Global equity markets finished the week on an extremely positive note, with the DOW surging more than 600 points! A strong close to the week was triggered by speculation that the Fed had the inflation crises under control and would not need to raise rates, by a spectacular and crippling 100 basis points. This was interpreted from Fed members commentary and the rose coloured glasses of analysts, looking at their own ‘books’. US and European inflation is at levels not seen since the crises of the early 1980’s, and if it was measured by the same methodology, then the US inflation would be more than 17%! The Fed does not have a good record on truthfulness when it comes to inflation. The initial reaction last year was denial, then labelled inflation as ‘transitory’, then finally recognising the crises but relegating the inflation peak as past. The consumer could tell Central Bankers a thing or two about inflation, as prices of food, rent/mortgages and energy spiral out of control, destroying the standard-of-living of many in Western economies.
The rampant inflation has been reflected in the rising USD, which forced the EUR below parity during the week, but has since bounced back to trade 1.0080. The ECB meet this coming week, to address monetary policy and have indicated a rate rise of 25 basis points. They will point to ‘peak inflation’ as the reason not to have acted earlier and more aggressively. The real reason is insurmountable deficit/debt, within the Eurozone. The Bank of Japan are the only other major Central Bank to maintain interest rates at negative/zero levels and they will likely continue this, in the BoJ meeting this coming week. CPI inflation in Japan has remained surprisingly suppressed, but the Bank of Japan’s monetary policy has forced the currency to records lows (139.50). The release of CPI data on Thursday will be an insight.
Commodity currencies have been victims of the surging reserve, with the AUD crashing below 0.6700, while the NZD collapsed to under 0.6100. The US Dollar is mighty, compared to other fiat currencies, but not when compared to commodities. Inflation remains key to equity, bond and currency markets.