Supplement 19 Nov 23 – Turning point?

Nov 19, 2023

“I think for anyone who’s gone through a crisis, there comes a turning point, an epiphany, that marks the beginning of the end.” – Deborah Norville, American journalist




Welcome to the Supplement everyone. A juicy week by this year’s standards, with, without doubt, confirmation of the best macro news that we’ve had in 2023 thus far. Of course, there are very few headlines about it, and it certainly isn’t reported with the same vigour that the next “crisis” will be reported – but that’s news media for you, right?


What’s got me quite so cheery, you ask? Well, firstly, don’t get too excited. I will be bringing us back down to earth, as always, in my inimitable factual style, busy on that quest for the truth rather than the sensationalism, the clicks, and all the rest of it. When I look at it – my own YouTube algorithm, where I do the majority of my learning these days – reflects exactly this. Factual commentators. I find myself deliberately staying away from clickbait, as if it will intellectually pollute me – even though I know some of the content is worth me allowing the title creators or marketeers to have their way.


Anyway – having managed expectations – inflation did, as predicted by many, get under that magic 5% number this week. CPI inflation, anyway. Don’t get me wrong – regulars will know that the horse hasn’t only bolted, he’s also fathered several foals and jumped 56 fences in the interim, but the stable door finally looks like it is at least back on its hinges, and the horse is quite tired.


Into the detail, as we will need this information to build up to a clear picture of 2024, which I will deliver in jigsaw-style format over the coming weeks. We have to get into the weeds before we do what the markets have already done, and assume that the problems are all over. Let’s revise a few of the points I’ve made over the past 3 years regarding inflation:


  1. i) Inflation, when over 5%, is seriously dangerous and out of control in a modern, post-industrial western economy. It affects everyone – no-one is safe. Without control, it damages the fabric of society itself, and makes the poor even poorer – but its damaging effect is quite literally across the board. That’s why it gets taken seriously
  2. ii) Services inflation makes up 47% of the current CPI inflation figure – more on this one later

iii) A bit of inflation is far better than none, or deflation – which is even more damaging to growth and living standards

  1. iv) It is easy to lose decades without progress if deflation occurs
  2. v) Historically, in inflationary cycles similar to this one – the most recent being the early 1990s – the top to bottom (breakout above target to back under target) is regularly 4-5 years long – it certainly is in a recessionary environment
  3. vi) Inflation is sticky – the journey from 5% (ish) to 2% (ish) is likely to be an arduous one

vii) Does anyone really believe the government is unhappy about inflation around the 3-4% mark for a period of time – there’s debt to inflate away, after all?

viii) Inflation offers opportunity for profit maximisers – i.e. companies – and provides an excuse or a reason (or both) for all sorts of behaviour, but primarily price-gouging. Don’t worry, the Bank of England has investigated and found no evidence for this – frankly, they haven’t looked hard enough (nor does anyone know what would really be done, apart from brand damage, if companies were found guilty of this – that’s why it’s landed on the Bank’s desk)


So where does that leave 2024 at first pass: inflation under 5% – should be, no reason why not, although how much below…….barring a Black Swan. Wages putting upward/continuing pressure on the inflation rate in general if they continue where they are, and 5.6% is enshrined in the national minimum wage (MW) for next April already. So many public sector jobs are now defined by where MW is, that it will be nearly impossible to see wage inflation  far below 5.6% in April, and 2023 has been the year where managerial and executive pay has caught up a bit after all the upper hand (in percentage terms) being with the lower paid since Covid. If that’s enough to feed spending (and of course it may not be, as people catch up with continuously higher rents and more people drop off fixed term mortgages), then that’s inflationary of course at a level over and above 5%. Next year could easily be an inflationary struggle between 3.5% and 5%, one that secretly the government would enjoy to inflate away debt, but not if their spending has to go up above inflation of course.


