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The week ahead 20 March 2023 - Markets cut rate forecasts after US bank failures

20 March 2023

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

Last week was a busy time for economists, as several major news stories broke; ranging from the US bank collapses, the shoring up of a major European lender, the ECB rate hike and the UK Budget. Additionally, for UK real estate there was the MSCI (IPD) numbers for February. To quickly cover off the Budget, our analysis is found here, although we wish to highlight the 12 enterprise zones and the childcare reforms, which are much needed to release more workers into an under-supplied UK labour market. On the MSCI data, February saw another month of capital values falling at a more subdued and almost marginal pace, as seen in January. This gives us more confidence to predict that the great majority of the price correction for this downturn has occurred; although that needs the caveat that it is too early to say how great the impact will be from events in the banking world last week.

Turning to the banking news, while pundits consider the US institutions affected to be exceptional in their business models, the insolvencies clearly have had an impact on sentiment across global financial markets. The insolvencies were partly caused by the rapid pace of interest rate hikes, which have pushed down the value of government bonds held by lenders to the extent investors lost confidence in certain banks that are viewed as special cases. Now expectations on interest rates are moving rapidly, shifting from the markets pricing in a 50 bps hike from the Fed at its upcoming meeting to a consensus of 25 bps, and one major bank even predicting a cut. In this respect, one might say it was bold of the ECB to hike by 50 bps last week, although that could also be seen as a statement of confidence in the strength of the Euro Area banking sector.

For property markets, the short-term implications are that investors and debt markets sense uncertainty again, so the timeline on reaching a turning point for the investment market gets pushed back. We do not feel there is enough panic in the market so far to cause another big drop in property values, but we do expect investors and lenders to stay on the side lines a while longer now. Our forecast is the relatively small drops in MSCI capital values seen in January and February will now carry on for several months longer than we previously anticipated.

Things to watch for this week

Wednesday 22nd March

US Federal Reserve Rate Decision, March

Previous: 4.75%
Forecast: 5.00%

Before last week’s bank collapses, the consensus was for a 50 bps hike at this meeting, but now a more cautious 25 bps rise is expected.

Thursday 23rd March

Bank of England Rate Decision, March

Previous: 4.0%
Forecast: 4.0%

We suspect the Monetary Policy Committee will stick to its previous pledge to monitor the data for a while, given the Governor queried swap pricing recently; plus the uncertainty in the banking market.

Friday 24th March

Euro Area ‘Flash’ Composite PMI, March

Previous: 52.0
Forecast: 51.8

After February’s unexpected surge for the PMI, we are forecasting a similar to slightly lower figure for March, reflecting recent data showing continued resilience for the Eurozone economy.

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