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The week ahead 10 July 2023 - Bond yields push higher

10 July 2023

What to watch out for in the UK economy and property market this week.

Last week saw government bond yields rise in most major economies, in anticipation of higher interest rates and growing concerns over the risk of a recession. UK 10-year bond yields reached 4.63% on Thursday 6th, up from 4.35% a week earlier and 4.17% at the end of May. This is the highest level for UK 10-year yields since October 2008. Similarly, US 10-yr Treasury yields softened by 30 bps to 4.05%, and German 10-yr bonds rose by 22 bps to 2.61%. Across the developed world there is a Groundhog Day feel to the economic news – inflation is too high and sticky, labour markets are warm and responding slowly to higher rates. Meanwhile the political elephant in the room grows bigger, with elections expected next year in the USA and UK, which are looking increasingly likely to take place to a backdrop of tough times for consumers, and mortgage holders in particular.

A recent seminar by Capital Economics saw the possibility discussed that central banks now risk a ‘fool in the shower’ moment. Someone steps into the shower, turns the tap and is blasted by cold water, so they turn up the heat. However, the plumbing is just taking time to draw through the hot water, and soon ‘the fool’ is scalded. Similarly, because of extensive use of fixed interest rates, the monetary plumbing takes time to deliver the dampening effect to the economy, with the risk that central banks may over do the rate hikes. While some have criticised central banks for being slow to hike rates, their caution has stemmed from a desire to avoid becoming the scalded fool. This has led to an uncertain interest rate environment, which is encouraging caution among property investors that is set to continue over the Summer at the least. 

This week sees UK GDP and labour market figures released, and they might send mixed signals to the Bank of England’s Monetary Policy Committee (MPC). We see GDP flatlining on a monthly comparison, which argues for no further rate hikes. However, the pay growth figures are expected to remain strong, a pressure towards higher rates. The MPC meets again in early August, and we are forecasting a base rate hike of 25 bps. Also, this week sees the release of two Euro Area economic sentiment indices – the Sentix and the ZEW. Both are expected to report a decline in sentiment.

Things to watch for this week

Tuesday 11th July

UK Nominal Pay Growth (ex bonus), May

Previous: 7.2% y-on-y
Forecast: 7.1% 

We believe that April probably marked the peak for nominal pay rises, as the effect of rising interest rates filters through to the economy. However, a tight labour market will mean a gradual decline over the coming months. 

ZEW Euro Area Economic Sentiment Index, July

Previous: -10.0
Forecast: -17.0  

We see sentiment on the Eurozone economy weakening further as concerns grow that higher interest rates may push more countries in the bloc into recession.

Thursday 13th July

UK Monthly GDP, May

Previous: 0.2% m-on-m
Forecast: 0.0% 

With the consumer side of the economy being squeezed by sticky inflation and rising interest rates, we believe GDP growth flatlined in May. 

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