The week ahead 30 May 2023 - Borrowing costs rise after UK core inflation increases
What to watch out for in the UK economy and property market this week.
Last week saw disappointing economic data for the UK and Germany. While headline UK inflation fell from 10.1% in March to 8.7% in April, core inflation saw an unexpected increase to 6.8%. This fuelled expectations the Bank of England would have to hike the base rate again. The one-year swap rate increased to 5.6% on Thursday last week, slightly exceeding its 29th September 2022 peak during the ‘mini-budget’ fallout. The 10-yr Gilt yield stood at 4.4% on Thursday, which was still below its 10th October 2022 peak of 4.5%, but well above the 3.8% seen just a week earlier. Meanwhile, Germany entered technical recession with GDP contracting by -0.3% in Q1 2023. This was partly due to lower consumer spending in the face of high inflation and rising interest rates, both of which have weakened household finances.
Across the advanced economies, inflation is proving to be stickier than expected, albeit with the UK harder hit than other G7 nations. Capital Economics are currently predicting 25 bps rate hikes for the Euro Area, UK and Canada in June, but not the US. For commercial property, higher interest rates will mean more owners are likely to have to sell when their debt comes up for refinancing. Also, the renewed uncertainty on the outlook for interest rates will make it harder for leveraged buyers to re-enter the market. While we still believe the great majority of the price correction for real estate has now occurred, the timing for a turning point and recovery is moving further away into the future. The risk of double dip for values is increasing for secondary assets, although we believe prime is looking attractively priced.
This week sees Nationwide release its UK house price index, and we expect to see another fall for the annual comparison, but a modest pick-up on a monthly basis. However, mortgage rates have already started to rise in response to last week’s events, so the housing market might weaken again in the coming months. Also, the Eurozone will publish inflation data, where we believe core inflation is only likely to see a modest decline.
Things to watch for this week
Thursday 1st June
Nationwide UK House Price Index, May
Previous: -2.7% y-on-y
Forecast: -3.2%
As the growth booked in the first half of 2022 drops out the index, we see the annual rate of growth sliding further into negative territory. However, a positive month-on-month figure is possible, given the increase in mortgage approvals in recent months.
Euro Area inflation, May
Previous: 7.0%
Forecast: 6.3%
With the energy spike of H1 2022 gradually exiting the index, inflation will probably fall markedly on the headline measure. Sticky services inflation could lead to a very subdued decline for core inflation though.
Friday 2nd June
US Non-Farm Payrolls, May
Previous: 253k
Forecast: 180k
With rising interest rates now acting as a brake on the economy, we are forecasting job creation to have slowed in May.
