US equity markets rallied strongly Friday, to close out a very negative week, destabilised by the ongoing banking crises and Central Bank interest rate rises. The Fed, ECB and RBA all raised rates by 25 basis points, recognising stubborn inflation in their economies. The banking crises claimed another scalp (The First Republic Bank) and other US regional banks are under attack. What ‘behind the scenes’ negotiations are going on with the US Banking regulators this weekend? Will another regional bank be sold to the ‘Too Big to Fail’ banks. Banking Centralisation is rapidly wiping out the regional banks and this cannot be a good thing for market choice and competition. The Non-Farm Payroll number came in hotter than expected, adding 253,000 jobs, while the headline unemployment fell to 3.4%, as wage growth continues to surge. The stronger labour market will only ‘green-light’ the Fed. Markets are expecting a pause in the Fed’s cycle of interest rate hikes, but a strong labour market and stubborn inflation may lead to market disappointment?
The coming week will look closely at inflation in Europe and the USA. Europe has been suffering a resurgence in inflation recently, while Core inflation in the US remains stubbornly high. If the data confirms this, in the coming week, then Central Banks will continue their hawkish monetary policy. The Bank of England will probably raise interest rates once again, this coming week, as inflation remains around the damaging and destructive 10% level. The GBP has surged to trade back up to 1.2650, the highest in more than a year, while the EUR trades around 1.1000.
Commodity currencies have rallied on the weaker reserve, with the AUD trading back towards 0.6750, while the NZD looks to regain 0.6300. Interest rates and differentials do drive currencies but at the end of the day, risk is a great equalizer. Global inflation and growth remain a big driver of markets, while the Banking crises continues to flash warning signals and geo-political risks remain ever present.