Daily Market Commentary 23rd February 2023

Markets remain nervous ahead of the release of the Fed’s latest minutes, from their last meeting. They are expected to show a commitment to tightening monetary policy, until interest rates begin to fall back towards the target range. Bond yields in Europe and the US have been steadily rising, confirming market speculation, that rates will continue to rise for some time. German inflation data released overnight shows a spike back higher, after recent falls. This is a worrying trend, as it does test the thesis of ‘peak inflation’ and ‘peak interest rates’. The ECB has been extremely hawkish, but are some way behind other Central banks, in terms of fighting inflation. The EUR holds grimly on to 1.0600, while the GBP trades above 1.2000, in anticipation of the impact of a hawkish minutes release.

The RBNZ was not shy in their war on inflation, lifting rates by 50 basis points, to 4.75%. The Central Bank did so, even in the face of devastating floods, following summer cyclones. The impact will be great on the economy, in terms of recovery and rebuilding, not to mention the impact on agriculture exports and shortages that is driving inflation even higher. The rate rise will not be welcome in many circles, but the prospects of even higher inflation, has brought the tough love. NZ Trade Deficits continue to climb as surging imports continue to far outweigh exports, which is likely to be exasperated by the flooding. The NZD was boosted by the RBNZ actions, rising back to trade above 0.6200, despite a strong reserve, while the AUD crashed to 0.6800. Markets await the Fed minutes and then attention turns back to inflation and growth, in Europe and the USA.