street got a dose of the wobbles and the highly speculative technology stocks that had been so much in demand last year took a beating.

Stocks hate higher interest rates, particularly those offering long term promise but no current profits. And especially those carrying large amounts of debt.

If the US Fed is forced to raise interest rates early, the shakeout would be felt across the globe.

Aussie dollar under pressure

The Australian dollar hit the skids on Wednesday night, shedding around 1.5 per cent.

For weeks, it had been slowly climbing on the back of an extraordinary hike in the price of iron ore, the nation’s biggest export earner.

A man holds a piece of iron ore in front of a remote-controlled truck in Sheila Valley, WA.
Iron ore prices have surged way beyond the levels most analysts forecast even just months ago.(Reuters: David Gray)

In the past fortnight, it has soared into record territory, scraping above $US200 a tonne before accelerating into the stratosphere. By the time America’s inflation numbers dropped on Wednesday, it was just shy of $US240 a tonne.

Ordinarily, that kind of performance would have lit a fire under the Aussie dollar.

But with US government debt now offering higher yields than their Australian counterpart, investors have dumped Australian dollars in favour of the greenback, giving a glimpse of the forces now at play.

Local technology stocks followed their Wall Street colleagues into a collective nosedive, particularly those that are yet to deliver profits.

Afterpay, which was roaring ahead until the inflation bogey reared its head, has slumped back to $82, around half its peak from earlier this year.

Economic cycle in overdrive

For the past five years, the Reserve Bank has been desperately trying to fire up inflation. Nothing has worked, even interest rates at barely above zero.

Like it’s American counterpart, it’s now willing to let the economy run hot before it even considers pushing rates higher. Hence the virtual guarantees that interest rates won’t rise before 2024.

That’s a radical departure from the past. It always has been accepted that central banks will try to act ahead of time, to curb inflation at the first hint of a break-out or cut rates if it looks like the economy is cooling.

A photo of the trading boards at the Australian stock exchange

In recent months, the RBA has been copping criticism all round, accused of being overly conservative in the post global financial crisis era, keeping interest rates too high and failing to respond to lacklustre economic growth.

Now it is doing the opposite.

But it is possible the RBA’s resolve may be tested sooner rather than later.

If last year taught us anything, it is that the economic cycle has not just sped up but gone into overdrive.

Recessions would scar an economy for years. Markets, for stocks, bonds, housing and commodities would go into hibernation.

That’s not happening now. During the GFC, stocks bounced around the bottom for most of 2008. Last year, stocks collapsed during February and March, hit the bottom on March 23, and then turned skyward.

The nadir lasted just one day.

Commodities are soaring. Iron, copper, oil, all manner of things. Housing prices globally are surging. Stocks are at records. Debt is ballooning.

About the only thing lagging this incredible performance is wages. That’s what keeps central bankers awake at night.

ASX boards showing red down arrows
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By Davies

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