The week ahead 21 August 2023 - Swap rates rise as UK core inflation refuses to fall
What to watch out for in the UK economy and property market this week.
Just as many thought clarity had been reached on the outlook for interest rates, there’s a new plot twist. A week ago the emerging consensus was that the UK base rate (currently 5.25%) could reach its peak at around 5.50-5.75%. However, last week saw punchy pay growth figures and data showing core inflation unchanged at 6.9%. This reawakened speculation the Bank of England base rate may reach or clear 6.0%. The one-year swap rate reached 6.18% last Thursday, up from 5.87% on 10th August – bear in mind wherever the swaps market believes the base rate will peak, lenders would likely add on a profit margin for themselves, plus some risk premium. Perhaps what is most noteworthy is how fluid the debate on interest rates has become thanks to unpredictable and volatile data.
‘Unpredictable’ and ‘volatile’ is not the ideal economic backdrop for enticing investors back into commercial real estate, and the latest MSCI numbers confirm that the market remains soft. The UK All-property capital growth index fell by -0.53% in July, which was slightly down on the -0.48% for June. The figures contained some very mixed messages, with industrial just about in positive territory with growth of 0.17% but offices falling by -2.14%. Our reading of the situation is that investors are concluding that for much of the property market yields need to be higher before they come off the side lines. However, some of those willing to enter the market feel industrial is perhaps the best option. Summer is a bad time to be taking the property market’s temperature, with many people away on holidays. The next big test will be the mood around mid-September when most of the property industry will be back at their desks.
Most major economies will this week see PMI index figures released, for which the convention is that a reading of over 50 suggests growth. Given the rise in interest rates, we believe the UK will slide closer to the pivotal 50 mark, confirming that the economy is still growing but at a marginal rate. Data will also be released on business confidence in Germany, which is being shaped by the opposing pressures of falling inflation and rising interest rates. These two factors will counterbalance each other resulting in little change in sentiment.
Things to watch for this week
Wednesday 23rd August
UK ‘Flash’ Composite PMI, August
Previous: 50.8
Forecast: 50.3
With interest rates rising but inflation still high, we expect to see a lower figure for the UK PMI reflecting subdued trading conditions for most businesses.
Euro Area ‘Flash’ Consumer Confidence, August
Previous: -15.1
Forecast: -14.3
The July figures showed consumers gaining in confidence on their personal financial situation. Given inflation has eased further we expect the index to strengthen.
Friday 25th August
Germany Ifo Business Expectations, August
Previous: 83.5
Forecast: 83.8
This index based on a survey of German businesses has weakened in recent months. With inflation declining lately, we believe sentiment will have stabilised and perhaps slightly improved.
