Markets continued to trade with extreme volatility overnight, with equities and bond yields bouncing back strongly. The Bank of Canada recognised the inflationary pressures in their economy and raised interest rates 25 basis points, while signalling more to come. The Bank of Canada chose to leave QE in place, to counter uncertainties, but in reality it is to enable the Government to fund their unsaleable debt and fiscal largesse. How can the Central Bank be raising interest rates, to combat surging inflation, while continuing to stimulate the economy through fiscal and monetary QE? This is what the Fed will attempt to do. It will be a ‘tip of the hat’ to rampant inflation, but QE is the reality that Central banks are not seriously addressing. Fed Chair Powell testifies before Congress today and will talk a big game about addressing inflation, but the key will be in QE. Central Banks must not only end QE, but begin to reduce the balance sheet and withdraw liquidity.
US Bond Yields have recovered, along with equities, but the roller-coaster is set to continue. The sanctions imposed on Russia will be just as painful for Europe, as it will drive energy prices higher and inflation. The damaging impact of the sanctions will be reflected in their economic performance, as the EUR fell below 1.1100, while the GBP struggles to hold 1.3350.
Commodity prices have soared, with Oil breaking above US$110/barrel, allowing the associated currencies to partially combat the rising reserve. The NZD held above 0.6750, while the AUD pushed above 0.7250, with a strong Q4 GDP number confirming the economic recovery. Attention remains firmly on he Ukraine and any escalations, while markets will focus on Federal Reserve Chairman Powell and his appearance before Congress.