European equity markets rallied ahead of the key ECB rate decision, in which they are expected to raise interest rates for the first time in 11 years. The EU inflation rate hit a record 8.6%, so the pressure is on to raise more than the 25 basis points, earlier indicated. The ECB have delayed raising interest rates due to the over-burdening deficit and debt, most member nations are carrying, hoping for ‘transitional inflation’ and that the problem will disappear. This will not happen and the energy crises looks as though it may further deteriorate, while many countries experience seasonal heat-waves, ahead of a gas-challenged winter. The EUR continued to recover, jumping to 1.0220, while the GBP pushed back to 1.1980.
US equities surged as the earnings season distracts from macro-economic woes. Surging energy prices and interest rates are a boon for US Banks and Energy Companies and they lead the equity charge. Housing is a leading indicator and red flags are fluttering away, in the winds of economic recession. US Housing Starts and Building Permits both contracted, following a sharp fall in the House Market Index.
The RBA minutes revealed strong inflationary pressures will drive wages and prices higher, which will lead to further interest rate rises. This will inevitably cut disposable income and raise the prospects of recession. The AUD continued benefit the flagging reserve, looking to push towards 0.6900, while the NZD regains 0.6200. Inflation and Central Bank speculation/action remain key to market direction.