Inflation dominated US markets overnight, with the headline CPI coming in much higher than expected, adding to the string of bad economic news. The Non Farm Payrolls massive miss, was ironically a boost for equity markets, as it insured QE infinity would continue. Inflation is the enemy of interest rates. US Inflation blew past expectations, spiking to 4.2%, from the previous 2.6%. This number is massive and way beyond expectations, considering the CPI components have been manipulated over recent years to camouflage the extent of rising prices in the broader economy.
The jump in CPI lead to immediate speculation that the Fed would be forced to raise interest rates and this would also impact the Governments ability to ‘borrow and spend’. Fiscal and Monetary tapering would be a huge reversal in policy and severely damage the economic recovery. The US Dollar jumped on the news, with the EUR falling to 1.2080, while the GBP fell to 1.4050. The GBP fell despite strong economic data releases confirming strong Manufacturing and Industrial Production growth.
The commodity currencies were hit hard by the surging reserve, with the AUD crashing to 0.7220, while the NZD crashed back to 0.7150. The asset bubbles will be sorely tested by a rise in interest rates.