The current stock market looks a lot like the old, great TV show called the Twilight Zone. This was a quirky and often scary weekly program that saw apparently normal people encounter abnormal life challenges. Right now, we’re all caught in a strange situation where we don’t know what we should be worried about — inflation and big interest rate rises or a possible recession, created by, you guessed it — big interest rate rises.

As a consequence, it’s hard to imagine that the week ahead can be non-scary for stocks, with central banks expected to continue to dish out pain via interest rate hikes. Our RBA is expected to raise rates by 0.5% on Tuesday and even the Yanks are watching us closely.

CNBC’s respected US business writer, Patti Domm, reported this over the weekend: “Tuesday is Australia’s central bank, and they’ll likely raise 50. Canada is Wednesday and they’ll likely go 75, and the ECB on Thursday could do 75 as well,” said Marc Chandler, chief market strategist at Bannockburn Global Forex, referring to half- and three-quarters point interest rate hikes.

Our market is expected to open down 16 points on Monday, but it could get nastier following Wall Street’s reaction to the OK jobs report in the US on Friday.

The first reaction to the figures was that the 315,000 jobs created was a ‘Goldilocks report’ — indicating that the economy was neither too hot (inflationary) nor too cold (implying heading for a recession).

Unemployment in August rose from 3.5% to 3.7%, which is what the Fed wants from its rate rises. However, by the end of trade, the Dow Jones Index was down 337 points or 1%, the S&P 500 was off 1% and the Nasdaq dropped 1.31%.

Showing how hard data is to read right now, was the European reaction to the US jobs data, with the German DAX up a big 3.3%, the UK FTSE rising 1.8% and the French CAC ending up 2.2% higher.

So why did Wall Street at first like the jobs number and then not like it?

Domm says the total report actually offered some good news that the market should’ve liked.

“For instance, there was a surprise jump in the participation rate to 62.4 %, up 0.3 percentage points,” she noted. “That means more people came off the sidelines to join the workforce. Wage gains also were less than expected.”

This looks like signs that inflation could be easing and a soft landing is more possible.

“Traders also viewed the jobs report as opening the door to a potential smaller half-point rate hike from the Fed at its meeting on Sept 20-21,” Domm revealed. “The futures market, however, was still pricing in fairly high 65% odds of a 75-basis-point Fed rate hike. That would be the third in a row after similar increases in June and July.”

So, why this fear of big rate rises despite improving inflation news?

This explanation from ex-NSW Government Treasury boss, Percy Allan, about the fears of the US central bank chairman, Jerome Powell is worth noting. Recall Powell spooked the market with his Jackson Hole speech, two Fridays ago, which saw him play the tough guy central banker.

“Arthur Burns was the chair of the Fed in the high inflation 1970s who practised stop/start monetary policy,” Percy explained. “He would jack up rates to fight inflation, but the moment the economy stalled he would reduce rates to protect employment. The result was stagflation – a stagnant economy with high inflation. When Paul Volker became Fed chair in 1979, he doubled the cash rate to 20% by mid-1981 which plunged the economy into recession, but also ended spiralling inflation. History now typecasts Burns as a blunderer and Volker as a victor.”

The Fed boss might have learnt from this.

Here’s Percy’s take on Powell: “Powell, after miscasting high inflation as transitory and refusing to raise rates to counter it, is now in a hurry to prove he is a Volker, not a Burns.

“This has changed market sentiment from risk on to risk off, as it reluctantly concludes that the Fed will refuse to rescue investors by abandoning its austerity drive.”

On the other hand, Percy added: “There are still sceptics who think that Powell will panic if unemployment rises, and asset prices crash in the lead up to the US midterm election in November, so he will buckle under political and business pressure. Central banks around the world (especially in English-speaking countries) are heavily influenced by the direction the Fed takes.”

Right now, the tough guy, scary Twilight Zone Powell is bringing stocks down, but a better-than-expected inflation number next week in the US, and a worrying jobs report early next month, could change the market’s attitude to what it thinks the Fed will do on rates.

If that happens, then all of the short-sellers in the market currently enjoying the bear market and share sell-offs could end up in their own Twilight Zone. However, if the inflation story does not improve, optimists like yours truly will have to endure and watch this current Twilight Zone for a lot more episodes than I would like!