8 December 2023: Mortgage costs are still rising

There are still several hundred thousand mortgage payers who were on fixed rate deals that predated the tightening cycle that the Bank of England began two years ago. The effect of this is that there is a constant flow of families who are still seeing their monthly outgoings rise considerably, even though the Bank has now, to all intents and purposes, ended that cycle.

This is one reason changes in monetary policy take an inordinate amount of time to work their way through the entire economy, and as such means that rates will be having their least effect on the economy when the bank begins to lower them.

Most predictions are now that the first rate cut will take place around the middle of the second quarter of next year. Over the past few weeks, that date has been brought forward. Only a month ago, Huw Pill was agreeing with the market’s view that the first cut would be made in the third quarter.

It is odd to note that the Bank of England Governor’s impression of the economy is significantly worse than that of the Government and to a large extent, the market, yet he doesn’t see the merit in lowering interest rates, even though inflation is now firmly on a downward path.

Given the lag mentioned above, even if rates were cut today, it would be several months before their full effect on demand is seen.

Megan Greene, the newest member of the Monetary Policy Committee, has flown under the radar since her appointment, although she has now voted at three meetings. At her first, she voted with the majority for a twenty-five-basis point hike, then, at the next two, she found herself outvoted in wanting rates to be hiked again.

This week, Greene has had her first opportunity to explain why she remains hawkish about interest rates, in her first public speech since her appointment.

She told her audience at Leeds University that she worries more about the continued persistence of inflation at a time when output is still mixed, and expects to see interest rates restrictive for a considerable period to achieve the Bank’s target of 2%.

To several market practitioners and commentators, it is not the absolute level of inflation, but its direction, which should exercise decision makers, and it is necessary for them to be more forward-thinking in their deliberations.

The pound’s path into the end of the year is going to be set by three events that will take place in the U.S. over the next few days. The first is today’s release of the November Employment Report, and then CPI data due for release on Tuesday.

Those two pieces of data will have a knock-on effect on the FOMC meeting which takes place on Wednesday, and will, unless the data is out of line, they will agree to a third consecutive pause in interest rate hikes.

Yesterday, Sterling ended, temporarily at least, its recent move lower. It climbed to a high of 1.2612 versus the dollar and closed at 1.2589.

Data released yesterday showing job cuts made in the U.S. in November signalled the continuing effect of the rate cuts that have now seemingly ended.

Around 45k jobs were cut in November, a 24% increase over October, but 41% lower than a year previously. At first glance this number appears confusing since the NFP data that will be published today is expected to show around 150k new jobs were created.

However, there is no data for the net number of jobs overall, since the economy is judged on the number of new jobs it creates monthly.

Overall, the employment market is loosening, with firms not in such a rush to employ new workers to fill vacancies, since they believe the outlook still is uncertain. This illustrates the difference in attitude between the theoretical view expressed by economists and the picture at the “coal face”.

The non-farm payrolls data has been on something of a rollercoaster ride this year, with virtually every month’s data having a backstory about recession or an exceptional recovery, since the market is still reacting to what the “new normal” looks like.

A slowdown in recruitment in the tech sector has been the main area of adjustment this year. This ties in with the collapse of Silicon Valley Bank earlier this year. The bank was heavily involved with financing startups and while that market is still active, it is far less vibrant than it was at this time last year.

Banks have also cut employment levels. This is a mix of the effect of new technologies which reduce the number of employees needed to man branches and a certain amount of retrenchment that has been seen in financial markets.

Most bank’s largest area of growth in staffing has been in regulation and risk management. This speaks volumes for the direction the sector is taking.

The subject that is closest to the minds of Wall Street economists is whether inflation has been defeated. On this, it seems that there is a difference of opinion with the Fed.

It is almost certain that the FOMC meeting next week will continue the recent pause to interest rate rises, but Jerome Powell still won’t be moved to announce the end to the cycle.

It is likely that he will still see the risks to the economy as balanced between inflation and growth.

Most observers see the first cut in rates to be in July, although that will not open the “stimulus floodgates” but will lead to gradually more accommodation from the Central Bank.

The market found out that the dollar’s recent advance was not going to be linear as traders squared positions ahead of today’s data. The risk of holding long-dollar positions into the data was not considered worth the potential losses from an “outlier”.

The index fell to a low of 103.25, although it recovered to close at 103.63.

The ECB is facing a growing clamour to announce a series of cuts to interest rates as the Eurozone economy appears to be plunging into a severe recession.

Data released yesterday showed that not only did the economy not grow at all in the third quarter, but month on month it continues to contract.

It is highly unlikely that the Central Bank will agree with market sentiment that it could have ended its cycle of hikes one or possibly two meetings sooner.

In late summer, as ECB officials returned from their month-long vacations, it was generally felt by traders and investors that the time had come to end their policy of hiking rates, but in keeping with the manner in which it started the cycle it ended in the same manner, with a delay.

It may be that the size of the Bank’s rate-setting Governing Council needs to be reviewed, since a committee that now has the heads of twenty members’ Central Banks as well as the six members of the executive board is unwieldy and prone to caution.

No one doubts that 2024 will be a year of market stimulation by the ECB, with the first rate hike leading to at least three more throughout the year. The only “fly in the ointment” may well be that if inflation falls below three percent, but then stalls. That will encourage hawks like Robert Holzmann, the Governor of the Austrian Central Bank, to lead calls for stimulation to end.

Four of the largest economies in the region, Germany, Italy, France, and Spain all started the fourth quarter in reverse and there is no viable pickup in activity being seen which points to a recession despite the economy just about escaping a contraction in Q3.

Employment is apparently continuing to grow, albeit at a slower rate, with a 1.3% increase in the number of people with jobs in Q3 compared with a year earlier. Employment data is notoriously difficult to gather accurately, so these figures may mask the true picture.

Fears about a significant drop in retail sales activity were proven to be unfounded. Although the data was consistent with a slowdown in activity, rising by 0.1% month on month, the figures only showed a fall of 1.2% compared with a year earlier.

The euro gained from a pause in the dollar’s advance yesterday. It climbed to a high of 1.0817 and closed at 1.0795.

Have a great day!