Supplement 24 Mar 24 – Downhill all the way?

Mar 24, 2024

“Before you attempt to beat the odds, be sure you could survive the odds beating you.” – Larry Kersten, author

 

Before we begin – thanks and well done to the early birds for our upcoming Property Business Workshop which is happening next month. Rod Turner and I will be covering due diligence, mergers and acquisitions, and joint ventures – with some real life case studies of deals we’ve done – the good, the bad and the ugly. The tickets for the workshop are here https://bit.ly/pbwtwo – the date is Wednesday 24th April, and if you haven’t booked your ticket yet, please grab one of the last remaining ones! 

 

Welcome to the Supplement, everyone. This week was one of those weeks that was teeming with “good” news – for property investors anyway. There’s a risk here, though, of false dawns and overconfidence – and that’s where the quote this week comes from. I’m not looking to pour cold water on the feelings of the nation (or the property crowd, anyway), nor do I want to spread diesel on the green shoots of recovery – but I do want us all to be prepared for the likely economic landscape as we get one week closer to the election (which the commentators seem to now think might be mid-November, although there’s a shout for October straight after conference season too). 

 

Talking briefly about that ticking clock while there’s still time, let’s have a realistic look at the remaining legislation that is running out of time before the summer recess in parliament. Renters’ reform bill (RRB) – I was really disappointed to see how much negative reaction there has been to Ben Beadle’s efforts to support the bill. How those who are “furious” at his support of the bill can’t see that a butchered labour version with a likely significant majority won’t be far more loaded in favour of the tenant simply beggars belief. I am a balanced person who is always happy to debate – if anyone fancies taking the other side of that issue, they are welcome on one of the Sunday morning live shows at 9am to have a pop! Hopefully this one goes through.

 

Here’s what we’ve got left in parliament: 15 April – 2 May. 7 May – 23 May. 3 June – 23 July. There’s obviously a chance that “that’s all, folks”. Things tend to go up to the wire, but you can see just how short the time windows are for making something happen here.

 

We’ve also got leasehold reform which seems to be sailing through a lot more easily, and then legislation around short lets which has not had an update for over a month now. Gove will have all these on his bunsen burner, and more, but in reality it is unlikely in the extreme, in my view, that all 3 will get through parliament within this tight timeframe. The odds are there will be a session in September, but I am not sure we can rely on that, and none of these bills are important enough to influence when the election will be held – nor do they contain any tangible political capital in my view – RRB would be the one, but a watered down version which the Tory backbenchers have made clear is all they are accepting will not garner any positive headlines in my view. 

 

Could we go 0/3? It’s possible, although Gove is not known for giving up easily, so that also seems unlikely. Let’s throw a dart at leasehold reform done, and the other two not done. The one I don’t see progressing quickly enough is the short let one, although if the legislation is easy to draft and it brings revenue to local councils, perhaps I will be wrong. There won’t be a large lobby opposing it like there is with the RRB. What’s needed is common sense, and, as is widely documented, that’s just absent in parliament these days. 

 

Great. Political update shelved for another week, or perhaps month. Hard to resist in an election year, and there’s lots in there that needs consideration and has significant implications for Supplement readers and listeners. We’ve also got to consider planning and PD changes of course – but again, the details are lacking on recent changes proposed, so it is pure speculation.

 

Onto the macro scoreboard for the week, then. This week’s title – downhill all the way – was a reference to the gilt yields, and of course the bond and swap market update will be contained in here at the end. Our macro metrics of interest were concertinaed into the rear half of the week and the remaining three areas really pick themselves – inflation (yep, buckle up), Flash PMIs, and the consumer confidence figures. The deep dive will then get stuck into the Bank of England and their monetary policy committee meeting this week. 

 

 So – inflation. My pet project over the past 3 years, 2 months. Some would say my obsession. Let’s get stuck in. Firstly, I thought we might still hold ahead of consensus, because I am bearish about how quickly services inflation is dropping. Consensus was 3.5%, the print was 3.4%, and I thought more likely 3.7% or so. In these circumstances, I’m (of course) happy to be wrong, and also not surprised – I watch it closely, but not to the tune of knowing what’s dropping out of the figures in each exact month. 1.1% Month-on-month in Feb ‘23 dropped out of the figures (and in coming months, 0.8, 1.2, and 0.7 are the next three) – remember that inflation is measuring what’s gone up in the past 12 months, but the point is, from some of those rises, that some things have gone DOWN since then in price, which are tempering the rate somewhat. 

