Markets sentiment surged on Friday’s close, in New York, as reports of a deal on the Debt Ceiling Negotiations, was at hand. This was always going to happen and the compromise will be ugly, sold as a win for both sides, but will be a marginal result for the economy. Massive overspending fiscally, will continue to add to the unprecedented levels of debt, with continuous and irreversible systemic deficit spending. The financial situation in the US is sustainable, due to the US Dollar being the World’s reserve currency, but only as long as this is accepted as such, and remains the only option. The Federal Reserve would have been watching the release of the PCE inflation indicator, as their preferred measure of inflation, closely. Inflation is being lauded as having reached the peak and subsiding. The PCE indicated that is far from the truth, with core inflation rising from 4.6%, to 4.7%. This is moving in the wrong direction, against the Central Bank and market narrative and ensuring the Fed will continue to tighten monetary policy. This will continue until it does not, as the Debt Ceiling being raised, allows further fiscal deficit imbalance, on a grand scale. The rising US Dollar was supported by firming bond yields, which pushed the EUR back to 1.0710, while the GBP slipped to 1.2310.
The robust reserve ensured commodity currencies remained depressed, with the NZD falling to 0.6040, while the AUD dipped below 0.6500. The Japanese Yen has been under huge pressure, collapsing to 140.70, succumbing to interest rate differentials, flagging global demand and a weak domestic economy. The coming week will be focused on the Debt Ceiling Negotiations, which may be finalised over the weekend, and then attention will turn to inflation and growth. European inflation readings are expected to continue to head south, so any reversal (as in the US) will not be welcomed by markets. GDP growth will also be the centre of market attention across Europe, while in the US markets will focus on a series of Employment report releases, culminating in the all-important Non-Farm Payrolls, next Friday.