Markets closed out the trading week flat, after serious reminders that inflation is alive and well, thriving in global economies. US CPI and PPI numbers, were both hotter than markets expected, therefore putting the dampers on hopes of ‘peak inflation’ and thus, ‘peak interest rates’. The Fed and its members remain committed to hiking rates, until the war on inflation, is truly won. Equities have suffered and bond yields, across the US and Europe, are on the march upwards. Markets will look at the coming week through the prism of inflation and Central bank expectations. We have inflation readings across Europe, all week, culminating in the Fed’s favoured PCE inflation measure, at the end of the week. This will determine the direction of equity, bond and currency markets for the coming week. The EUR will look to regain 1.0700, while the volatile US Dollar, allowed the GBP to regain 1.2000.
The rise in US Bond yields has resulted in a surge in the reserve currency, driving the AUD back towards 0.6800, while the NZD has fallen back to 0.6200. The RBA Governor has suffered aggressive questioning in front of Parliamentary committees, left to defend his now hawkish monetary policy. The problem has not been his current actions, but his failure to act early and take the tough measures required. He is also left much maligned, by his assurances in 2020/21, that rates would not rise until 2024! The RBA waited too long to raise rates, probably for political reasons , with a looming Federal election in May 2022. The RBNZ acted earlier and harder and consequently operates in a slightly better environment. The RBNZ will be tested, once again his week, when they decide on their next monetary move. Political pressure will come to bear on the Central Bank to soften their aggressive approach, but markets expect a 50 basis point rate rise, none-the-less. Interest rate rises should support the currency, but in this global environment of rising rates, an any initial boost may be short lived.