The September wage numbers were 7.7% up (This is the 3mo/year, i.e. the rise between July and September, but annualised) WITHOUT bonus, and 7.9% with bonus. There’s a lag there, clearly, and this inflation print will only really have kicked in within 3-4 months as far as the figures reporting goes. Nonetheless you can see how far ahead of 5.6% that is, and we don’t have the same reason for a sudden “shock” downwards that we did in CPI in October thanks to energy prices normalising at least a little.


Remember our 47% services inflation contribution to CPI. It still baffles me that this doesn’t see services inflation in the headlines more! This is so important for the future of CPI I’ve made it this week’s graph, where you can see just how much that HASN’T fallen like CPI has. 6.6% is the number for October, and the 3Mo/Year (to align with wages, perhaps unsurprisingly) is around 6.7%. In simple maths (rounding the 47% to 50%) – services inflation at 6.6% makes CPI 3.3% without the other components – so unless goods are actually dropping in price (and of course, energy has – and food also has) then that tells you the absolute floor for CPI. We did have some energy/oil price spikes in terms of fuel costs in October as well of course, because of the middle east situation – otherwise CPI would have been even lower.


So – until companies stop putting their prices up (which won’t happen until wage demands temper significantly) – I don’t see CPI breaking that 3.5% low. Of course, SO much depends on expectations – but traditional/textbook economics falls down here, as it so often does. In the world of academia, wage demands are based on inflation expectations – whereas in the real world, where the majority of workers don’t understand or particularly care about macroeconomics, in this sort of environment the first priority of the worker has been to try and maintain their standard of living, which has required some catching up on what’s already happened – before considering keeping up with what’s going to happen over the NEXT 12 months. There’s no mechanism for really understanding that at the governmental or employer level – but that’s pragmatic economics rather than dry, sterile economics. People need and want to catch up before they can keep up, basically.


The CPI number – before I rain completely on the parade – was 4.6% for October – and, as is always important, it was below the expectations of 4.8% in the market. I’ve spoken many times this year about how important it would be when we start to undershoot expectations, and this was such good news that it sent those gilt yields that are so important to mortgage costings right down to new lows. Thursday night’s close at 3.991% (round numbers are always psychologically important when trading markets) was the lowest close since 23rd May this year (nearly 6 months). It then dropped at the 8am open to 3.85% fairly quickly, rather than going back above that 4% resistance level. For technical analysts, this signifies that the near future lies below 4% (until something changes, of course!) – and the 4% was tested before the close, but we closed the week at 3.96%. Where does that leave mortgages for new products for the rest of the year – as at today – well, around 5% with a 5% fee, or some 4.6% with a 7% fee might be perfectly likely. I switched one loan down to a 4.75% 7% fee on Friday itself. Some lenders (Paragon likely the best example, Mortgage Works also) could go lower, because they access funds from savers rather than just from the swap markets/other (bigger) banks.


The headlines created are helpful for managing inflation expectations going forward – and as redundancies continue to mount as they will in the new year, this will significantly affect wage rise conversations of course – especially as the opportunity to pass on increased costs will also decrease significantly. 


Core inflation, which has been popularised as a more stable measure as it strips out the volatility of food and energy, is still much higher. 5.7% was the print, with 5.8% the expectation – another reason to be somewhat positive, but above 5 is still uncomfortable. With food and energy down for the month, it is obvious that core would be above CPI, of course. If you looked at core on a 3Mo/year basis – to put it into context with the rest of the discussion today – it would be coming in at just under 4%, which is much more manageable – and indeed the last 5 months’ worth of core have not seen a print above 0.5% – worlds apart from February to April 2023, where the monthly prints were 1.2%, 0.9%, and 1.3% – truly an out of control situation. 


The retail price index, for those who still have any leases linked to RPI, printed 6.1% – still dangerously high, but well under the forecasted 6.4%. Generally – relief, but the concern I have for services inflation still looks well justified, and that will of course drive the wages demands and CPI in general, because we lack that “event” like we had with CPI in terms of energy and the price cap dropping in October. Guess what – on the price cap, we are back to an increase in January 2024 – although the 5% rise on that date will be matched by a 5.7% forecasted fall for April 2024, and that will again be helpful. The current forecast is for significant stability in unit pricing after April – which will be most welcomed – but then most forecasts usually look like that…….(I look at Cornwall Insight, who tend to have the best price cap analysis, for those interested in the sources).


