Calendar Week 38-2022

 

US Inflation caught the market out, well the stock traders anyway. We knew better than to be buying into the idea that the Fed will pivot or that inflation has gone away. US inflation its at 8.3% with the core rate at 6.3%. UK inflation dipped a fraction but is still crazy high at 9.9%. Meanwhile Aussie jobs disappointed, having its first uptick in unemployment since November last year.

 

The above commentary is the definition of stagflation, which is when you have high inflation, high unemployment and slow growth. So that is what we are dealing with. The US jobs are yet to turn, but as rates go higher and growth grinds down it will. The week ahead will be interesting but the thing to keep an eye on is US jobs. As that weakens it will confirm the worlds largest economy is in stagflation and that is a tough period to work out of.

 

Higher rates is a given, the Fed has telegraphed this time and time again. It is just a matter of how high. When US unemployment ticks higher, think 5% from its current 3.7%, the S&P500 should be in the low 3000s from its current 3900. Rates by that stage would be close to 4% in the USA, from its current 2.5 with a widely expected 75bps move this week by the Fed.

 

Thursday will be a super busy day with the central banks of USA, Japan, Swiss, UK all meeting that day. Japan the odd one out, unlikely to move rates, but the rest expect aggressive hikes.

 

Currency Guidance

 

USD – Bolted on CPI but has failed to make a higher high, yet. Has been sideways pretty much since Tuesday. The march higher should continue but I get the sense it doesn’t want to. Fundamentally the picture is for a higher dollar for longer, but technically it is not showing that. Once the technicals match the fundamentals then we can be more certain.

 

AUD – with the RBA behind the curve of global rate rises and falling commodity prices as the world growth shrinks I prefer to be short the Aussie. It is going to get repetitive but the technical picture does not match the fundamentals. Technically it looks strong here and could climb its way back into the 0.68’s.

 

EUR – Another mismatch of technical and fundamental pictures. Is stuck in the range again and could go either way, the chart is not showing any indication of which. Prefer to be short it but without a clear signal will stay on the sidelines.

 

GBP – The lowest it has been in over 30 years. Whilst there is little reason to be bullish the UK economy or growth with inflation running at 10%, the Cable looks like a technical buy as it is showing clear momentum divergence.

 

JPY – Consolidating at these extreme levels not seen since the late 90’s. Like the Pound, have no reason to be a buyer of Yen, but like the Euro, it is not indicating which direction the next move will be.