The Cut
Height Capital’s Weekly Update

The last week was all about Global inflation rates, so we have dedicated this issue to unpacking those we consider most prominent:

• Last week we saw some major announcements especially in the US. The US Fed Chair, Jerome Powell, gave a House and Senate testimony, which is a two-day presentation on the outlook of the economy and what the Fed views as important targets over the coming year. The market was more focused on the short-term effect of the July FOMC meeting than their long-term outlook. The expectation from the FOMC is to see rate rises in the next few months. With the long term forecast to reduce back towards to 2.5%. Which is a long way off the current short-term expectations.

• In the UK, the Bank of England surprised markets with a 0.5% rate increase compared with market expectations a 0.25% increase. The BoE rate is now set at 5% and expected to peak around 6%. This was the beginning of the market correction last week, where markets fell for the last 3 days of the week. The Governor outlined the need to bring inflation under control, which doesn’t look like they will be able to do for a number of years yet given the sticky inflation they have faced to date.

• On of our key indicators is the Volatility Index, which is now sitting at one of the lowest points over the past 10 years. We see this as a tipping point for the market. We expect this to increase and increase back towards the long term mean of 20.

• Markets are factoring in some form of correction. The Australian Financial Review reported that short selling on the US market hit a high of $1.5 trillion in short positions in April alone. Traders are factoring in the potential recession and also the 14% increase in the S&P500 for this year may be close to the end of its run.

Now with the global rates peaking in the coming year, and the expectation that long-term rates will fall. The short-term movements could have substantial effect on global economy and tip it into a recession. With this expectation, we are now at a point where the market is at terms with that view, the question is the short-term pain will it be 3 months, 6 months or 12 months. We will wait to see.

Please reach out if you have any questions or would like to discuss anything in this newsletter in more detail. If you enjoyed this update and know of someone that may be interested in also receiving our newsletters, please pass on their details.