That’s the comprehensive inflation roundup out of the way. My dose of realistic misery will just say – the markets have priced all this in awfully quickly. It’s a bit of a classic “I told you so” as everyone forgets that many were predicting that rates would be “right back down again” by the end of this year. I.e. they didn’t really tell us so at all. The likely outcome here for early 2024 is just more sludge, really. The bond markets are now suggesting that there will be 3 interest rate cuts (of 0.25% each) in 2024, with the first one coming around springtime. That would see base at 4.5% at the end of 2024, which is perfectly possible. 


Where would that leave the 5-year gilts at the end of 2024? Perhaps around 3.5%, or so, although caution is needed here. This is where we have to discuss the yield curve – remember, the yield curve simply plots the yield of each bond in terms of its duration on one curve, where the horizontal axis is simply “time” and the vertical axis is “yield”. At this time – the curve is inverted – meaning that you get a better interest rate for money invested over a shorter timeframe than a longer one. The one-year gilt is still hovering around 5%. 

That makes the mathematical example a little less painful than it would otherwise be. For the sake of keeping this simple – please be aware this isn’t mathematically perfect, for the purposes of trying to explain rather than be technically correct. If I get a 4% return, per year, from a government bond for money invested for 5 years – but 5% in the first year, then for £1000 invested:


5 year bond: £40 interest each year for 5 years, and £1000 returned at the end of the period

1 year bond: £50 interest for the year and £1000 returned at the end of the period.


So, after 1 year, I have £1050 if I take that option. In order to get the same return as the 5 year was offering, I’d need to invest that £1050 in a 4 year bond at around 3.5% in order to get the same £1200 back. Arbitrage keeps these markets fairly tight on a second-by-second basis, so that’s a good stab at the 4-year gilt yield in 1 year’s time. What will that “new” 5th year part be, however – that can be estimated by looking at the current distance between the 5 year bond yield and the (relatively illiquid) 6 year bond yield – which trades a little higher at the time of writing) – so perhaps 3.6% or 3.55% would be a better estimate. And that – I must be clear – is only today’s estimate, with all the information we have today. 


That would see some 4.5-4.6% rates with a 5% fee, or some 5.2% rates with a 1% fee (or something inbetween). A return to those days might be very welcomed at this point, even though we might have choked on our cornflakes (other breakfast cereals are available, and always remember that “breakfast is the most important meal of the day” was simply a marketing slogan popularised by J.W. Kellogg) 2 years ago at the thought of that sentence.


That – I hope – puts into context just how low – or not – rates might currently go by “waiting”, which I am almost never a fan of. Wait a couple of weeks – or so – sure, that can be tactically wise, when there’s been a big drop in the yields, so that products can be released (lenders can be a bit slow at putting prices down, in case you hadn’t noticed). Wait 6 months or a year – that could be a great buying opportunity turned down there – don’t do that. Excuses for inaction do not build balance sheets.


Remember my Q4 2023 soapbox as well. IF YOUR BROKER IS NOT CHECKING IF THE RATES ON ANY EXISTING APPLICATIONS HAVE GONE DOWN BEFORE THEY GET TO OFFER, THEY ARE NOT LOOKING AFTER YOUR BEST INTERESTS. Make sure that they are! At this time, yields have fallen really significantly over the past month – a bit like they did when Sunak took over from Truss – and the market is repairing. Make sure you ask those questions, and keep asking them until you get to offer – and perhaps afterwards, because some lenders are very fair indeed in these situations (although might charge you an admin fee for a new offer – which is fair enough). 


