Daily Market Commentary 31st October 2022

US equity markets are on a tear, with the October rally on the Dow, rivalling the largest rally since 1967! This rally is being fuelled by speculation that ‘peak inflation’ is in sight and that the Federal Reserve will ease their aggressive monetary policy. The latest measure of US inflation, the PCE, is the one the Fed pays most attention to. The latest numbers, released last Friday, were in line with expectations so confirming the narrative. The PCE was 6.2%, while the Core PCE jumped to 5.1%, from 4.9%. The Core PCE excludes volatile food and energy, but does reflect a widespread inflation, infiltrating most corners of the economy. Bond yields were flat in both the US and Europe. GDP reads in Europe remain marginally positive, while inflation in most EU member states, remain in double figures. The  EUR trades around 0.9950, while the GBP continues to recover, pushing up to 1.1600.

The Bank of Japan left interest rates unchanged, as expected, but forecast rises in projected inflation. Inflation is showing signs of getting away in Japan, so the Bank of Japan is taking a potentially dangerous monetary path, while intervening in the FX markets to protect the Yen. Commodity currencies have been beneficiaries of strong prices, but the reserve strength has been damaging. The AUD fell back to 0.6400, ahead of this weeks Melbourne Cup Day RBA meeting, while the NZD tries to hold above 0.5800. The RBA is expected to raise rates by 25 basis points, but the surge in the latest inflation number (7.3% p.a.), may encourage a more aggressive stance?

All eyes are on the FOMC meeting this coming week and whether they become less hawkish, while Non Farm Payrolls this coming Friday, will also be of great import.