The ECB Monetary Policy minutes were released overnight and they revealed that members were finally willing to face the inflation realities. They indicated that they would raise rates by at least 50 basis points in September and perhaps more, if required. The ECB have missed this boat, well and truly, with inflation clearly running rampant across the zone. The Bank of England were one of the first Central Banks to begin the cycle to raise interest rates, in the fight against inflation, but their inflation has now hit double figures with the prospect of 13% plus! The ECB should have acted early and more aggressively, but were curtailed by the prospect of rising interest rates killing economic growth and seriously damaging debt serviceability of heavily indebted ‘Med Nations’. Now the EU faces contracting economic growth (German GDP is expected to fall to zero for Q2) with rampant inflation, or ‘stagflation’. There is no avoiding a deep recession, as the energy crises deepens further, under the self-imposed Russian sanctions. This serious situation will only deteriorate further as the winter approaches.
Markets keenly await the address of Federal Reserve Chairman Powell, although he is unlikely to change his hawkish stance on monetary policy and the war on inflation. The PCE, the Fed’s favoured measure of inflation, will be released tonight. This will be released prior to the Chairman’s speech. The CPI numbers hinted that inflation had peaked, which allowed markets to rally over the last couple of months, so any reversal of this narrative may have dire consequences. The US Dollar retreated overnight, with the GBP pushing back above 1.1800, while the Yen rallied to 136.00.
The commodity currencies enjoyed the flagging reserve, with the AUD pushing back up towards 0.7000, while the NZD broke above 0.6200. NZ Retail Sales contracted 2.3%, for Q2, and fell an annualised 3.7%. Cost-of-living pressures are smashing disposable income, as inflation forces interest rates ever higher. All markets now keenly await Powell’s address to the Jackson Hole Economic Symposium.