Global markets continued to digest the blow-out US inflation number, 9.1%, which was breaking records and confirming the serious nature of the problem. US PPI input costs also blew out, rising to 11.3%, from the previous months 10.9%. This all translates into more aggressive rate rises from the Fed, as they are playing catch-up, with many predicting a 100 basis point rate rise at the next FOMC meeting. The impact of steep interest rate rises will be a recession, which has practically already arrived, but awaiting technical confirmation from the Q2 GDP contraction. The Bank of Canada took unprecedented action, by raising rates a full percentage, or 100 basis points, to address surging inflation. It is not since Paul Volcker stamped out rampant inflation in the early 1980’s have we seen such actions.
Italy was plunged into political turmoil, when the unelected administrative PM Draghi, resigned overnight. The ex-Goldman Sach’s Banker, was attempting to address the inflation spiral and the energy crises, but the coalition fell apart, when the 5-Star Party withdrew support. Italian bond Yields surged and the EUR crashed to way below parity, trading down to 0.9960. The Yen is in a state of collapse, falling back to 138.38, while the GBP crashed below 1.1800.
Commodity currencies followed suit, responding to the resurgent reserve, with the NZD plunging to 0.6060. The AUD crashed below 0.6700, despite the unemployment rate hitting 3.5%, a rate not seen since 1974! The tight labour market does not reflect the parlous state of the economy, as the labour market has been distorted with non-unemployment registered, COVID welfare payments and assistance. The steep rise in interest rates, food and energy costs are driving a collapse into recession.