The massive liquidity that has flooded markets and driven asset bubbles, has been checked by a rally in interest rates. The narrative for the week was dominated by the rise in Bond Yields and the consequences of more expensive debt and inflation. The brakes have been applied to equity markets, due to concerns over debt costs and rising cost of living pressures. Newly appointed Treasury Secretary Yellen called for massive fiscal stimulus, to combat the negative economic impact of the pandemic. This is in line with her monetary policy, from when she lead the Federal Reserve under President Obama. The modern monetary and fiscal policy advocates massive expansion of the money supply, zero interest rates and huge Keynesian debt levels. This is a recipe for disaster as it destroys wealth and the real value of money. The enemy of this monetary and fiscal and monetary largesse is inflation.
Economic data in Europe is depressed, due to the economic lock-downs imposed by Governments, that has been imposed to combat the pandemic. The latest flash PMI data reflected the destruction wreaked upon the European economies. The US has performed much better than Europe, as the lock-downs have been political and ‘Red States’ have largely rejected the shut-downs. The Biden administration is imposing Federal restrictions, which will translate directly into future economic data. The unprecedented monetary and fiscal largesse will be undone by economic destruction and now inflation.
The rebound in the Dollar, triggered by rising Bond Yields, was interrupted Friday, with the GBP breaking back above 1.4000, while the EUR pushed up to 1.2100. The coming week will be measured by economic data and developments in the virus/vaccine. Commodity currencies have been beneficiaries of the flagging reserve, with the AUD jumping above 0.7850, while the NZD fast approaches 0.7300. Employment, growth and CPI inflation are key economic touchstones.