Markets closed the week strongly, with US equities testing record levels, reassured by the Fed Chairman Powell. Powell delivered the opening address to the worlds Central Bankers at Jackson Hole, Wyoming and confirmed tapering and deferred interest rate rises. This reassured liquidity addicted markets and ensured a steady-as-she-goes policy line. Powell concentrated on tampering down inflation expectations, misleadingly suggesting that inflation is around the Fed’s target level of 2%. The Fed chooses to use the PCE as a measure of inflation, which came in at 4.2%, while the CPI latest was 5.4%! Powell maintains that these pressures are ‘transitory’, due to supply chain disruptions, but they are at record levels and rising. The speech was in line with market expectations and bond yields settled, as did the US Dollar. The EUR fast approaches 1.1800, while the GBP rebounded to 1.3760, despite testing economic conditions across the UK and Europe.
The University of Michigan Economic Sentiment has literally collapsed over the last two months, a major red flag for purveyors of strong economic recovery narrative. The Fed’s call to taper monetary largesse is being completely contradicted by the Fiscal behaviour of the US regime. Congress are busy launching massive deficit spending bills that must be funded by debt and this can only be derived from the Federal Reserve printing more US Dollars. The Debt Ceiling has been reached and this may lead to a crises in the coming weeks. The fall in the reserve allowed a recovery in commodity currencies, with the AUD jumping to 0.7300, while the NZD looks to regain the important psychological barrier of 0.7000.
A huge week of data is due to be released , including inflation, PMI data and culminating in Non Farm Payrolls. The Geo-Political situation in Afghanistan will also be in the spotlight and this instability may spread to Asia and Eastern Europe?