US equity markets reopened after the Independence Day long weekend and tumbled quickly, as the statistical confirmations of recession is almost certain. The Atlantic Fed have already released data confirming the Q2 GDP numbers will be a contraction of more than 2%, following a Q1 contraction of 1.6%. This is the definition of a technical recession. Commodity prices are softer, but will remain depressed in the energy markets, due to the ongoing Western sanctions.
The UK is in a state of political turmoil, with PM Johnson a ‘dead man walking’, and further key resignations, bringing the inevitable ever closer. Chancellor Sunak and Health Minister Javid, both resigned citing Government incompetence. More will follow unless the clown PM resigns. The only problem is the likely replacement? The GBP collapsed to trade 1.1900, while the EUR plunged to a twenty year low, trading 1.0240. The ECB has ignored inflation and maintained QE, while switching bond purchases to prevent a collapse in debt. The energy crises will be joined by the food crises, in Europe, which will claim the scalp of Boris Johnson and with more to come.
The RBA raised rates by 50 basis points, with a promise of more, to combat inflation. The problem is that Central Banks are chasing the curve. Inflation is far higher than are interest rates, as this horse has long ago bolted, while the Central Banks need to act far more aggressively. Rising interest rates will only drive cost-of-living pressures higher, which is the trade-off, as politically unacceptable. The next politically unacceptable result, of these economic conditions, is the rise in Unemployment. This is coming like a freight train and is being partially disguised by Government welfare payments, which continue following COVID in many countries. There are millions not working across Western economies, hidden in the COVID welfare slush funds, which will emerge. Unemployment is nowhere near record lows Governments would have us believe.
Commodity prices are softer as the recession takes a grip, while the reserve rallies behind sharply rising interest rates. The RBA actions are way too late and the currency plunged to 0.6760, while the NZD crashed below 0.6150. Attention is all on inflation and Central Banks, but the Non Farm Payrolls number, may be the first sign of a collapse in the US Labour market?