Daily Market Commentary 18th August 2022

Inflation in the UK has exploded, breaking above 10.1%, for the first time in more than 40 years. The CPI number was blown out of the water by the energy and food crises enveloping the country. The ‘renewable green energy policies’ put the UK in a vulnerable energy position and the Ukraine war sanctions cut off Europe and the UK form cheap energy. The Bank of England has forecast inflation to spiral above 13% this calendar year and  that Q4 would herald a deep recession. Disposable income has collapsed, as real wages are being crushed, thereby hitting consumer demand. The GBP fell back to 1.2030, while the EUR rallied to 1.0200, following better than expected preliminary GDP numbers.

The RBNZ raised rates by 50 basis points, to 3%, as expected. The RBNZ Governor’s appearance in front of the press was surprisingly upbeat, with the Central Bank boss indicating that they were on top of the runaway inflation (7.3%) and the heroic assumption, that NZ would avoid recession. The Bank expected house prices to fall by 20% (which will seriously test those with low equity margins), lowering the pressure on inflation, but ignoring the downside to a collapse in the housing market. Real wages are being smashed and food inflation is driving serious challenges on cost-of-living. The NZD has plunged to 0.6260, as markets digest the RBNZ ‘happy talk’, while the AUD crashed to 0.6910.

The FOMC minutes assured markets that the Fed would continue to raise rates and combat inflation, but the real question remains about QT (Quantitative Tightening) and whether the Fed will reduce the massively inflated balance sheet? US Retail Sales were flat for July and markets will monitor growth and inflation numbers to determine direction.