Watch For Inflation And Interest Rates To Drive Market Direction This Week

Good morning and welcome to another week in the markets.

The markets have opened a little lower but we’ve had some good news from the UK economy.

A downbeat start to the week in Asia after a fall in equities late Friday night in the US means that indices have opened in the red as we kick off a crucial week for the markets.

Coming off the back of a week that saw sharp gains across China-related stocks, the Hang Seng has been a major underperformer overnight, losing over 2% as scientists warn that the plan to remove Covid restrictions will lead to a sharp spike in cases as a result.

In the West, inflation and interest rates look set to dominate, starting with tomorrow’s US CPI figure.

This morning has seen a host of UK data and despite what you might hear from the press, it’s not all bad.

House prices remain under pressure, but I think we all know and understand that. This will continue for a short while, but to be honest they can’t go up forever and they need to come down so that the younger generation can actually afford to buy one.

Rightmove House Price Index signalled further house asking price contraction of 2.1%. This still puts the average house price 5.6% higher than at this time a year ago, only slightly below the 6.3% growth recorded in 2021.  

Even house prices can’t just go up forever. Higher rates will mean that the average price will need to drop but it doesn’t mean anyone needs to panic. It is also worth bearing in mind that this is only relevant if you plan to sell. Even then, house prices going down is only bad for those who are looking to downsize. For everyone else, it really isn’t bad at all.

If you’re not moving, it’s irrelevant, if you are moving but to something slightly bigger, then a drop in prices is a good thing as the difference between the two houses will have contracted.

We all get over excited about house prices because many of us own one. But if you’re not selling, it really doesn’t mean anything so stay calm.

Other good news that the media will somehow spin into bad news is that October GDP came in above expectations at 0.5% for the month on month.

This means that despite all the ‘bad news’ the UK economy is growing again.

The press will focus on the only part of the figure that came in negative and that is the 3 month change due to the contraction of the previous month which was -0.6%. September was negative, fine, but we don’t need to dwell on a single negative.

On that back of a positive October, year on year GDP also came in slightly higher than expected showing growth of 1.5%. It’s small, but it’s good news.

Manufacturing production had a particularly good October with an increase of 0.7%, significantly higher than the 0.1% expected.

Here’s what else we have to look forward to this week:

Economic data

Interest rate decisions are front and centre this week. The US, EU and UK are all expected to ease off somewhat on the levels of planned rises.

There is also a wealth of data from the US and UK that influences rate-setting committees. The gulf between short and long-term borrowing costs — at its widest level since 1981 — has strengthened expectations among investors that the Fed will stay the course on its monetary policy tightening to tame inflation, despite increased worries about recession.

The last time the UK’s Monetary Policy Committee met, in early November, attention was focused on restoring confidence in the country’s economic management. The Bank of England continues to talk tough, but this time the MPC’s response is expected to be more measured. Expectations are for a 0.5 percentage point rise in the base rate on Thursday, rather than repeating the 0.75 percentage point rise of last month.

The week ends with G7 flash purchasing managers’ index (PMI) figures. There is also an EU leaders’ summit and Opec publishes its monthly outlook report.

Companies

It’s a quiet week for earnings announcements, but one with some notable companies reporting from specific sectors. In retail fashion, there is H&M, which has been talking up its recovery in the Chinese market after a long-running consumer boycott. Expectations are also high for Spain’s Inditex, home to the Zara brand among others. For tech, there is the acquisitive Oracle. And in the outsourcing arena, Capita and Serco are representing.

Key economic and company reports

Monday

·    UK, October GDP estimate, industrial production and trade balance data

·    Results: Oracle Q2

Tuesday

·    Germany, ZEW survey and November Harmonised Index of Consumer Prices (HICP) inflation figures

·    UK, December labour market statistics

·    US, November CPI inflation rate figures

·    Results: Capita trading update

Wednesday

·    EU, October industrial production figures

·    Japan, revised October industrial production figures (AM local time)

·    OPEC issues its latest monthly oil market report

·    UK, November CPI and producer price index (PPI) inflation rate figures

·    US, Federal Open Market Committee’s interest-rate decision

·    Results: Inditex Q3, Tui FY, Weber Q4

Thursday

·    China, November retail sales and industrial production figures

·    EU, European Central Bank governing council’s monetary policy meeting

·    UK, Bank of England MPC rate-setting meeting

·    US, November retail sales and industrial production figures

·    Results: Adobe Q4, Biffa H1, Currys H1, H&M Q4 sales update, OVS Q3, Serco Q3

Friday

·    Quadruple Witching Day, when during the final hour of stock market trading stock index futures, stock index options, stock options and single-stock futures expire

·    EU, France, Germany, Italy, Japan, UK, US: S&P Global flash manufacturing and services purchasing managers’ index (PMI) data

·    EU, November HCIP inflation rate figures

·    UK, FTSE UK Index quarterly review with Abrdn, Beazley and Weir Group set to replace Dechra Pharmaceuticals, Harbour Energy and Intermediate Capital Group in the FTSE 100

·    UK, November retail sales figures and GfK consumer confidence survey

·    Results: Hollywood Bowl FY

Our market bias at the moment:

After an excellent October and quite a solid November for most strategies on TPP, our traders will be keen to end a challenging year on the front foot.

December traditionally witnesses a 'Santa rally' going into the end of the year, but with many projecting a market sell off in the short term- will Santa stay away this year?

On our platform, our strategies have a variation of biases at the moment.

Some are on the 'buy' side, some are selling the markets, whilst other remain fairly flat.

Overall, there is a slight SELL BIAS, so a market retracement would be positive in the short term..

It's interesting how we've noticed many of our traders and trading teams adopt some short sell positions on their portfolios. The most commonly markets being sold right now are the DAX and CAC in Germany and France, alongside many of the US markets. The FTSE 100 and the Nasdaq still seem like a BUY for some.

If the traders and trading teams can catch some downward traction, before moving back onto the BUY side, it would set us up nicely for the end of the year.


If you currently have an underperforming portfolio elsewhere, or are holding cash whilst waiting for an entry point- contact our team for a FREE market consultation.

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Have a great week in the markets and may they be kind. Christmas is nearly upon us and the snow (for some of us), has arrived.

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