Markets Weekly podcast – 8 April 2024
Property market special and US jobs
08 April 2024
Join Stephen Moroukian, our real estate financing specialist, as he reflects on growing UK mortgage approval rates and the implications of a possible fall in interest rates. Meanwhile, Henk Potts delves into US employment, the most recent manufacturing figures and eurozone inflation.
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Henk Potts (HP): Hello, it’s Monday, 8th April, and welcome to the Barclays Private Bank Markets Weekly podcast, the recording that will guide you through the turmoil of the global economy and financial markets. My name is Henk Potts, Market Strategist with Barclays Private Bank. Each week, I’ll be joined by guests to discuss both risks and opportunities for investors.
Firstly, I’ll analyse the events that moved the markets and grabbed the headlines over the course of the past week. We’ll then consider the outlook for the real estate market. And, finally, I’ll conclude by previewing the major events and data releases that are likely to shape the week ahead.
Now, it was a volatile week for risk assets last week as investors digested the escalation of the conflict in the Middle East, a disruptive earthquake in Taiwan and dissipating rate-cutting optimism. That was counterbalanced, you could argue, with supportive economic data and positive corporate updates.
Stocks retreated from record highs, the dollar strengthened, commodity prices rose and Treasury yields hit year-to-date highs. The STOXX 600 in Europe was down over the course of the trading week. In fact, was down by 1.2%. The S&P 500 over on Wall Street was also down but was only off six-tenths of 1%.
Across the global commodity complex, there were notable gains for oil, gold and copper, as geopolitical tensions ratcheted up and on signs that a global manufacturing slump is starting to bottom out. The attack on the Iranian embassy in Syria, and confirmation that Opec production cuts will continue until June, pushed crude prices higher. In fact, we saw Brent trading above $91 a barrel on Friday, taking the year-to-date gain to around 18%.
Gold set record highs every day during the course of last week, the precious metal trading above $2,330 an ounce as central banks, particularly China, India and Russia, continued to buy and investors hedged against the uncertain geopolitical backdrop and the prospect for lower rates. Copper also traded higher. In fact, it hit its highest level since January 2023. It was up round about 9% year to date, as traders reacted to fears over oil supplies, reduced smelter production levels in China and production disruption in the Democratic Republic of the Congo.
Now, on the macro front, the focus was on the PMI data, eurozone inflation and the US employment report. The latest survey snapshots provided further evidence of the manufacturing rebound, albeit from a low base. US factory activity expanded in March for the first time since September 2022. The ISM manufacturing gauge rose 2.5 points last month but, crucially, rising above that 50 mark for the first time in 16 months, as production levels surged, demand increased and new orders picked up.
China’s manufacturing Purchasing Managers’ Index also rose, hitting 51.1 in March, meaning the manufacturing sector there has expanded for five straight months. That’s the longest period of expansion that we’ve seen in two years, with increasing foreign demand helping to boost exports.
Key takeaways, well, after a miserable period, the global manufacturing backdrop does appear to be stabilising. Consumer demand remains resilient, business investment is holding up and companies are slowly considering rebuilding their inventory levels. China’s composite PMI displayed a broad-based improvement across manufacturing, services and construction, suggesting that growth in the world’s second largest economy in the first quarter surprised to the upside.
We currently have 4.4% pencilled in for the first three months of the year. However, a stronger-than-expected start to the year may actually discourage much-needed further policy support, which could, in turn, infringe upon its ability to hit that annual 5% growth target.
In terms of the US, well, the employment report delivered another blowout number. The US economy created 303,000 jobs in March, the highest that we’ve seen in nearly a year, ahead of the 214,000 consensus and a downwardly revised 270,000 we saw in February.
In terms of the gains, well, they are mostly in healthcare and government. The unemployment rate actually ticked down. It ticked down to 3.8%. The participation rate improved. Average hourly earnings rose. They rose three-tenths of 1%, coming in at 4.1% now year on year.
