InvestMacro

By Orbex

Analysts have speculated for a long time that the BOE would be the first of the major central banks to raise rates. Lately, that has come into focus as the bank’s rhetoric shifted from talking about employment to talking about inflation.

Despite the UK having relatively low CPI change, it’s still above target. And the BOE at no point pledged to tolerate higher inflation to compensate for prior deflation.

Yesterday, money markets adjusted to an expectation that the BOE would raise rates at their December meeting.

There is only one more meeting before that, and the consensus is that the BOE will likely offer some kind of advance warning that a hike is coming. This means there is a lot of anticipation building up ahead of the November 4th meeting.

What we’re looking for

Naturally, that means a lot of focus is on the upcoming data releases.

Tomorrow’s inflation data will be the last before the next BOE meeting, so investors are likely to pay a lot of attention to it. Not only could there be an immediate reaction in the market, but the results could pave the way for the market trend for the rest of the month.

Economists anticipate that the annual Headline Inflation will remain at last month’s level of 3.2%. That’s well above the 2.0% target of the BOE.

However, the central bank focuses on the core inflation rate. This figure discounts the price changes in food and energy, and it’s one of the major price drivers as of late in the UK.

Where the complication could lie

Economists expect the annual Core CPI change to show a slight decrease to 3.0% from 3.1%. Of course, that’s still way above target.

A trend towards the downside could be an indication that inflation isn’t as transitory as the BOE expects it to be. This would reduce the pressure on the bank to act quickly. And in turn, they might consider holding off on raising rates for a little while longer to continue to support the economy.

Nonetheless, the monthly change in inflation might be the deciding factor because it’s a “faster” indicator showing what’s going on right now. This is contrary to the annual comparisons, which consider the change in prices compared to a year ago. Monthly inflation could drop to 0.4% from 0.7%, a notable deceleration.

Putting the pieces together

The market has priced in these expectations, so the question is: what could happen if these projections don’t pan out?

If we see a marked reduction in the inflation rate it could lead investors to adjust their expectations for a later rate hike. And this would imply a weaker pound and support for the stock market.

On the contrary, the expected drop in near-term inflation might not manifest, or worse, actually accelerate. That would likely affirm the market’s expectation that the BOE will raise rates, and push the pound higher.

However, there is a pretty strong consensus that a rate hike won’t come as a surprise. So, it’s unlikely that the market will move up expectations of a rate hike to November.

Article by Orbex

Orbex is a fully licensed broker that was established in 2011. Founded with a mission to serve its traders responsibly and provides traders with access to the world’s largest and most liquid financial markets. www.orbex.com

by JustForex

The US stock market traded yesterday without a single dynamic. At the close of the stock market, the Dow Jones index decreased by 0.10%, the S&P 500 index increased by 0.34%, and the NASDAQ index added 0.84%. The technology sector and the consumer cyclical sector were the leaders. The health care and utility sectors were the fallers. The US industrial production declined as the ongoing global shortage of semiconductors reduced auto production, further evidence that supply constraints hamper economic growth.

Guggenheim Global Chief Investment Officer Scott Minerd said yesterday that the stock market could jump more than 10% over the next year as risks from inflation or rising interest rates are limited. For this reason, individual investors and funds are buying into falling stocks, despite the obvious macroeconomic problems.

A new insider trading scandal is brewing in the United States. According to SEC reports, Federal Reserve Chairman Jerome Powell sold between $1 million and $5 million of stocks from his personal account on October 1, 2020. This sale occurred just before the Dow Jones Index declined significantly. Recall that three other top Fed officials faced heavy criticism for making stock trades during the pandemic. Dallas Fed President Robert Kaplan and Boston Fed President Eric Rosengren were suspended due to the disclosure of their trades. Fed Vice Chairman Richard Clarida has also been criticized for stock trading. Other trades are currently under investigation by the Fed’s inspector general and the SEC.

Data from the Federal Reserve show that the wealthiest 10% of Americans own 89% of all stocks in the United States.

European stock indices closed yesterday in the red zone. German DAX decreased by 0.72%, British FTSE 100 lost 0.42%, French CAC 40 fell by 0.81%, Italian FTSE MIB and Spanish IBEX 35 lost 0.83% and 0.68%, respectively. The market is under pressure from high inflation in the region, the energy crisis, supply chain problems, rising commodity prices, and declining real estate market activity.

The number of British energy companies that have gone bankrupt since the beginning of September amid soaring natural gas prices has reached 13. As the UK Gas and Electricity Markets Authority reported, Goto Energy, Pure Planet, Colorado Energy, and Daligas left the market last week.

According to a Deutsche Bank survey, many investors expect the US Federal Reserve and the European Central Bank to keep a softer monetary policy for much longer.

German digital bank N26 raised $900 million in a new funding round valued at $9 billion, thereby overtaking the country’s second-largest bank, Commerzbank, in terms of capitalization.

Oil prices fell slightly yesterday due to a slowdown in economic growth in China and weak US industrial production data. According to Bloomberg, OPEC+ countries produced 15% less oil in September than planned initially. If oil prices do not fall, the union could face political pressure. The White House continues to press OPEC members to solve the oil supply problem. Some traders are betting that Brent crude will hit a record $200 a barrel by December 2022, according to QuikStrike.

Asian stock indexes mostly rose on Tuesday. Japan’s Nikkei 225 added 0.68%, the China A50 increased by 1.14%, while the Australian ASX 200 fell by 0.08%. Asian investors are following the US colleagues and are buying back declines in stocks, despite many macroeconomic problems in the region. Electricity problems in China appear to be escalating as coal prices rise again to record highs. The latest data showed that fuel supplies fell in September, heightening fears that domestic production may not be able to meet the growing electricity demand.

Main market quotes:

S&P 500 (F) 4,486.46 +15.09 (+0.34%)

Dow Jones 35,258.61 −36.15 (−0.10%)

DAX 15,474.47 −112.89 (−0.72%)

FTSE 100 7,203.83 −30.20 (−0.42%)

USD Index 93.97 +0.03 (+0.03%)

• – Australia RBA Meeting Minutes (m/m) at 03:30 (GMT+3);
• – UK BoE Gov Bailey Speaks at 15:05 (GMT+3);
• – US Building Permits (m/m) at 15:30 (GMT+3);
• – US FOMC Member Daly Speaks at 18:00 (GMT+3);
• – US FOMC Member Bostic Speaks at 21:50 (GMT+3).

by JustForex

This article reflects a personal opinion and should not be interpreted as an investment advice, and/or offer, and/or a persistent request for carrying out financial transactions, and/or a guarantee, and/or a forecast of future events.