Will Interest Rates Go Up Today?

TPP Midweek Trading Update:

What's been happening in the markets and will rates go up?

After last week's FTSE rally the potential for a drop was high, but UK inflation data yesterday morning was much better than expected and stocks appreciated; we’re now waiting for the Bank of England interest rate decision.

In Europe, stocks rose yesterday and the pound weakened after British?inflation?came in lower than expected.

Most of the financial reports are saying that it slowed, but that’s just not true. Since last month, overall inflation is actually 0.3% higher this month (compared to a drop of -0.4% last month) so it actually sped up. However, core inflation (minus food and energy) came in 0.1% higher than last month, less than the 0.3% the month before so core inflation has slowed a touch, but still increased.

So the short of it is, we saw an easing in core inflation, but an increase in overall inflation.

Nothing drastic, and it was much less than expected so the markets have taken it well.

Sterling fell as much as 0.5% against?the dollar?to its lowest level since May as traders bet that the Bank of England is nearing the end of its hiking cycle.?UK bonds?rallied reducing yields on the 2-year by -0.126%, the 5-year by -0.124% and the 10-year by -0.08%.

Longer-dated bonds are less affected by shorter term policy changes.

The slight confusion comes because most reporters will look at the year-over-year figures which tell us that the Consumer Prices?Index rose 6.7% from a year earlier in August, the slowest pace in 18 months, and less than the 7% expected by economists. However, all that tells us is that last August, had a higher month-over-month figure this August. Not that much help if you’re trying to work out what’s going on right now.

Anyway, this now means that the probability of a quarter-point rate increase by the BOE at its meeting today, almost guaranteed earlier this week, fell to less than 50%, according to swap pricing.

Clear communication?from the BOE on its decision will be crucial and there will likely be?a reaction in markets?regardless, though higher oil prices?could complicate?the picture.

Within the inflation data, the?fuel-price?impact is messy, as are?air fares, while food has seen?price growth ease?but is still very high overall. We also dug into?cakes, rising?booze prices?and?the contributions?to the reading from sofas, pyjamas and indigestion tablets.

At TPP we have been expecting this drift up in equities, particularly the FTSE. We have also stated regularly that the interest rate market has been wrong with regard to how hight rates will go.

So far so good. However, one thing we did not see coming was OPEC squeezing oil prices.

Commodity prices have collapsed over the last 12 months. UK gas is down nearly 70%, European Gas is down 80%, Coal has dropped 63% and wholesale electricity is down over 70% across the board in Europe. This is great for disinflation.

However, what is happening with oil prices is a concern. Saudi Arabia and Russia cut oil production in the summer, and they do not appear to be in any hurry to roll back these production cuts nor are they too worried that current prices will erode the demand for oil.

Several Opec-plus delegates told Energy Intelligence that they are not concerned about current price levels (not a huge surprise given the higher it is the more they make), but realize that large consuming countries are likely to protest if prices stay high or rise further.

"It's just too early to make any changes to Opec-plus policy. We have to wait and see," said one delegate when asked about current prices and any plans for reversing supply cuts implemented since late last year.

Since November 2022, Opec-plus has put a complicated mix of collective and individual supply cuts in place.

The collective cuts are set to run until the end of 2024, while Saudi Arabia recently extended an additional voluntary cut of 1 million barrels per day until the end of this year.

Energy Intelligence estimates that as of August,?Opec-plus supply management efforts?had removed nearly 2.9 million barrels per day from the global oil market, laying the foundation for the recent rally in Brent crude to the mid-$90s.

This, we didn’t see coming and it will have an effect on inflation. Just as the data we’ve been waiting for finally starts to filter through to the consumer, we are seeing the one thing that could halt progress.

Leader Board - Top Trading Strategy

Goldman Sachs analysts raised their forecast for crude back to?triple digits?as worldwide demand hits unprecedented levels and OPEC+ supply curbs continue to tighten the market. The Wall Street bank pushed up its 12-month forecast for Brent to $100 a barrel from $93. However, most of the rally “is behind us,” the bank said in a note.

As we have pointed out, fighting inflation is much harder while oil is high.

Meanwhile, Bank of America’s Savita Subramanian became the latest?Wall Street strategist?to boost her target for the S&P 500 after the sharp rally in 2023 left forecasts in the dust.

The strategist now expects the benchmark to end the year at 4,600 points versus her earlier target of 4,300 — implying a gain of about 3.5% from its Tuesday close.

Indicators on the macro cycle, valuations and positioning are flashing bullish signals, she said.

However, given it’s nearly October, suggesting a 3.5% rally isn’t particularly imaginative. Most Wall Street analysts have been so far off this year it might almost be as embarrassing as last year.

One other thing worth keeping an eye on is housing affordability which is becoming a problem in the US and is transforming the market in ways that could be difficult for homebuyers and homebuilders alike. Tuesday's economic calendar saw housing starts plunge by 11.3% month over month in August to 1.283M, marking the lowest level since June 2020. On a Y/Y basis, housing starts fell a further 14.8%, well below the 1.435M units expected by economists. "High mortgage rates are clearly taking a toll on builder confidence and consumer demand, as a growing number of buyers are electing to defer a home purchase until long-term rates move lower," Robert Dietz, chief economist of the National Association of Home Builders, said earlier this week. The statement came after homebuilder sentiment dropped for the second consecutive month and fell below the key break-even measure of 50. The latest data may not only spell trouble for current housing dynamics but future supply as well. Many are sitting on mortgages taken out during the beginning of the COVID pandemic, when rates were at 3% or under, and are not in a rush to exit their current properties.

At the same time, builders are concerned about constructing new houses that buyers may not be able to afford, which has pushed many of them to the sidelines. Student loan repayments are also about to restart, which can be another big setback for millennials who are looking to break into the market.

We could well see the same thing happen over here in the UK. It’s the most obvious consequence of high interest rates and it could be a while before we see any significant drop in borrowing costs.

Have a good second half of the week, and we’ll be back with a full roundup at the weekend.

Closing Comments:

After an excellent week last week, our traders are still on the BUY side of the market place at the moment, but many profits have been booked and exposure has?been reduced.

If you're frustrated with what many?believe is a stale and outdated wealth management model- then consider arranging a call with our team.

We are also of the opinion that the industry needs revamped, and that wealth and asset managers have no excuses for failing to beat their benchmarks most years.

Investors want more than 4, 5, or?6% per annum, without taking on excessive risk.

Investors are frustrated with the poor performance and excessive fees.

Ladies/Gents -??this is the very reason why we built TPP.

TPP has been built for frustrated investors globally. It's time to empower yourself, and start to beat your benchmark. At TPP we offer a multitude of different strategies and trading techniques- they all have one thing in common. They are all designed to beat their market benchmark. Their track records suggest they will do exactly that.? It's time for change. No more exposure to underperforming?funds, and their inflated fees.

Change how you invest, work with TPP. Don't just hear about the revolution: Join it. Welcome to the future of investing.???