Daily Market Commentary 11th April 2022

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Markets closed out a fairly volatile week flat, dominated by inflationary pressures and resulting Central Bank reactions. The Fed minutes and various Federal Reserve Board members, all pointed to aggressive plans to address the runaway and rampant inflation, engulfing the US economy. The crises will result in Central Bank reactions to attack inflation, through aggressive interest rate rises and now the removal of QE and replacement with QT. The Federal Reserve balance sheet has expanded to nearly US$10 trillion, from US$5 Trillion prior to the Covid pandemic (doubled) and from around US$1 Trillion prior to the GFC. This has been sanctioned by Central Bankers, ignoring the inflationary consequences, instead decided to justify monetary largesse through the alignment with ‘Modern Monetary Theory’. MMT is the socialist economic theory that issues, that there will be no inflationary consequences to expanding the money supply and monitising Government debt. The current hyper-inflationary world, is blowing this deluded theory out of the water and is being mugged by reality.

The Fed has been jerked out of the Meta-world, as they now embark on an aggressive interest rate-raising cycle, and finally looking to reduce the balance sheet by somewhere around US$100 billion/month. The Bank of England, the Central Bank of South Korea and the RBNZ have already set off down this road. The Federal Reserve has only just experienced their own ‘come to Jesus moment’ and the RBA is still in denial, although the recent RBA meeting changed the narrative and hinted at rate rises, in the near future. Central Banks are loath to change monetary policy prior to an election.

The Federal Reserve’s newly adopted, hawkish stance on monetary policy, has seen Bond Yields spike. The rise in interest rates, has at times inverted the yield curve, signalling an imminent recession is anon. The rise in interest rates has also supported the US Dollar, forcing the EUR under 1.0900, while the Yen has crashed to trade at 124.50 and lower.

The war in the Ukraine has only served to heighten global inflationary pressures, surging commodity prices and further disrupting supply chains. This has afforded some support for the commodity currencies, but the surging reserve has taken a toll. The NZD has crashed back below 0.6850, while the AUD has dipped under 0.7500 once again, after bouncing on the last hawkish RBA statement. The RBNZ will probably continue to raise rates, in their coming meeting this week, while markets will avidly watch global CPI/PPI data and await the ECB meeting, later in the week.

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