Ear to the Ground

December 2 2022

It has been a quieter one on the UK economic data front this week, especially in the UK. There was data out regarding the housing market and it was no real surprise to see a fall in both price and activity here. Mortgage approvals and mortgage lending came in lower than in the previous month and also below forecast. A weakness has been expected here as the threat of recession, the higher cost of living, including higher interest/mortgage rates, continues to bite.

Nationwide also released its latest house price index. Here we also saw weakness, with house prices declining 1.4% month on month. This follows a 0.9% fall in the previous month and was worse than expected, where a fall of 0.3% was forecast. This is now the third consecutive month of house price declines. Uncertainty is likely to prevail, with the UK economy to contract if the latest Bank of England forecasts hold. Where UK interest rates and therefore mortgage rates peak also remains clouded and therefore there could be a period of ‘let’s wait and see’ by potential buyers.

Data released in the US meanwhile was heavier and at the time of writing, we are awaiting the release of the latest non-farm payrolls. Whilst this is a lagging indicator it will provide some guidance as to the strength of the US labour market, with any variation to market forecast, either to the upside or downside, likely to cause some excitement in the market, especially rate expectations and bond yields.

The housing market in the US, like the UK, also continues to see weakness, for many of the same reasons. Pending home sales in October were down 37% year on year. This represents the largest fall on record. The S&P/Case-Shiller Home Price Index fell 1.5% in September from the previous month. This is again very much a lagging indicator, but the direction of travel could prove important. This is now the third consecutive recording of the month on month declines.

Negativity in the housing market is important, psychologically as much as anything else. If homeowners are seeing the value of their homes increase it is likely to make them more confident and therefore have a greater propensity to spend. Conversely, if they are seeing the value fall on what is likely to be their largest and most valuable asset, they are likely to be more inclined to tighten the purse strings. The ability of homeowners to refinance at higher rates, or indeed new owners get on the property market, remains to be seen, particularly in the UK where homeowners fixed term rates are shorter and are likely to find themselves refinancing potentially at an interest rate double their current offer.

This week we also heard from Fed Chair Powell in a speech at the Brookings Institute. Here he was quoted as saying, “It makes sense to moderate the pace of our rate increases as we approach the level of restraint that will be sufficient to bring inflation down. The time for moderating the pace of rate increases may come as soon as the December meeting”. This was pretty much as expected and the market has been expecting for a while now that the hike which we see in December is likely to be 0.5% rather than the 0.75% that we have become accustomed to. The market continues to be left to guestimate where it thinks the terminal rate will lie, although he continued to reiterate that it is likely to be higher than that forecast in September. We suspect that the Federal Reserve is buying some time here, probably uncertain what it will be themselves!

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