 

Bit confused? Don’t blame you. Let’s make it specific. Energy prices. We remember the Energy price cap of Winter 2022-23 I’m sure (although it is VERY lightly spoken of, for whatever reason). Perhaps because Liz did the right thing there and it doesn’t fit the overall narrative (regular readers and listeners will know I deride her regularly, but not for the same reason as the national press do – for the right reasons, but I would say that wouldn’t I!). But – energy prices have gone down significantly since then. Don’t forget that the price increase in natural gas was the equivalent to oil going to $1000 a barrel. Yes, $1000. Imagine what that would have done at the petrol pumps!!! And remember, 40% of the UK’s electricity is created by burning gas. That price has dropped SO much since those peaks, and that’s still making a big difference to the downside. That, also, can’t last – in the US, natural gas is down to its lowest level for over a decade (or at least touching those same lows) – that’s how much the price has already come back. It now looks cheap – far too cheap. It went negative in early March – supply exceeding demand and also exceeding capacity to sell – early part of the month was warm and record temperatures (so regular these days they make no headlines any more) meant demand was low for the season.

 

UK Gas is back below pandemic peak prices. We are still at 70 (GBp/therm) at the market close this week, compared to 36 in 2019 in the same week or 28 in 2018 in the same week – so still a massive percentage increase, but we have touched 50 this year, the market is very volatile, and the top was 640 (yes, 640). Normality has resumed – but my overarching point is that the vast vast majority of the disinflation in gas prices has happened. Ofgem’s site has some magnificent data but the speed at which it is updated is too slow for a market so volatile – however, take a look at some of the graphs on there to get an idea about exactly what really happened to wholesale electricity and gas prices. 

 

There’s the first order effects of all that – costs to businesses and households of light and heat – and then the second order. Food is an obvious one, because it needs energy to be transported and sold, of course. Corporates are bound to try and make prices as “sticky” as possible (as are individual businesses – can you see rent coming down much, for example, even if the environment DID provision for it?) Supermarkets, however, work in the very most competitive space with the very smallest margins and huge volume – so they do work to keep each other honest, meaning that price falls have happened in some months previous.

 

The ONS perhaps put it best in the section of their inflation report that covers “notable movements in prices” – “Large downward effects from food and non-alcoholic beverages, and restaurants and hotels were partially offset by a large upward effect from housing and household services.”

 

Think about this for a moment. Firstly – you can see my argument that this won’t continue, for long, as a trend – and soon start on the uptick again (I hope). Secondly, rent increases lagged the supply-side, commodity and energy price surges that there were from early 2021. They didn’t start to really take off for another 6 months at least (depending on which of the supply-side constraints you are looking at). So – again – this is not a surprise. They also have the advantage of being very close to where wage rises are at, currently – so, although they are eye-popping compared to historical rent increases (which, as I have said many times, have simply not kept pace with inflation since 2005, the first year for which the ONS has robust data), they are not unsustainable nor are they likely to do what energy prices have done or what food prices are doing to a much lesser extent.

 

Whilst on the ONS and inflation – a few notes on their report. Firstly – they are much more interested in CPIH these days. That’s CPI plus a housing component. I like the idea (and, in this game, CPIH is more relevant than CPI – that’s not questionable). However, the execution of CPIH has me a little worried, because it contains “synthetic” components. Not real inflation. The notion, for example, that homeowners pay an “equivalent” rent. This is hogwash to those who know that more homeowners own their home outright than have a mortgage on it. More than a third of all households do not pay a mortgage, or any rent – so a synthetic solution is just that – made up in a lab somewhere. CPI remains the darling of the press – rightly so – because CPI is the Bank of England’s inflation target figure. Council tax – however – is also taken into account and council tax rises are some of the largest they have been for many years, as has been published widely.

 

CPIH is 3.8% for February 2024, down from 4.1%. You can see this is above CPI, because housing costs are going up faster than many other things, as the ONS highlights in their comment from above. In order to keep up, here, you need to be able to distinguish between the rate of inflation going down (so, still accelerating, but less quickly) and the price of underlying goods or services actually going down (so, using the car analogy, actually reversing) as is happening with energy.

 

Next up, cause for excitement (OK, maybe just for me). This piece of the ONS report had me on my haunches: “The annual rate for actual rentals for housing was 6.9% in the year to February 2024, up from 6.5% in January, with the rise between months caused by price increases from privately rented properties. For the first time, we have used our new Price Index of Private Rents (PIPR) as the source of rental prices. This replaces the Index of Private Housing Rental Prices and forms part of our transformation of consumer price statistics”

 

This looks close to peaking, you would think. Remember the ONS data takes into account a broad sample, across the whole market – not just new lets (Homelet’s rental index, which spent last year in double digits for most of it, only measures new lets for example). Homelet are at 7.4%, out of interest – so very close to the ONS’s 6.9% – whereas the old ONS index was printing numbers like 4% when Homelet and others were at 10%+ last year.

