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Models suggest recession coming soon Our composite models suggest the economy was on track to fall into recession soon even before the impact of the banking turmoil feeds through. There also appears to be a lower, but rising, chance that a recession has …
5th April 2023
London office capital values fell by a relatively modest amount in the second half of last year and monthly data show values stabilised in the first two months of 2023. But that has left London office spreads very narrow at a time when the recent banking …
The decision by the Reserve Bank of New Zealand to lift its official cash rate by 50bp, to 5.25%, came as an upside surprise, but we still think the end of the hiking cycle is approaching. In any case, the Bank’s aggressive tightening confirms our view …
The sharp fall in job openings in February shows that labour demand was cooling even before the recent banking turmoil and provides another reason to think that the Fed’s tightening cycle is nearly over. The fall in vacancies and downward revision to …
4th April 2023
Narrow money growth has turned negative as savers have shifted out of bank deposits and into money market funds and bonds, which now offer significantly higher returns. (See Chart 1.) Bank loan growth remains robust but, with the tightening in credit …
The Reserve Bank of Australia kept open the possibility of further tightening when it decided to leave its cash rate unchanged at 3.60% today. As such, we do still expect the RBA to deliver one final 25bp rate hike in May before bringing its tightening …
The latest mortgage market data show that the banking crisis has, so far, had a minimal impact on the housing market. While spreads have increased, overall mortgage rates have dropped and applications for home purchase have increased since SVB collapsed. …
30th March 2023
While households and businesses took further advantage of rising interest rates in February by moving money into bank accounts with higher rates, they are not withdrawing money from the overall banking system. We doubt this significantly changed after the …
Japanese banks have nearly doubled their lending to overseas non-bank financial intermediaries over the past decade. Some of this reflects purchases of collateralised loan obligations, most of which are highly-rated. But the bulk of that lending is very …
The 2023 Budget projects a much larger deficit than the prior Fall Economic Statement and, as a result, the government now agrees with our forecast that the debt-to-GDP ratio will rise. Roughly half of the hit to the budget projection is due to weaker …
28th March 2023
The surge in credit card spending over the past year hasn’t been any larger than the increase in overall consumer spending. And with personal credit accounting for a small share of overall credit, a surge in business loan defaults would pose a far greater …
27th March 2023
Fears over small regional banks in the US have focused on the unrealised losses on debt securities (see Chart 1 ) and deposit insurance but, in what would have echoes of the savings and loan crisis, maybe we should be more worried about deposit flight due …
24th March 2023
The flash PMIs for March suggest that not only did advanced economies avoid recession in Q1, but the outlook for activity has improved as well. However, we still think the hit from higher interest rates will intensify . And with services price pressures …
The ongoing struggles of the banking sector in the US and elsewhere has muddled the outlook for the dollar. But while we think the balance of probability has shifted against the greenback, we continue to expect a near-term rebound in the dollar, in …
Bank failures have had only a modest impact on UK banks’ wholesale funding costs to date, reflecting an assessment that lenders are in good health which we think seems fair. Greater investor scrutiny could still lead to more caution in mortgage lending, …
US regional banks’ higher exposure to CRE debt means we expect their struggles to weigh heavily on credit availability for commercial real estate investors. Even without building in second round effects on lending from other debt providers we expect this …
23rd March 2023
The Bank of England followed the Fed’s example by forging ahead today with a 25 basis point (bps) interest rate hike, taking rates from 4.00% to 4.25%. This could prove to be the last hike of the tightening cycle. But if wage growth and CPI services …
The 25bp rate hike and new projections unveiled by the Fed today were towards the more dovish end of potential outcomes. Despite recent strong economic data, officials acknowledged the likely hit from the banking sector turmoil and left their end-year …
22nd March 2023
Although recent strains in the banking sector mean that the economic outlook is especially uncertain, in our view equities are unlikely to perform particularly well, regardless of how things play out. It goes without saying that, over the past year or so, …
The UK commercial real estate (CRE) debt market seems to be in a better position than the US, where troubled regional banks were the main providers of finance. That said, credit conditions are also set to tighten in the UK which will make refinancing more …
With bond yields now dropping back again, the drag from unrealised losses on banks’ capital ratios should start to reverse. However, a sharp increase in losses on banks’ foreign loan portfolio has yet to materialise. While our view that major advanced …
21st March 2023
The ghosts of 2008 have made a sudden reappearance. Many metrics of core market functioning have worsened worryingly fast, but the overall situation is still long way short of the type of strains seen during the worst parts of the Global Financial …
16th March 2023
The direct impact on real estate of the collapse of two US regional banks over the weekend is likely to be relatively small. But we expect lending criteria to become more cautious in the short-term, which will weigh on the supply of real estate debt. …
Even as the economy has slowed nominal all-property rental growth has held up relatively well. But that largely reflects the impact of high inflation, which is now falling. In any event, underlying supply and demand conditions are ultimately the more …
15th March 2023
This year’s Shunto should result in the strongest negotiated pay hikes in decades. But the average Japanese employee will have little to rejoice in. Weaker corporate profits as well as a likely loosening of labour market conditions on account of a …
