The market fallout from the Federal Reserve and Bank of England erupted overnight, as bond yields exploded and US equity markets collapsed. The reality of inflation and the impact on economic performance and markets is becoming a reality. Runaway inflation was denied by the Fed for almost a year, then once accepted, remedial action is slow and not serious. The Fed missed the boat, as they were funding fiscal and monetary expansionism, through deficit spending funded through balance sheet expansion. The realisation has not completely dawned yet, as QE should have been eliminated completely and QT should have been enthusiastically embraced. Interest rates are rising but QE remains.
US equities collapsed overnight, and US 10 year bond yields surged to 3.1%, while currencies were left in the chaos. The EUR traded around 1.0500, while the GBP crashed to 1.2330, following the next Bank of England rate rise. The Bank of England have recognised inflation and the growing prospect of a deep recession. The policies of the Government are fuelling this crises, through sanctions on Russia, that have only served to exasperate the energy crises. Europe and the UK are at ‘ground zero’ and look to already be in a recession.
Commodity prices have supported the associated currencies to a degree, but rising US Bond Yields and the reserve, have put downward pressure on the currencies. The NZD is crashing below 0.6400, while the AUD plunged below 0.7100, following the reality of shock inflation data being processed by the RBA. Inflation needs to peak or this crises will spiral out of control, but this will not happen until Central Banks contract their collective balance sheets and deficit spending is under control.