The Fed minutes were released just before the close of trade yesterday and they startled markets. The Fed has finally taken the inflation crises seriously and abandoned the false narrative of inflation being in any way transitory, or temporary in nature. The realisation that this is a major problem has finally dawned upon Fed members and the call to action is upon them. The minutes revealed that QE will end and QT will begin, sooner than expected, while interest rates will rise at least three times in 2022! The reality hit the markets like a hammer, with all equities crashing , while 10 year bond yields continued to surge.
The Fed’s hand has been forced and this has driven equities lower and the US Dollar up. The EUR crashed below 1.1300, while the GBP fell back to 1.3520. Inflation and growth forecasts are being hurriedly reviewed negatively, with growth forecasts marked substantially lower and inflation much higher. EU PPI came in at a staggeringly 23.7% p.a., while German CPI surged to 5.3%, despite crashing growth and economic activity, due to crippling restrictions to battle the latest virus mutation.
The recent gains in commodity currencies, dragged upwards by commodity demand, hit a brick wall. The AUD crashed to 0.7150, while the NZD slumped to 0.6740. Inflation remains the key market driver in 2022, while attention will focus on the important Non-Farm Payrolls number, to be released tonight in the US.