What do we make of the reading? Well, it was a hot reading but in itself it may not be enough to dissuade the Federal Reserve from cutting rates in June. It certainly adds to the risk of a delay. What we do know is that immigration is fuelling the supply of labour. Pay growth has been moderating and the US economy is clearly expanding at a faster rate than expected. The timing of future rate cuts still, I think, very much is data dependent and, as such, I think the focus will now switch to the inflation reports which we get later this week.
Turning back very quickly to Europe, the March inflation print came in below the consensus. Headline CPI actually moderated to 2.4% year on year. The core reading came in at 2.9% annual rate. The deceleration was driven by an easing of food, alcohol and tobacco, along with core goods. However, sticky services inflation, which rose to 4% last month, continues to be a concern, I think, for policymakers.
Now, on a regional basis, France provided the biggest downside surprise. There were weaker-than-expected prints also in Italy and Spain, whilst Germany and the Netherlands continued to deliver firmer price gains.
In terms of the outlook for inflation in Europe, the latest figures suggest that price increases will continue to moderate in the coming months, though the disinflationary momentum is starting to slow. We expect headline CPI to average 2.4% this year and then 2% in 2025, and that should be providing some relief, I think, for policymakers in Europe.
The focus this week will be on the European Central Bank meeting. The ECB recently lowered its growth and inflation forecast amid the prolonged downturn in domestic demand. There are, however, some early signs that the intensity of the downturn is starting to moderate. February’s composite Purchasing Managers’ Index output measure, for example, rose to an eight-month high, as improving demand for services is helping to offset the weakness that we’ve been seeing in manufacturing, whilst the unemployment rate, at 6.5%, remains historically low.
If you look at the growth trajectory for Europe, well, we expect the eurozone to stagnate through the first half of this year before returning to trend growth over the rest of 2024, as pay growth starts to outstrip inflation and easier monetary policy prompts more private consumption and investment. Therefore, we expect output to expand by round about four-tenths of 1% during the course of this year before improving to around 1.3% in 2025.
In terms of the outlook for rates in Europe, well, I think the discussion around cutting rates has clearly begun. The timeframe still remains very debatable. We know members of the Governing Council are starting to become concerned that policy is too restrictive, and the risks are growing that they will undershoot the inflation target in the medium term.
To remind you, money markets now see a near 100% probability of a cut in June. I think we’d probably agree with that assessment. We also see the deposit rate finishing this year around 2.75%, to give you some perspective in terms of where we see rates in Europe going.
So, that was the global economy and financial markets last week. In order to consider the outlook for the real estate market, I’m pleased to be joined by Stephen Moroukian, Head of Product and Proposition for Real Estate Financing for Barclays Private Bank.
Stephen, great to have you with us today. Last time you joined us the data around UK mortgage approvals and property prices wasn’t exactly rosy. How is it looking now with the first quarter of 2024 under our belts?
Stephen Moroukian (SM): Hi, good morning, Henk, and really great to be back with you today. And, yeah, let’s get right into it. You’re absolutely right. We said those mortgage approval numbers were acting like the canary in the mine and these were, frankly, quite muted for most of 2023, especially in the second half of the year. It was quite concerning as they dropped into the 30,000 per month territory, but we’ve had some much more encouraging data this quarter. I’m really pleased to say we’re up to 60,000 approvals for purchases per month in February, with the March figures imminently to be released.
Now, the three-year average is around 70,000 approvals, so we’re slowly but meaningfully creeping back up to those levels. And that’s an encouraging moment as buyers come back to the market and the UK property market activity indicators are almost back up to pre-pandemic levels. So, buyers and sellers are transacting which, of course, means buyers are either paying the price being asked or they’re successfully negotiating at levels that sellers are happy to deal. And nationally, we think close to 50% of accepted offers are under the published asking price.
