Global equities staged a week of a recovery rally, perhaps due to a perception that inflation has peaked? It has not! Central Banks have been avoiding inflation crises for more than a year, labelling it ‘transitory’, but is anything but that, structural is a more accurate term. Inflation has been building for years, despite efforts to redefine the actual data measurement, with massive fiscal deficits funded by Central Banks printing more money. Debt monitisation is a big no-no in the world of Central Banking, but ‘modern monetary theory’ provided an excuse to do just that. Inflation is a cancer to an economy and not easily stamped out. The last major dose in the USA, was the 1980’s and the only solution was severe fiscal consolidation, huge contraction of the Central Bank’s balance sheet and massive increases in interest rates. Fed Chairman Paul Volcker raised the Fed rate to 20%! The current Fed Chairman does not have the internal fortitude to do what is required, as witnessed by his past and present efforts, thus insuring inflation will remain a problem for some time to come.
The Fed’s preferred measure of inflation is the PCE, which came in at 6.3%, off from the previous month of 6.6%. This invited speculation that inflation has perhaps peaked, thus a confidence rally in equities, but all will be in vain. The energy crises will be accompanied by a food and cost-of-living crises. The suicidal sanctions the West have imposed on Russia, a resource rich super-power, is an act of folly and stupidity. The war in the Ukraine is likely to continue for some time, as will the energy and food crises, which will drive Europe and the US into a severe recession. This coming week will focus on inflation and growth data, from Europe and the US, while the week will close with the release of the all-important Non-Farm Payroll number. The softer US Bond market allowed the US Dollar to drift lower, with the EUR holding above 1.0700, while the GBP pushed up to 1.2650.
Commodity currencies have been beneficiaries of strong commodity prices and a softer reserve, with the NZD consolidating above 0.6500, while the AUD looked to regain 0.7150. Rising interest rates attract flows to support these currencies, with the RBNZ aggressively raising interest rates, while the RBA interest rate train has just left the station. Inflation and cost-of-living will drive consumption and demand lower, while the looming recession will be hard to avoid.