June 30 2023
A quieter week for data on both sides of the Atlantic this week. We did hear from US Federal Reserve Chair Jerome Powell however, speaking at a conference on financial stability, where he reinformed that a strong majority of rate setters in the US still expect two or more rate hikes by the end of the year. Assuming a 0.25% hike each time, that would take the US Fed Funds rate to the 5.5%-5.75% range. For the moment I think it is fair to assume that the pause that we saw the last time the Fed met to set interest rates was exactly that, rather than potentially the end of the hiking cycle.
There was a similar message from ECB President Christine Lagarde. The central bank believe that wage growth is adding further to the inflationary pressures which we already have. Thinking is that this could mean that inflation above the desired level could linger for some time. As a result, the interest rate will need to rise to a level which is restrictive enough to bring these pressures under control. It would be fair to say that another rate rise should be expected in July and possibly further into the future.
In the UK the data of interest, certainly to the UK public, was the release of the Nationwide House Price Index to June. This was better than forecast, with house prices falling 3.5% year on year compared to a forecast of -4.3%. Month on month a rise of 0.1% was posted against an expected fall of 0.3%. Despite this, it is perhaps a little too early to get excited. The Nationwide Chief Economist believes that “the sharp increase in borrowing costs is likely to exert a significant dragon housing market activity in the near term.” Mortgage payments for a first time buyer have risen sharply and now sit at c. 40% of their take home pay.
In terms of the higher impact of refinancing on outstanding mortgages, they note that there are around 400,000 borrowers due to refinance each quarter in the years ahead, which is roughly 20% of fixed rate mortgages refinancing by the end of 2023 and 40% by the end of 2024. Those with a product maturing are, of course, likely to be faced with a much higher rate. Nationwide believe those coming off a 2 year deal and looking to replace with a deal the same length, are looking at a rate 4.25% higher than their maturing mortgage. Those preferring 5 year deals, meanwhile, are looking at a rate around 3.5% higher.
Whilst we are seeing wage inflation, this higher cost has to prove to be some sort of barrier to consumers spending on other services and goods. Still, they believe a soft landing in the housing market is possible if the wider economy acts in the way it is forecast to, with the labour market being resilient and wage growth supportive. Given that their home for many is their main asset, the direction of the housing market will undoubtedly have an impact, on sentiment at least.
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