Markets smashed as US inflation soars ahead of further rate hikes: Robert Gottliebsen
The only way to stop that acceleration was to speed up the destruction of the pillars that have underwritten US growth for many years -low interest rates and high employment. Much higher interest rates were required to turn US labour shortages into labour surpluses and increasing unemployment. Retail sales and economic activity would fall.
In this new environment retail sales, economic activity and profits will fall because price and wage rises will be made much harder to achieve.
Once that message hit the share and bond markets we saw extraordinary repercussions which will dominate the future outlook for world and Australian economies.
Like others I could see it coming and at the weekend I started my series on the pillar dismantling under the heading ‘Time to brace for a new world as inflation starts to bite’.
But the trends I isolated are now creating high drama. The Australian dollar was trashed: Japan gave in to a raid on its currency: Bitcoin investors suffered huge losses and a European recession is virtually locked in. And just to cap off the drama whereas last week China looked like recovering disturbing news emerged.
The US Federal Reserve will announce its interest rate rise later this week but bond markets are not waiting. The two year treasury bond jumped to a 15 year high of 3.25 per cent and the 10 year bond almost touched 3.4 per cent.
The consequent share market falls were severe. The S&P index fell almost four per cent and the Nasdaq almost five per cent. The S&P index is down more than 21 per cent for the year putting the American market into official bear territory. There have been US 14 bear markets since the Second World War and the median fall is 30 per cent so traders fear there’s a lot of worse to come. Most bear markets last at least a year.
The markets are sending a clear message to US companies that they should be very careful about continuing to award wage rises on the eve of a major downturn. The same message will spread to Australia but many of our top managers have never experienced this environment.
Meanwhile, the signal that the world’s largest economy was going to move from a shortage of labour to a surplus sent shockwaves through most commodity markets including oil and gas. Copper and platinum were hammered.
But then there was also a chilling a lesson for Australia. Japan’s central bank has been resisting increasing interest rates along with US trends. World traders decided to teach it a lesson and in recent weeks have been punishing Japan by dumping the yen.
But last night a top government spokesman recognised the lower currency would hit Japan so capitulated and declared that Japan had got the message and would take “ appropriate action” The traders acknowledged victory and the bear raid ion the yen was called off. The Japanese currency steadied at lower levels.
The currency traders fresh from that victory then found a new target – the Australian dollar. Here was a country that depended exports and was playing silly games with power generation by not running its coal power stations correctly causing blackout threats.
Until last week, our central bank has been nervous about raising interest rates so, like Japan, the traders concluded its now time to bring Australia into the real world. As an opening blow our currency was trashed and sent below 70 US cents. Like Japan if the currency raid continues we will have to our increase rates faster than planned because otherwise the cost of imports goes through the roof.
But of course as pointed out on Monday, we are among the most vulnerable countries in the world to high interest rates because our recent bank lending spree has saddled a huge rump of younger Australians with mortgage debts with flexible interest rates. American home borrowers have fixed rates for 30 years.
Bank shareholders are paying a big price the lending spree but householders who over borrowed will pay an even bigger price.
Until the weekend the Chinese economy looked to be recovering. Then came announcement that Beijing city, as a result of a Covid outbreak, had suspended offline sports events, delayed return to schools and tightened other controls, just days after loosening them.
This added to the commodity market jitters.
But the biggest losses came with the trashing of Bitcoin. The higher interest rate environment has hit gold prices although the fall in gold prices as expressed in Australian dollars has been mild because of the increase in US dollar over the Australian dollar.
Bitcoin had been holding around $US30,000 for some weeks but it collapsed plummeting below $US23,000. Total losses on Bitcoin since November exceed $US2 trillion dollars. A number of large US institutions have suffered badly but the bulk of the losses have been shared among the younger generation who saw Bitcoin as the challenge to the establishment.
A large number of young people will be returning to their parents home because their assets have been wiped out by the Bitcoin collapse.
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