8 November 2022: Homeowners facing market dilemma

Homeowners facing market dilemma

Morning mid-market rates – The majors

8th November: Highlights

  • Housing market slowing dramatically
  • Goldman Sachs doesn’t expect recession to be severe
  • EU seeks changes to the Growth and Stability Pact

GBP – Mortgage rates set to continue to climb

The continuing tightening of monetary policy is beginning to slow activity in the housing market.

With mortgage lenders having withdrawn close to a thousand products from the market due to uncertainty over the path of long-term interest rates following the mayhem created by the recent mini-budget, borrowers are facing difficulty securing finances.

The cost of building land reached its highest-ever level as limited supply, and increasing demand drove builders to reduce the stock levels in their land banks.

Recent data showed that builders are slowing down housing starts, which will have a knock-on effect throughout the market.

This is a significant factor in the slowdown in the economy, which will ultimately lead the country into recession.

House prices fell by 0.4% last month following a 0.1% fall in September, leading to a year-on-year rise of 8.3% following a rise of 9.8% last month. A continued slowing down of price increases will deter people from moving house as they wait for the market to stabilize.

The unemployment rate is predicted to double in the coming months as the Bank of England continues its policy of raising short-term interest rates.

There appears to be no end while inflation is still at elevated levels. The cost-of-living crisis is being dealt with by wholesale cost-of-living payments to all consumers and discounts being made to household energy bills.

Bank of England MPC members Huw Pill, Jonathan Haskell and Silvana Tenreyro are all scheduled to make speeches this week. Given Andrew Bailey’s press conference following last week’s meeting, it is unlikely that they will do anything other than add their support for hikes to continue for at least another quarter.

Sterling saw a significant rally yesterday as the dollar suffered from election nerves and risk appetite improved. It rose to a high of 1.1551 and closed at 1.1511.

On Friday, data for industrial and manufacturing will be released as will trade figures. The first cut of GDP for the third quarter will also be published, and it is expected to show that the economy contracted by 0.5% between July and September.

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USD – Republicans seeking to reverse the mayhem of 2020

Voting begins later today in the midterm elections, which are widely predicted to see a change in control so the senate. Since the Presidential Election two years ago, President Biden has enjoyed the support of a Democrat majority. Still, that support is unlikely to remain, and he will face a hostile House of Representatives.

The well-known investment bank Goldman Sachs published a report yesterday that was less bearish than seen from other banks recently.

While the CEO of J.P Morgan predicts a major recession to begin early in the first quarter, Goldman doesn’t believe that the contraction will be severe.

In its latest bulletin, it still sees a 35% chance of a recession but believes that the economy can escape the worst of the slowdown. It is clearly encouraged by the positive employment data for October that was released last Friday.

It has been predicted elsewhere that headline employment will turn negative in the first quarter. Goldman agrees that there will be a slowdown in new jobs, but a fall into negative territory is not their central view.

Bloomberg released a report over the weekend stating a 100% chance of a recession, while other models say the probability is above 90%.

It is a brave call from one of the biggest firms on Wall Street. They believe that there is still a chance that Jerome Powell, despite his continued hawkish attitude, may still be able to engineer a soft landing for the economy.,

It seems that nominal wage growth, as reported last Friday, has not yet begun to spill over into the creation of a vicious circle of wages chasing high inflation and adding to the problem. Workers are still moving jobs chasing higher pay, but they are not yet demanding high increases in their current positions.

The rebalancing of the labour market will occur as new jobs become less plentiful, and workers stay put and raise higher prices.

The dollar was hit by the uncertainty created by the election and fell to test medium-term support yesterday. It fell to a low of 110.05 and closed at 110.17. It is in proximity now to significant support at 109.70 and should that be broken, it may fall to 107.75.

EUR – Tax and energy support could be effective

The first cracks in the veneer of solidarity that has been a mark of the ECB’s switch to tightening monetary policy over its last two meetings began to appear. However, it came from a somewhat unlikely source.

The Governor of the Bank of Greece called for the ECB to consider halting its tightening of policy as it is beginning to cause undue damage to Europe’s economy.

Yannis Stournaras believes that the ECB should encourage tax and energy authorities to do more to curb rampant inflation. He believes that no matter how high interest rates get, they will not dampen inflation as rising prices are due to external sources.

Leaving the ECB to fight inflation alone will lead to sky-high interest rates and see output collapse.

Since the financial crisis, Greece has been the poster boy for fiscal discipline. Having reduced its public spending significantly, it has emerged stronger and now looks to the future with optimism.

Stournaras believes that all the arduous work Athens has undertaken could be undone by interest rates moving significantly into restrictive territory.

He is considered one of the more dovish members of the ECB’s Governing Council, having apparently made an impassioned plea for the hike in rates to be just fifty basis points at the most recent meeting.

The Energy shock has had a profound effect on many Eurozone economies and making policy changes while in the throes of such a crisis could come back to haunt them.

He believes that inflation will fall to below 6% next year, which is a level that the Eurozone can live with.

The German and Austrian Central Banks will likely have treated this remark with a feeling that Greece wishes to return to the bad old days of high inflation and high interest rates.

The euro climbed above parity, as it has threatened to do over the past week or so. It rose to a high of 1.0034 and closed at 1.0020. It will need to break 1.01 to confirm a new trend, but the resistance around that level is strong.

Have a great day!

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.