Inflation continued to cast a heavy shadow over markets, to close out yet another week of volatility, which is likely to continue. The inflation CPI number in the US was the highest since 1982, while the PPI number was the highest on record, which will force the Federal Reserve into action. Markets were not overwhelmed by the numbers, as they were in line with expectations and the rises were not as high as previous monthly rises. Inflation will deliver higher interest rates, less liquidity and the pace of QT will determine the impact on asset bubbles across the classes.
US Bond yields have moved higher in 2022 and this trend will continue, as monetary policy is tightened, supporting the US Dollar. The major threat to the US Dollar is the US Administrations fiscal policy. If the record deficit spending continues and debt is monitised, this will undermine the future of the US Dollar and blow inflation out completely. The EUR fell back to 1.1400, while the GBP slipped to 1.3670, despite stronger then expected GDP growth numbers for November.
The rising reserve addressed the recent renaissance in commodity currencies, with the AUD breaking back below 0.7200, while the NZD crashed back under 0.6800. Growth and Inflation remain the key to markets in the coming week, with key CPI/PPI data out in Europe and the UK.