And, personally, I can’t recall a time over the last 12 months where I’ve been speaking to so many colleagues, clients and friends telling me about their purchases and mortgage decisions, so I’m certainly feeling first-hand what the data is telling us. Whether this is a bottleneck of activity coming through from various delaying hiatuses that we’ve seen, and whether these transaction volumes are sustainable remains to be seen, and interest rates and mortgage affordability are a key player in the frame.
HP: Well, Stephen, it’s certainly interesting to hear about those developments we’ve been seeing in terms of transactions. Let’s look at mortgage interest rates. We’ve spoken about the mortgage price war that’s been playing out and the volatile swaps rates. What are UK borrowers thinking right now?
SM: Yeah. Well, look, here’s some examples to bring it to life a little for our listeners, and both for fixed rates and tracker rate variable scenarios. The average five-year fixed rate on sale today in the UK is around 4.5%. That’s accounting for loan-to-value and other factors, with a five-year swap rate that’s been stuck at around the 4% mark since Christmas. The average two-year fixed rate is closer to 4.75% with a two-year swap of 4.5%. So, in the normal run of things, you’d always expect a premium to fix for longer, so clearly the market’s still predicting higher rates holding in the short term and the longer-term easing. And that lines up with, you know, the forecasters of course.
But also margins for lenders, as you rightly call out, Henk, in terms of a price war, are incredibly thin at the moment, and they’re all competing very hard to move liquidity off their balance sheets and into the mortgage market. In contrast, the average two-year track is around 5.5%, which, again, is a very small margin over the current Bank of England base rate, as we all know it’s 5.25%.
So, fixed rates are baking in today a reasonable discount which, in effect, is the market pricing in expected rate falls. Now, however, we’ve been here before and about this time last year, actually, but I think this time around we’ve got better inflation figures that are finally shifting and looking like they’re staying there, and we’ve got more buyers and sellers coming to market.
And I guess just as a little reminder, 90% of mortgages taken out over the last 10 years were fixed rates. Today, there are still close to one million borrowers this year coming off those fixed rates that were at about an average of 2.5% and, thankfully, they’re not coming onto rates that we had at the dizzy heights of 6% and 7% at points last year. But, of course, these borrowers will be doing their numbers and the shift to tracker rate mortgages is quite stark, even with that premium that’s there that I’ve just described. And really that indicates that borrowers can’t see fixed rates at a level that’s exciting enough, at the moment, for them to take and we’re certainly seeing that in the high net-worth mortgage market even more starkly.
HP: OK. Let’s try and put that in some sort of context then. Given the current interest rate expectations and the looming rate-cutting horizon, what impact do you think these factors will have on buyers and sellers, particularly, as you say, in that high net-worth market?
SM: Well, many commentators, including us, see this as a pivotal moment and that sentiment has been, you know, I’ve seen that with clients and prospects that I’ve been speaking to both here in the UK and overseas when I’ve been out on the road. And that’s about locking in yield now and preserving liquidity, trying to execute on best-in-class acquisitions, very difficult to find at the moment, which are typically assets that are better insulated in the down cycle, but also rise faster when the market is busy, try and find value in the property market. After all, prices have adjusted and will continue to do so, but not massively. Use leverage now with the conviction that as lending costs reduce in the cycle, there’s both capital appreciation and probably a degree of inflationary benefit there as well.
Now, all of those factors may or may not happen, and they may not happen all at the same time, but that’s the sentiment that’s playing out at the moment and the themes that I’m hearing. And there’s a lot of hindsight around not locking in to those sort of very good value fixed rates when they’re around at all-time lows. So, a real reflection period.
HP: OK, Stephen. One thing we know we can’t ignore is the political hiatus as we head towards the general election in the UK. How do you see that as a factor that’s likely to impact client decisions when it comes to making acquisitions in the property market during the course of this year?