 

I haven’t dived into the new methodology for rents in detail that the ONS are now using. However, I know from the past few years that they were not comfortable that their methods were accurate – they are largely (not completely) free of political influence and bias as a rule, and I do trust their integrity in making these figures better. (If we had a Labour government we might be more suspicious about rent measurements being changed, of course, but as we still don’t for the moment, I feel that we should trust the changes that have been made). 

 

Fuel prices are down 6.5% for the past 12 months – another energy-related effect. In July 2022, the motor fuel inflation rate was 43.7%, for context…….another component of the cost of living crisis of course, although fuel did get particularly cheap during the pandemic, that was primarily in 2020 of course. 

 

Onto the core – which I prefer, because it strips out a lot of this noise. Core CPI printed 4.5% against a consensus of 4.6% – core CPIH was 4.8%, so still higher as you would imagine. Still a good indicator of the pressures facing households, all-in. Trend downwards, absolute number still far too high. Congruent – however – with 5%+ wage rises (and our last 12 month figure was 6.1%, last week, so some real progress is being made on average). 

 

Month-on-month for both core CPI and CPI itself were still 0.6% – not something to dwell on in February, because prices ALWAYS come down for a January sale (even in a pandemic!), and back up in Feb. If you annualised the last 6 months core CPI- you would get to core CPI of 1.6%, which would be great – and is the most promising reading for a while. January’s impact is overstated by doing that – but nonetheless, the numbers that have been printed on month-on-month core since June 2023 are much more promising. Remember that coincides with genuine economic slowdown – so if that wobble IS behind us, as now looks 99.5% certain pending a disaster in the last week of March, with the flash PMI numbers in – so that might also be a false dawn. The MOST important inflation metric to watch for the next 3 months is core CPI (or core CPIH, if you are a convert – I will stick with core CPI). That would complete a year of “calm” core CPI – I’d define calm as no months with 1% changes either way, and 2 or fewer changes over 0.6% either way, looking at “calm years” data). 

 

Services inflation has to remain a concern. 6.1% is still trending the right way – but not very quickly – and I fear that with the wage increase coming in a few days, and wages still rising at 6.1% ex-bonus, that it will take plenty of time for this to come down below 5%. There isn’t a big “bump” in the data or that level of volatility from energy, food, alcohol or other products that move very aggressively. To expect it to suddenly play ball under 4% in the coming months looks exceedingly unlikely. Moves of 0.5% or more per month are very rare in the “calm” data that exists over the past 20 years. Coming down – yes, but at what pace – and will it come down below the rate at which wages are increasing? Possible, of course, but you’d expect it to track that quite closely and “fight” to stay at least in line with wage increases. My fear is that when energy is not going down in price any more (August/September onwards) that the contribution upwards, plus services inflation still at around 5% at that point and wages still around 5%, see 2.5% inflation as a very very difficult threshold to breach on an ongoing basis. It can be done in one month when a massive price increase (that has been cut since then) drops out of the figures – and many think that will be April 2024 – and we are on course for that on the current trend – but that simply doesn’t look sustainable to me at this stage, still. 2024’s inflation – to me – still looks like 3-3.5% for the year when we wash up in early 2025.

 

The ONS also now have a cute tool to work out your “personal inflation rate”. It has been around for a while, apparently, but has been updated with the latest data. If you want to have a play – here it is: https://www.ons.gov.uk/economy/inflationandpriceindices/articles/howisinflationaffectingyourhouseholdcosts/2022-03-23 

 

Enough inflation, until next month. I could go on (as you know) – but that tells you pretty clearly where I am at. Happy it is coming down, concerned we will hit a bottom and come back up. It’s great that Core has dropped so much so quickly, but 4.8% for households doesn’t suggest wage demands of under 4.8%, let’s face it (and that’s not where the companies, the Bank of England, or the OBR or anyone else, including me, expect wage demands to be).

 

Flash PMIs – much faster and easier to deal with. My favoured metric – because it is real time – of economic health. We’ve had some roaring prints in services (and you can almost ignore the rest because services take up much more of the economy than anything else in terms of the share of the pie, although I take more than a passing interest in the construction figures of course). We hit a little under consensus and under the magic 53 with the composite index – 52.9 – but still on the healthy side, even if revised down when the figures are in for the end of March. This puts the last nail in the coffin, even if it hasn’t banged it in quite all of the way, on the recession (soon to be known as not even a recession) of H2 2023. 

 

Manufacturing printed 49.9 on the PMI, so the closest to 50 for a long time (July 2022, not the first time that’s appeared today and actually a point very near the hardest part of the cost of living crisis) – and this was a big surprise to the upside. Services disappointed slightly at 53.4, but still well in clover and ahead of the magic 53. None of this looks like calming inflation down in services……just saying…….but it is good news for growth.

