Markets closed out a week of gains on equity markets, spurred by the continued ‘peak inflation’ narrative and positive economic growth numbers. The latest data release was the US PCE inflation number, which the Federal Reserve uses as its’ primary gauge. This number was in line with expectations, coming in at 5% p.a., down from 5.5%, but still destructively high. The number triggered a rally in equities, inspired by the assumption the Fed will be more reluctant to act on aggressive interest rate rises. Markets await a series of rate decisions this coming week, led out by the Federal Reserve on Thursday and closely followed by the Bank of England and the ECB. The week will be dominated by these events, with speculation surrounding inflation and economic growth and the impact on the Central Bank rate decisions. Markets are predicting a 25 basis point rise from the Fed, while the ECB and Bank of England are tipped to hike rates by 50 basis points. Inflation may have peaked in Europe and the USA, but it is far from conquered and is causing incredible pain to business and the consumer.
US and European Bond Yields remain steady, but these are likely to be challenged in the coming week, with a plethora of inflation releases across Europe, in the lead up to Central Bank rate decisions. The accompanying commentary from the Central Banks, will drive monetary policy, interest rates and the corresponding currencies. The EUR has been holding firm above 1.0800, while the GBP has rallied up towards 1.2400, both likely to be boosted by predicted 50 basis point interest rate rises.
Australian markets were shocked by the recent spike in inflation, which has been building, surging to 7.8% (highest level since 1990) in the latest reading. This should come as no surprise, when considering the sluggish monetary policy measures adopted by the RBA, in their efforts to combat surging inflation. The RBA have underestimated the impact of inflation, due to the commodity-based nature of the economy and had hoped to fly under the radar. The Bank of Japan has followed this route, but even more extreme, by completely ignoring inflation. The Japanese monetary circumstances are completely different, and not so dependent on global markets, but they still face severe challenges. Australia as a heavily trade and capital dependent nation, and is extremely exposed to global financial markets. The AUD surged on the inflation news (breaking back above 0.7100 by the close of the week), realising the RBA must face obvious denied and pressing realities. New Zealand inflation, by contrast, was in line with expectations. Inflation came in at 7.2%, but is perceived to be controlled by a far more active and aggressive RBNZ. The inflation war is an existential risk to Central Banks, their balance sheets and their mandates. It is a hammer blow to business and the consumer and must be extinguished. This should be the number one priority of Central Banks, but it is an extremely difficult proposition, when political leaders run continued, reckless and dangerous deficits funded by overwhelming cumulative debt.