Inflation was not the only fruit – but we were overdue a monster update, and since it was the first really juicy good news for over 2 years, I thought I’d make the most of it! Unemployment held at 4.2% for September (rather than rising to 4.3% as the forecast suggested), and wages as discussed held up at nearly 8% rises including bonus. There have been a number of one-off bonuses, BUT the 3Mo/year without bonus rises are still 7.7%. They are looking backwards, and I expect January’s numbers to look very different as discussed – but we will only know then. The tight labour market looks ever less tight, with 957k job vacancies – the pre-pandemic high was 865k, so it is still a high print, but the number 18 months ago was 1,302k and we are down 26.5% since then in terms of vacancies. The top category backpedalling, with a 35% drop quarter on quarter? “Real Estate Activities”. That perhaps won’t surprise – Construction is third with “only” a 10.9% drop quarter on quarter – although there are still 32.2% more construction vacancies than January to March 2020 – whereas there are 36.4% fewer real estate activity vacancies since the same period. 


The smallest companies are shrinking vacancies by the largest percentage – as so often the pain bites in the smallest companies first. 


Overall, though, the labour market hasn’t tightened as quickly as expected – in a carbon copy of what’s happened already in the US with their faster cycle – and that should put serious caution on those who think this is “over”. The phrase I’ve tried not to over-use this year – the “soft landing” – i.e. that we will just conquer inflation, and well done, and there will be no major consequences – is peaking in interest as companies report this to their shareholders and investors. This is an unlikely outcome – and, as I have said before – if we get there, it will be by luck not judgement. 


There’s only really one way we can get there – and that’s that the inflation, as I joked some years back, WAS indeed transitory – it’s just that transitory meant “a few years”. There IS reason for that inflation to drop out of the system more easily than before – although the bad news is, that’s already happened. In the US it leaves CPI at below 3% (if we consider the world price of commodities only – which were a major factor in this inflationary cycle) – in the UK we’ve only just got under 5%, and also have to battle a strong dollar which doesn’t have the same impact for the US since they trade in dollars by default.


I say again, the path from 5% to 2% has historically been difficult and never without recession. Unemployment doesn’t usually rise a bit and then tail off – it normally becomes a self-fulfilling prophecy, and for next year it is very clear from corporate America that layoffs are absolutely on the table. Companies want more and more profit, and the only way it is easy to achieve is reducing headcounts and making people work harder. An insider told me this week that the expectation is 20% increase in margins, only to be achieved by M & A arbitrage and cutting costs. 


The pandemic might just give us an occurrence that has only happened once in the past 43 years – a soft landing – but again I say, more by luck than judgement. 


It is also worth saying that the Bank of England has massive latitude, really, in when they reach the 2% inflation target. That’s convenient, I hear you say, because the Government really don’t mind a bit of inflation as long as it is contained. If it takes years – but preserves the housing market (which is going to get SOME kind of boost in next week’s autumn statement, as the chancellor has money in reserves, although the OBR forecast will dictate how much is needed to plug a bigger gap last year than they budgeted for – just like every year), and also preserves social stability and keeps repossessions down to a manageable number – then rates can calm off a little if the hawks on the monetary policy committee follow the party line or remain out on their own in a little posse of 3. 


That’s likely deflated everyone enough for the day – but the central message is, act cautiously, act as if there could still be a credit shock – but, of course……..Keep Calm and Carry On!


Next week we have the autumn statement from the Chancellor, who survived an eyebrow-raising reshuffle. Will SDLT be cut? Inheritance tax tweaked? Some even think Section 24 will be repealed (I checked, and no pigs were harmed in the making of the supplement by flying past the window or crashing into the clouds)….Until then…..If you haven’t given me a subscribe on Youtube or the podcast platforms yet, I’d really appreciate it if you do – links are here to Youtube: and here to the Propenomix website: – thanks for supporting me spreading the word, more subscribers will lead to more and better content, and that’s the aim. I’m at around 460 subscribers on YouTube – if I get to 500 before 1st December, I will post an economic advent calendar with some daily explainers of economic concepts relevant to property investors, developers and traders – and if that isn’t enough of an incentive to subscribe, I don’t know what is………