Daily Market Commentary 12th August 2022

Inflation dominated European and US markets overnight. Following the better than expected US CPI number (8.5%), PPI actually contracted (0.5%) for July, which was better than an expected slowing increase (9.8% annualised). Many will take these two important, but flawed measures, to mean that inflation has peaked in the US economy. The immediate fall, from record historical levels, was due in the main to a drop in the prices of ‘gas’ in the US (7.2% contraction for the month). The global energy crises continues unabated, with sanctions smashing supply and raising prices. It is summer in the Northern Hemisphere and energy demands spike in the Autumn/Winter. This will be the litmus test, as Western sanctions bite Europe extremely hard, sending cost-of-living soaring. The US Congress just passed another massive inflationary bill(ironically named the Inflation Reduction Act), $750 Billion of deficit/debt spending, which will only drive inflation higher.

Markets took the PPI number as a positive, with equities continuing the strong recent rally, while Bond Yields fell. The Fed will need to fund this further fiscal monstrosity, when it should be reducing the Balance Sheet, but easing pressure on further rate rises. Monetary expansionism triggered this outbreak in the global inflation crises, only aggravated by the energy crises. The improving conditions allowed the US Dollar to weaken further, with the EUR rising above 1.0350, while the GBP held above 1.2200.

Commodity currencies were beneficiaries of the softer reserve, with the AUD hitting 0.7100, while the NZD looked to regain 0.6450. Market attention will now turn to the University of Michigan Economic Sentiment report to close out the US trading week, which has hit record lows in recent times, but may bounce on lower US gas prices?