SM: Yeah, I think it’s a really important question actually, but you can’t answer it through a single lens, or if you do then you do have to caveat that. Is a change of government good or bad for the London property market? I’ve been asked that a lot of times over the last three months and, of course, my answer is it depends. You know, in the last 100 years there’s been around 13 Labour governments, there’s been 17 Conservative governments and property prices have done pretty well.
I’m not entirely sure the impact one single government sitting can have on the course of property prices but, of course, the mini Budget, the COVID stamp duty holiday, the mortgage charter and even Margaret Thatcher’s right-to-buy scheme probably stand out, I’m sure, across that landscape.
But perhaps, you know, perhaps that’s a podcast for another day, Henk. We’ve got 75 elections, either general or presidential, in 2024, happening globally. That’s far more seismic in terms of push-and-pull factors to and from the UK, and they’re all from different locations.
It’s a complex web of connectivity and the clients that I speak to, the conversation’s far more about timing and location, less about politics. It’s about school term start dates, it’s about work relocation timings, it’s about the time it takes to get from the house to the office, to Heathrow airport and what are the places to buy and what properties, you know, what can a property be used for in terms of its purposes through the ownership window, whether that’s as a home for a child while they’re at university or as an investment at some point in due course.
And, of course, getting the right wealth plan and thinking around that as early as possible is key as well. So, the UK fundamentals remain strong, drawing lots of folks into the UK, and that continues to be the sentiment even with the recent changes to the non-dom landscape. So, I think the UK election, of course, is important. There’s a range of other factors that you have to consider at the same time.
HP: OK. To finish off, let’s try and broaden out the conversation and consider the global picture. Presumably, we’re seeing similar things playing out there as well.
SM: Yeah. Look, you can look across the landscape of property markets across all continents globally and see locations where mature markets that were doing well during the pandemic or just before have had the heat come off, and fundamentally driven by the increase in cost of borrowing. We’ve commented on those in both the French Riviera, and Nice specifically is a great example of that. And some of the urban hubs in Switzerland, where rapid price growth over a 10-year window has finally slowed. And in some of those locations, it’s even actually come back a little bit. But, of course, that creates a little bit more affordability in the marketplace and those buyers that can fill in the vacuum, so very active markets.
And then on the other hand, we’ve seen locations where the cost of borrowing has had no effect whatsoever as buyers taking debt in those markets are largely discretionary or the cashflow impact of increased interest rates, you know, can be absorbed. And Monaco and super-prime London are great examples where you’ve seen properties trade hands at record levels and that will continue to do so in all likelihood through 2024.
And just very briefly, best-in-class globally remains where equity is taking flight to. So, you know, they really are premium properties that tick a lot of boxes, and they are exclusive and, typically, trade outside of being in the public domain in terms of availability, so across what we call the grey-market transactions.
Now, look, if we want a glimpse into the possible future, I’m keeping a close eye on markets where interest rates are lower than they are here in the UK and to see how that supply-and-demand dynamic works but, as you rightly say, there’s a host of macroeconomic considerations overarching all of that which, of course, could change the course of some of those markets also.
HP: Well, thank you, Stephen, for your insight today. We know that real estate’s certainly a subject that listeners are always interested in, so we certainly appreciate your update.
Let’s move back to this week when investors will eagerly await the March US inflation report. We forecast that headline CPI will rise by three-tenths of 1% month on month, pushing the annual rate up to 3.4%. That’s due to unfavourable base effects due to less relief coming through from energy prices. We do expect some limited deceleration in core inflation, driven by an easing of core goods and a modest slowing when it comes to core services.
In terms of the outlook for US inflation, we still expect a moderation to play out. In fact, we’ve got headline inflation running at around 3% year on year in December of this year, and we think at least back to around 2.4% by the time that we get to December 2025. No doubt the Federal Reserve will be watching that development very carefully indeed as we move towards the start of that rate-cutting cycle.
But with that, we’d like to thank you once again for joining us. I hope that you’ve found this update interesting. We will, of course, be back next week with our next instalment but, for now, may I wish you every success in the trading week ahead.
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