The week ahead 06 November 2023 - Markets call the peak for interest rates
What to watch out for in the UK economy and property market this week.
Last week the Bank of England and the US Federal Reserve followed suit on the ECB and the Bank of Canada, and left their policy interest rates unchanged. This led to rallies in both equity and bond markets, as investors speculated that interest rates have peaked. In their accompanying policy statements, the central banks hedged their bets by warning that further hikes are not out of the question if future data were to justify it. They also cautioned that rates would likely stay at current levels for some time, i.e. higher for longer. For the Bank of England, the vote to leave rates unchanged was 6-3 in favour, up from 5-4 in the previous meeting. This shows rising support for leaving rates unchanged, although much will depend on upcoming data, given inflation in the UK is high compared to other G7 nations.
GDP and inflation data for the Eurozone justified the ECB’s decision in October to pause. GDP growth in Q3 slipped to -0.1%, slightly below forecasts the economy would flatline; while inflation fell abruptly from 4.3% in September to 2.9% in October. From a property perspective, news that rates probably won’t be going higher is welcome, particularly for anyone who has to refinance debt in the near-term. However, the Eurozone GDP figures remind us that the price of taming inflation is a hit to growth, which is bad news for leasing demand. In the coming months, debate amongst economists will switch to the question of when will interest rates start to fall? We view a cut in the UK base rate as unlikely before Q4 next year. However, market interest rates have fallen lately as they price in the base rate not rising as high as was previously predicted. On Thursday the UK five-year swap rate stood at 4.6%, down from 4.9% a month ago.
This week sees data released in the Eurozone on retail sales, and given the recent poor GDP figures, we are expecting sales to fall. The Fed will be closely watching the US initial jobless data, hoping for signs of a slowdown in the labour market. In the UK, GDP numbers are to be published on Friday, and we are expecting the data to confirm the economy has stagnated over the summer in the face of strikes and high interest rates.
Things to watch for this week
Wednesday, November 8th
Euro Area Retail Sales, m-on-m, September
Previous: -1.2%
Forecast: -0.3%
Given that interest rates are high and the GDP data points to a contracting economy, we believe retail sales fell in September due to consumers becoming more frugal.
Thursday, November 9th
US Initial Jobless Claims, week to Nov 4th
Previous: 217k
Forecast: 220k
We are forecasting US initial jobless claims to gradually rise over the rest of the year, as higher interest rates slow the labour market. Any clear evidence the jobs market is decelerating will reassure the Fed on its decision to leave rates unchanged.
Friday, November 10th
UK GDP Growth, q-on-q, Q3
Previous: 0.2%
Forecast: 0.0%
The third quarter saw a number of exceptional factors impact the UK economy, including strikes and adverse weather; plus there is the effect of high interest rates to be factored in. We are predicting GDP growth will flatline.
