US Share Markets closed out a very strong week of gains, despite (or perhaps ironically because) of very bad news on the economic growth and inflation front. The Q2 GDP contraction of US GDP, confirmed a recession has enveloped the US economy and the PCE Inflation number broke a 40 year record, hitting 6.8%! This is the inflation indicator the Fed claims to be the ‘bees knees’ of market gauges. The Fed raised interest rates a further 75 basis points, at the latest FOMC meeting and re-committed to the war on rampant inflation. The recession should have provoked doom and gloom on markets, but the opposite occurred. US Equities rallied strongly, while Bond Yields crashed, signalling the markets lack of confidence in the Fed’s commitment to the cause. The strong performance of markets, in the face of such terrible economic data, suggests the Fed will back down on further rate rises. The Fed do not want to be seen as being responsible for a collapse in the economy and have responded to political pressures in the past.
Inflation data across Europe was dreadful (Italy 7.9%, Poland 15.5%, France 6.1%, German 7.5%, Spain 10.8% etc), with the EU CPI coming in at 8.9%, smashed by the energy crises. The GDP numbers still remain in the positive, as the ECB has, only just begun to raise interest rates, but these positive will soon turn negative, as interest rates rise and the energy crises takes it’s toll. EU sanctions on gas and oil are crippling the business sector and crushing the consumer. This will flow through into production and consumption. Europe is in a far more desperate economic situation than the USA, despite the GDP numbers. The EUR edged back up to 1.0200, while the Yen strengthened to 132.50, despite the Bank of Japans dovish monetary policy.
The softer reserve allowed the AUD to trade around 0.7000, while the NZD looks to regain 0.6300. The coming week will focus on growth and inflation, with key markers being the RBA rate decision, on Tuesday and the Bank of England rate decision later in the week.