The week ahead 30 October 2023 - Have interest rates peaked?
What to watch out for in the UK economy and property market this week.
Both the ECB and the Bank of Canada left their policy rates unchanged last week, which has fuelled speculation that interest rates for major economies have peaked. However, this week the US Fed and the Bank of England will make their rate announcements, and although the consensus view is that both will leave rates on hold at this particular meeting; it is not out of the question that both may yet hike rates one more time in December. In the case of the US, the economy is not decelerating as quickly as one would expect after so many rate rises, indeed GDP growth strengthened in Q3. UK inflation remains worryingly high, but to a backdrop of weak economic growth and rising unemployment. We believe both central banks will want to see more data before hiking again, hence our prediction of a pause this week. However, if the inflation numbers do not fall further before December we could see one more rate increase in both countries.
The latest PMI index data pointed to difficult trading conditions for UK businesses. The October reading was 48.6, and the convention of the index is that a reading of under 50 points to a contraction in output. The sub-indices show the situation is more difficult for the manufacturing sector, which is at 45.2, than services at 49.2. Separately, a survey by the CBI found that factories had seen a sharp fall in new orders in October. The lesson of previous economic slowdowns is that knowledge services firms can often be more nimble in redeploying towards a changed marketplace than manufacturers, who have to retool plants to produce different goods. For property, this could mean leasing demand might reach a turning point sooner for services-oriented real estate, such as offices.
As mentioned above, this week sees the Fed and the Bank of England hold their rate setting meetings. Also, the Nationwide will release its October house price index, which we believe will show signs that price falls are now moderating. In the US, data comes out on job creation, and we are predicting a slowdown as a result of high interest rates. The Eurozone will release GDP and inflation numbers.
Things to watch for this week
Tuesday, October 31st
Eurozone GDP Growth, q-on-q, Q3
Previous: 0.1%
Forecast: 0.0%
Our forecast is for GDP to flatline for Q3, with a contraction in Germany being counterbalanced by growth in France.
Eurozone ‘Flash’ Inflation, y-on-y, October
Previous: 4.3%
Forecast: 3.4%
A marked fall in inflation is expected as a lot of base effect on energy comes out of the index, and prices respond to the economic slowdown.
Wednesday, November 1st
Fed Funds Rate Decision, November
Previous: 5.25-5.50%
Forecast: 5.25-5.50%
Although the labour market and GDP data have been relatively strong, we believe the recent fall in core inflation will encourage the Fed to leave rates unchanged.
Thursday, November 2nd
Bank of England Rate Decision, November
Previous: 5.25%
Forecast: 5.25%
Based purely on the inflation data, the Bank of England should be raising interest rates. However, with a range of indicators showing the economy is slowing, we believe the Bank will want to see more inflation figures before hiking again, so will leave rates unchanged at this meeting.
Nationwide House Price Index, m-on-m, October
Previous: 0.0%
Forecast: -0.1%
Although the economy remains week, which is bad for buyer sentiment, lenders have been offering better mortgage deals in recent months. This we believe should limit the downwards pressure on pricing to a marginal fall.
Friday, November 3rd
US Non-Farm Payrolls, October
Previous: 336k
Forecast: 180k
After a rebound for the figures in September, we are predicting a deceleration in hiring activity in October, as higher interest rates exert downwards pressure on the jobs market.
