Global equity markets have suffered an ocean of red ink, in the week following the Fed Chairman’s speech, delivered at Jackson Hole. Powell’s assessment that there was ‘some pain ahead’ for the American economy, in the form of higher interest rates and a deeper more elongated recession, was not received well by markets. US equities have given up much of the summer gains, while Bond yields have spiked upwards, forcing the US Dollar higher. Chinese PMI data confirmed a contraction in manufacturing, while Germany (the engine-room of Europe) suffered the same fate.
The energy crises is destroying the European manufacturing base, in the process of de-industrialisation, while cost-of-living across Europe and the UK soars. The UK has seen inflation blow through 10% and this looks likely to deteriorate much further, with growing momentum. Political leaders are feckless and have left the fiscal deficit/debt situation in such a mess, that there is little they can do. Massive overspending has driven the inflation explosion and more fiscal bail-outs, will only exasperate an already dire situation. The GBP has collapsed, to trade down to 1.1500, while the EUR plunged to 0.9910.
The global economic woes cannot be ignored and the rising US reserve has hit the commodity currencies hard, with the AUD falling to 0.6770, while the NZD heads towards 0.6050. The only saving grace for the Australian economy, which suffered the same fiscal and monetary mismanagement as Europe and the USA, is the high commodity prices.
All eyes now turn to the Non Farm Payroll number released tonight, with the ADP Jobs report hinting it could be weaker, but if not, it will be a green light for further hawkish Central Bank action.