The end of another extremely volatile week on global markets, highlighted by the Federal Reserve meeting and decision to raise rate a further 75 basis points. Markets were anticipating a more dovish statement, predicting ‘peak inflation’ and a Fed pause or pivot from aggressive rate rises and QT. The statement included a recognition that there is a lag between monetary policy adjustments and the impact on inflation. That was enough to trigger a surge in equity markets and a corresponding fall in US Bond Yields and the US Dollar. Fed Chair Powell was quick to dismiss such speculation, reinforcing the Fed’s aggressive monetary policy and even forecasting a higher termination inflation level and for interest rates to address this. The commitment to hawkish policy and reaffirmation to the war on inflation, quickly hit markets hard, with equities plunging and US Bond Yields and the US Dollar rebounding. The rebound in the US Dollar was brief, as the EUR closed the week trading 0.9950, while the GBP recovered to regain 1.1380.
The ECB has also reaffirmed there aggressive and belated monetary strategy, prioritising the war on inflation. The statement said that they ‘will not allow inflation to become entrenched’, setting up a possible wage-price spiral, to fuel runaway inflation. The ECB have been far too late to this party and it has spiralled out of control already. The ECB built a EUR$5 Trillion monetary stimulus package on their balance sheet and must address this through urgent QT. Unfortunately the ECB is a political animal and this dangerously expansive monetary policy, is an instrument of control over member nations. The RBA missed another trick, by only raising rates by 2 basis points, for the second consecutive meeting. Inflation blew through original forecasts once again, hitting 7.3%, and now predicted to hit 8%! The RBA was also late to the inflation party and have been reticent to act, as the nation remains extremely indebted and vulnerable to rate rises. Crunch-time is on the way. Commodity currencies experienced extremely volatile trading, with the AUD plunging below 0.6300, only to close the week above 0.6450. The NZD had a similar experience, crashing to lows of around 0.5750, only to close the week above 0.5900.
The coming week will be highlighted by the Mid-Term elections in the USA, as this will determine future fiscal policy, through the control over Congress. The other important check-point, is the inflation data out of the States (which is expected to soften), but expect another volatile week of trade.