2 June 2023: Nationwide house price index falls to a fourteen-year low

2 June 2023: Nationwide house price index falls to a fourteen-year low


  • Inflation fuelled by Brexit, claims Larry Summers
  • Will today’s data presage the Fed’s “pivot”
  • Euro supported by hawkish Lagarde speech
GBP – Market Commentary

Former U.S. Treasury Secretary “will be surprised” if the UK avoids a recession over the next two years

The UK economy suffered a pair of blows yesterday after a month of generally good news since the IMF announced its “volte-face” over the nation’s performance over the rest of 2023.

The Nationwide survey of house prices was published, and it showed that across the entire country, prices fell by 3.4% in May, its largest fall in close to fourteen years.

Then Larry Summers, the influential economist and former U.S. Treasury Secretary commented in an interview that it would be a major surprise if the UK didn’t suffer a recession in the next two years and that even this year, it is not out of the question that the economy could slip into a mild recession this year.

The Nationwide Building Society in a report that accompanied the data warned that further interest rate rises could see the market fall by even more.

This may be good news for first-time buyers who have seen house prices continue to rise in the past few years, even during the Pandemic, although then Chancellor, Rishi Sunak provided significant support in the shape of cuts to stamp duty.

In a further blow to the property market, the Bank of England released data which showed that new mortgages were at an all-time low in April with borrowers repaying a net one point four billion pounds.

The housing market is one of the cornerstones of the UK economy with activity in the sector “filtering down” to several areas of both services and tradespeople.

Meanwhile, Larry Summers labelled Brexit a “historic error” which has helped fuel the current cost of living crisis. He believes that this is the reason why the UK’s economic woes are currently more acute than its G7 partners.

He believes that the country’s decision to leave the EU has put downward pressure on the pound, upwards pressure on prices and had a serious overall effect on its competitiveness. It has also limited the supply of labour and has contributed to a skill shortage.

Although the Federal Reserve has also kept rates low for several years, Summers feels that the UK should have been more proactive in anticipating a rise in inflation and acted to preempt a rise in inflation.

Despite the obvious risks to the economy, he feels that the Central Bank has now “painted itself into a corner”, and sees no option other than to continue to hike short-term interest rates that are currently at 4.5%.

“It is going to be very difficult to eliminate entrenched inflation without having a severe effect on growth” Summers ended his interview with BBC’s Today programme by saying.

The pound continued its strong performance this week, reacting well to the prospect of further rate increases. It reached a high of 1.2539 and closed at 1.2523.

USD – Market Commentary

Private sector jobs fall while jobless claims continue to rise

Today’s publication of the May employment report could be the catalyst for the Fed to pause its cycle of interest rates that has been continuing for more than a year.

Fed Chairman, Jerome Powell has been insistent that the Central Bank will be driven by the data as it considers a pause, although both he and a number of his colleagues on the FOMC are keeping their options open by saying that they may have to return to further increases should inflation “flare-up” again.

Patrick Harker, the President of the Philadelphia Fed, which produces the monthly report on overall activity in the manufacturing sector, spoke this week of his feeling that the economy, while sufficiently robust, would benefit from a pause.

His colleague, Fed Governor, Philip Jefferson, backed his comments but was strident in his belief that the Fed cannot commit to ending its programme of hikes while inflation is still well above target.

The employment data that has already been released has been fairly neutral as far as the Fed’s actions are concerned. A resize in job openings back above ten million shows that workers have plenty of opportunities to move jobs in order to secure an “inflation-busting” pay increase, while the data for the private sector, released yesterday, remained strong, well above the market’s expectations.

Today’s non-farm payrolls are difficult to predict since the headline number often contains a number of estimates which are corrected the following month.

Given what has gone before, the risk is clearly to the upside, although the numbers do have the ability to provide a shock.

If the headline were to come in at a figure below, say, 150k, a pause in rate hikes would become the market’s base view and see equity markets rally, while the dollar would likely correct towards the 100 level over time.

Yesterday, the index fell to a low of 103.49, closing at 103.55.

EUR – Market Commentary

ECB concerned about banks if fund performance falters

Christine Lagarde remains steadfast in her belief that interest rates need to continue to rise in the Eurozone, to combat inflation which remains well above the Central bank’s target rate.

She spoke yesterday of a lack of evidence that inflation has peaked, despite prices falling to their lowest level since Russia invaded Ukraine according to the latest data.

Putting aside the flash data for May that showed that inflation fell to 6.1%, Lagarde was insistent that she sees nothing to suggest that prices have peaked and therefore no reason to discuss pausing the series of rate hikes that have continued for nine months.

The ECB was late in beginning hiking rates, compared to the majority of other members of the G7 due to its continued preoccupation with providing fiscal assistance to several Eurozone members.

Any discussion of G7 attitude to growth or inflation will always be slightly skewed since if the EU itself, which is a “non-enumerated” member, is included, Europe makes up more than half of its membership.

While the Fed mulls over a pause in its programme of hikes and the Bank of England agonizes over its next move, the ECB is certain to press ahead with further rate increases despite the largest economy in the Eurozone already being in recession.

There is little being said by the German Finance Ministry or the Bundesbank about the prospects for growth in the near future in the country, presumably because the German “man on the street” is as frugal as his Government and appreciates receiving a more “appropriate” return on his savings.

Further data on economic activity will be released next week as well as retail sales numbers of the entire Eurozone.

Also due to be published, is a further update on Q1 GDP. It is expected that the economy will have grown by 0.1% QoQ while the economy is likely to have grown by 1.3% over the past year.

The single currency is expected to continue to rally in the short to medium term due mainly to the support it receives from it having the most hawkish Central Bank in the G20.

The euro rose to a high of 1.0768 yesterday and closed at 1.0762. It stands on the cusp of further advances if it can break resistance at 1.0775. A lot will depend on what happens in the U.S. later.

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.