Inflation remains the key driver of markets, as this is what is dictating monetary policy and interest rates. The cost-of-living pressures directly impact consumer demand and rising interest rates will only drive C-O-L pressures higher, while degrading disposable income. The energy and food crises engulfing Europe and the World is spiking inflation and this is feeding through into the data. UK inflation hit a 30 year high, jumping to 7%, while Spanish inflation fast approaches double figures.
The RBNZ surprised markets, as did the Bank of Canada, both raising rates by 50 basis points! This reveals the concern Central Banks have over spiralling inflation, as they ratchet up interest rates, shut down QE and contract the balance sheet. The sharp rise in interest rates did little to attract buyers, seeing the NZD plunge to 0.6750, as investors cleared out of local KIWI bonds. These Central Banks know the damage of rampant inflation and have ignored the tell-tale signs for too long, propping up fiscal indiscipline and funding largesse through debt monitisation. This will only replicate in the US and Europe. The ECB meet tonight and are expected to leave rates unchanged, but this would be very, very unwise. Inflation is surging throughout Europe, fuelled by the critical and expanding energy crises. The food crises is about to hit global markets and this dangerous combination will likely effect more than just the wallet. These crises are already manifesting in social upheaval in South America and Asia, which will spread across the Middle East and Europe. Have the banks acted too slowly, in addressing this economic cancer, yes, but will elevated interest rate rises be enough to address the problem or will massive QT be required?
The AUD also suffered a similar fate to the NZD, falling back below 0.7400, in overnight trade. The EUR pushed higher to 1.0880, ahead of the ECB meeting, so perhaps markets expect the ECB to jump the gun?