21 February 2023: Property market stagnating


  • Private sector wages not keeping pace with inflation
  • Employment is a regional phenomenon
  • Output begins to expand after months of contraction
GBP – Market Commentary

Tenreyro believes rates are too high

House prices were flat this month, following a rise of 0.9% in January. This contributed to a fall in price rises of 3.9% compared to 6.3% year-on-year.

House prices are one of the most visible effects of the rise in interest rates. Previous recessions have been triggered by falls in this sector, but with the Bank of England expected to begin to ease rate rises relatively soon, this is another area that may have escaped the worst of any contraction.

Food inflation is still a major concern. Prices of several household staples like eggs, milk and olive oil rose significantly in January and now there are concerns over supply of vegetables, particularly tomatoes, due to bad weather that has affected Europe and Africa.

Inflation is slowly beginning to react to tighter monetary policy as it dampens demand, but the knock-on effect of price rises in several areas of the economy means that it is not falling as fast as Andrew Bailey and other members of the MPC would like.

Silvana Tenreyro, one of the three independent members of the MPC, spoke yesterday of her belief that the base rate of interest is already too high and the reason that inflation is not falling yet is that there is a significant lag between the bank’s policy decisions and their effect on prices.

Tenreyro testifying to MPs on the Treasury Select Committee yesterday believes that just 20% of the effect has so far been felt and continuing the policy of rate increases will see a recession hit the country later in the years, unless several factors combine to work in the Central Bank’s favour.

At the last rate setting meeting Tenreyro was one of two members who voted to hold interest rates at 3.5% the other being the newest member of the committee, Swati Dhingra. The third independent member, Catherine Mann, is likely to paint an entirely different picture when she testifies later in the week.

Mann is far more hawkish on inflation than either Tenreyro or Dhingra, often voting for an even bigger hike than is eventually agreed.

While the public sector continues to be plagued by strikes, with junior doctors having voted to join their nursing colleagues yesterday, workers in the private sector are also suffering but either more realistic than public sector workers or their pay has kept up with inflation in previous years.

Workers at retail giant Tesco have accepted a 7% increase, which will see their real wages fall.

The pound was barely changed in trading yesterday as the market continues to receive mixed signals about the future actions of the Bank of England. With the budget looming and Jeremy Hunt expected to provide a clearer picture of prospects for growth going forward, traders are loath to put too much stock in expectations that the Bank will slow the pace of rate increases or stop them altogether.

Yesterday, Sterling fell marginally to a low of 1.2014, but recovered to close at 1.2036.

USD – Market Commentary

Fed may signal a longer period of hikes

The minutes of the latest meeting of the FOMC that are due for release after the London close tomorrow may reveal the Fed’s intention to continue to raise interest rates for a longer period than the market currently believes.

While there is probably an underlying feeling amongst members that it would be beneficial to pause and consider the effect of the series of rate hikes that have taken place since last spring, Jerome Powell appears to want to press on to ensure that inflation is well and truly defeated.

Following the release of the minutes, there is a relatively narrow window for FOMC members to speak publicly about their views and voting intentions, before the blackout period begins that precludes them from comment.

Data released over the past few days, sheds some light on the comments made by FOMC members recently. While overall the economy has started the year in a more robust manner than was seen in Q4, there are regional pockets where growth is not as strong as it is elsewhere. This may be borne out by the release of Purchase Managers Indices, which will likely show some regional diversity.

Output remains in contraction overall, although the PMI’s for February are expected to show an overall improvement. It would stand to reason, therefore, that manufacturing output is already expanding in some areas of the country.

Jerome Powell is at pains to show a hawkish side, but in private he is likely to be more sympathetic to those Regional Fed Presidents who are seeing a less certain next few months. That is probably why he endorsed a twenty-five basis point increase in the fed funds rate at the last meeting.

The market hopes rather than expects to receive a degree of guidance as to the Central bank’s intentions when the minutes are released.

The dollar index remains at the top end of its recent quite narrow range. It is often seen that when the market is in the doldrums, as has been seen over the past week, that any breakout turns out to be quite violent.

Yesterday, the index traded in a 104.07/103.75 range, closing virtually unchanged at 103.87.

EUR – Market Commentary

Terminal rate unlikely to be reached before summer

The euro is likely to remain supported for a significant time by the continued tightening of monetary policy. That is according to Olli Rehn, the Head of the Finnish Central Bank and member of the ECB’s fate-setting Governing Council.

Rehn, who is a member of the hawkish frugal five, along with the Central bank heads of Germany, Austria, Belgium and The Netherlands, doesn’t believe that interest rates have yet reached the point where they are dampening demand sufficiently to have any material effect on demand and therefore inflation.

The issue with making sweeping comments such as Rehn made yesterday is that they are unlikely to apply to the entire Eurozone, and in Rome, there is probably an equal and opposite view.

The President of the Banca D’Italia has been more conciliatory in his comments recently, accepting that rates still need to be increased but that any increases must be justified and voted for by a majority of the Governing Council.

Rehn went on to say that rates will need to be raised beyond March, and the terminal rate is unlikely to be reached until the summer. He also scotched any talk of cuts in interest rates, which he feels would be premature and when the time comes they should not be rushed.

The release of the ZEW survey for both Germany and the Eurozone as well as flash PMIs of February later this morning are being looked forward to with some excitement by the markets.

The composite survey for both manufacturing and services is expected to consolidate its move into expansion that was seen last month. The ZEW surveys are both expected to see a significant improvement in future expectations, although current expectations in Germany may not yet show the improvement that has been seen from the fall in the wholesale price of gas.

The Euro should see some support from the data. Yesterday it was barely changed, in keeping with the other major currencies. It closed at 1.0684, just nine points lower than last Friday.

Have a great day!

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Alan Hill

Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.