The Week Starts Here
Interest rate hike imminent
February 1, 2023
The Week Is About to Begin.
So far, this week hasn’t been too exciting even with all the big corporate earnings. On Monday US stocks were down a bit, yesterday they were up a bit and today they are down a bit. It can look a little different in Europe because of the time differences and official closes, but they have mostly moved together.
The reason we aren’t reading too much into what has gone on so far this week, is that this week is really only just about to start.
At 7pm tonight we have the Interest rate decision from the Federal Reserve; tomorrow we hear from the European Central Bank and the Bank of England.
Stocks have enjoyed a great start to the year as inflation has started to come down (as predicted). This is great news, and it does mean that the FOMC might not need to go as far as they initially suggested (as predicted). This is good for stocks, BUT beware, we don’t think they will change their rhetoric yet.
The rally may well have got ahead of itself and the FED are likely to push back against any narrative of easing rates or the possibility of a pivot – higher for longer will remain the theme.
Signs that the economy is weakening, still seems to be seen as positive news for the market and stocks have risen on the back of it.
For the last decade, bad news has been good news for markets as it has meant more QE, more stimulus, and continued low interest rates. All of these are good for money going into the stock market even if the reason for it is negative.
This is all about to change. We are about to enter a world of more economic normality. Interest rates are a ‘thing’ again. They won’t get back to the lows of the last decade – that simply won’t happen. They will however go up and down again in a controlled fashion.
QE is over, stimulus is over, and neither of them are coming back. Money is leaving the system and interest rates will range as inflation moves.
From now on, or at least some time in the very near future, good news will be good news and bad news will be bad news again.
Economies have slowed, and most are entering recession, or getting very close to it. Costs are high, wages are high so profits will come down. This should mean sell, but cautiously as there is still a chance the market sees weak numbers as a good thing for a little while longer. Bear in mind half the traders on Wall Street and in the City of London have never seen a market with interest rates!
Currently, the positions on TPP are a bit mixed but the overall bias is to the short side. Most of the active strategies are short, most of the buy or flats are long a little but not very much. A drop would certainly benefit our portfolios, but the drop may not be tonight, it may not be next week, but it is VERY difficult right now to see the economy strengthening.
Yesterday, ‘The Big Short’ investor Michael Burry tweeted out a piece of investing advice consisting of just one word:
This evening at 7pm is the FOMC’s interest rate decision, and it would seem some think it a good opportunity to short the market.
There’s no doubt the market will move tonight and if we had to fall on one side of the move, it would also be to short it. The FOMC will do a minimum of 25 basis points. The market is predicting 25, so the risk is they do more, or imply there is more to come.
There is a very good chance of that given what Jerome Powell is trying to achieve.
Then there will be more of the same tomorrow with the ECB and BoE. It’s going to be an interesting couple of days so expect some volatility. Positions on TPP can change quickly, but right now, we’re looking for a drop.
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