This checklist helps clients keep track of the key forecasts announced during the Spring Budget at 12.30pm (GMT) on Wednesday 15 th March. Our more detailed preview is here . We will send a Rapid Response shortly after the speech, we are hosting a “Drop …
14th March 2023
Australian banks are unlikely to experience the same valuation losses that resulted in the demise of Silicon Valley Bank. The biggest risk is that a freezing up of overseas bond markets shuts down funding avenues for the major banks, but the Reserve Bank …
Even if the collapse of several mid-tier banks doesn’t develop into a full-blown systemic crisis, it will more than likely trigger a credit crunch. That raises the risk that the economy will suffer a harder landing, which would accelerate the needed …
13th March 2023
The circumstances of the Silicon Valley Bank (SVB) collapse are unique enough that it probably won’t trigger a widespread financial contagion. Nevertheless, it is a timely reminder that when the Fed is singularly focused on squeezing inflation by jacking …
10th March 2023
Failed dockworker union negotiations on the West Coast have led to further diversion of US imports toward the East and Gulf Coasts, supporting warehousing demand in those markets for longer than expected. We expect a degree of this demand to persist into …
The Bank of Japan didn’t make any policy changes at Governor Kuroda’s last meeting today but we expect incoming Governor Ueda to abandon Yield Curve Control in April . While that decision was widely anticipated, we were among the few who predicted the …
The Fed is clearly trying to avoid a premature easing in financial conditions and a repeat of 1970s-style “stop-go” monetary policy. This Update discusses some lessons from that period for equity markets today. Equities have struggled over this week, …
9th March 2023
The US may not have a monarchy, but cash has arguably become its proverbial king of investments. If history is a guide, it is a reign that is likely to feature equities underperforming bonds amid a recession. Last November, the yield of a 3-month Treasury …
We expect industrial completions to exceed 3.5% of inventory this year, despite the first quarterly drop in space under construction in Q4 for over two years. But new starts are already slowing and with higher interest rates, elevated construction costs …
The numerous “plans for growth” that have been announced by the Government, the Opposition, and various commentators in recent months vary in their analytical rigour but all miss one crucial point: many of the reforms required to lift the UK’s pitifully …
The JOLTS survey showed a drop back in job openings in January, with the timelier job postings data from Indeed pointing to a more marked deterioration in labour market conditions in February. (See Chart 1.) The private job openings rate has …
8th March 2023
A record amount of industrial space is currently under construction, which looks poorly timed given the upcoming recession. However, the sector is entering the downturn in a strong position with very low vacancy. And we expect the share of online retail …
The Reserve Bank of Australia signalled that further tightening will be needed when it hiked the cash rate to 3.60% today and we’re sticking to our forecast that the Bank will lift the cash rate to 4.10% by May . The RBA’s decision to lift the cash rate …
7th March 2023
In this Update we examine the implications of affordability for house prices at the market level. Despite sunbelt markets seeing the strongest house price growth over the past couple of years, affordability looks most stretched in the West. This has been …
6th March 2023
Germany is more vulnerable than most advanced economies to a reduction in trade with China both because of the scale of trade and the use of Chinese-made inputs to its large manufacturing sector. We have highlighted in our Spotlight series that the …
With labour productivity falling the most on record over the past year, unit labour cost growth has surged even as hourly earnings growth has remained sluggish. While we expect productivity growth to rebound, we also expect hourly earnings growth to …
Although recent economic data have surprised to the upside, we still think that economic growth in the US will falter later this year. In our view, indicators of the equity risk premium in the US point to some complacency regarding the economic outlook, …
3rd March 2023
With much of the global economy holding up surprisingly well and inflation not coming down as quickly as expected, investors are weighing up the risk that policy rates remain elevated for much longer than previously thought. This Update discusses what …
The current economic downturn will mean that short-to-medium term property performance is under-par. But over a longer horizon, we expect real estate returns to reassert their traditional position somewhere between bonds and equities. Last year was an …
2nd March 2023
Although the fall in house prices slowed significantly in February, we are not convinced that Australia’s housing market is out of the woods yet. Even so, there are growing indications that dwellings investment will take less of a hit than we had …
The broad-based improvement in the output components of February’s manufacturing PMIs suggests that the worst of the global industrial downturn is already in the rear-view mirror. That said, it is too early to call a durable turnaround in industrial …
1st March 2023
A widening in profit margins could mean that inflation is slower to fall back to the Bank of England’s 2.0% target than we expect. That would cause the Bank to raise interest rates even further than we currently anticipate and/or keep them higher for …
28th February 2023
Energy Performance Certificates (EPCs) are the main benchmark for environmental standards in UK housing. There is evidence that they are improving efficiency in new-builds and new regulations will enforce change on rental properties, but this progress …
27th February 2023
House prices bounced back in February, led by Sydney. While leading indicators point to an improvement in housing market activity, the RBA’s determination to raise interest rates further means that affordability will remain extraordinarily stretched. …
24th February 2023
We think the recent outperformance of the US “big-tech” “super-sector” could continue, but not because of the “bargain hunting” that we think has caused it to occur despite higher real Treasury yields . The rise of more than 30bp in the 10-year TIPS yield …
23rd February 2023