 

Consumer confidence next. I shared that sad story of confidence not being positive in consumers according to GFK since January 2016! A -21 print “isn’t bad” in the context of the past few years – that’s how badly off we are on that front – but there were some chinks of light too. 

 

The really big deal is what this looks like compared to one year ago. Every metric has improved massively. We are still at a significant negative – of course – but the one component that has hit the front is the “Personal financial situation over the next 12 months”. It registered a +2 on the survey – the first positive, anywhere, for a long time. It’s the overall economy that the consumers have no confidence in, it seems – still at -23, although looking back over the past 12 months they score it at -45 (compared to their expectations of -40 12 months ago). 

 

I like these surveys and metrics quite a lot. “Guess the weight of the cake” is more accurate than a lot of the forecasts that you see (the saying, if you haven’t heard of it, is based on the fact that if you have enough people – 100 or more – guessing the weight of a cake at a fete or similar – then the average of those 100 guesses is nearly always bang on the actual weight of the cake). The wisdom of the crowd.

 

Personal finances that are OK and households in work, able to pay rents and meet obligations, would suit us just fine though I think as we continue to battle our way out of the pandemic hole. 

 

This index has been going for 50 years and I thought this was worth sharing as it puts everything into context (perhaps, also, quite how much we are influenced by the press or perhaps are just a bit more fragile these days):

 

“The highest value of the Overall Index Score – the headline score – was in January 1978, when it reached +21. It reached +16 twice in 1979 (first in July and again in September). The lowest score recorded was -49 in September 2022, and other lows include -39 in July 2008, during the global financial crisis, and a score of – 35 in March 1990, in the lead-up to the 1990/1991 recession. The largest monthly increase was in May 1993 when the headline score jumped 12 points. There have been seven monthly drops of 10 or more since the survey started, with the largest by far happening during the coronavirus crisis when it dropped 25 points from -9 in mid-March 2020 to -34 at the end of March.“

 

Fair to say they didn’t see the winter of discontent coming, then…….and also I really can’t see that winter 2022 really compares to the GFC or to Black Wednesday/the recession of the early 1990s. Lots more people lost jobs and houses in both of those – which is as much as any of us have to lose, other than our lives – let’s face it. Perhaps stick to guessing the weight of your own cake……or perhaps it shows that people can be overconfident in good times, and overly bearish in bad ones, especially when they’ve been relentlessly bombarded with fear for several years on the spin!

 

So – onto the slopes for the bond and swaps update. This week’s graph is one I’d love to see replicated time and again in the bond markets, that’s for sure. We opened the week at 4.018% and decayed to 3.816% by the end of the week. Inflation was below consensus which helped, and then the expectation was that the Bank would vote 7-1-1 Hold-Raise-Lower on the rates – but more on that in a while. Back towards the middle of my suggested trading range for the year, and that’s pleasing. Next week we’ve got very little domestically that will move the needle, so this trend downwards could well continue – that’s not a prediction though, to be clear!

 

The swaps closed Thursday at 3.811% for the 5 year, comparing to the 3.893% on the gilt at that point. That is still showing that as per last week’s mortgage data analysis, supply is exceeding demand for mortgages and new units are unlikely to be making a dent in the rental needs for some months to come just yet. Rates are still high enough to keep most investors out of the buy-to-let market, in aggregate. Long may the trend continue.

 

Onto the Bank of England, then. Every other meeting they don’t produce a full inflation/economic outlook report, and so these are a bit more workable in terms of a line-by-line, at least on the exec summary, so that’s what I’ve plumped for this time round.

 

The Bank of England’s Monetary Policy Committee (MPC) sets monetary policy to meet the 2% inflation target, and in a way that helps to sustain growth and employment. They don’t always word it like this, but it is a timely and deliberate reminder, since growth has been negative overall in the past 12 months after inflation has been taken into account, and because unemployment is going the wrong way (but from a very low starting point, it has to be said). 

 

At its meeting ending on 20 March 2024, the MPC voted by a majority of 8–1 to maintain Bank Rate at 5.25%. You’ll have noticed this, I’m sure. The notable bit here is that the two Hawks – Haskel and Mann – both came back into line to vote to hold, compared to last month’s meeting. I thought they might still both vote upwards with services inflation, and wages, both still above 6% – but was happy to be wrong. I didn’t think voting up was the right thing to do – to be clear – but I did think it was what they were going to do. 

 

One member preferred to reduce Bank Rate by 0.25 percentage points, to 5%. This is Dr Swati Dhingra, a famed Dove. She prefers lower rates. At points during the hiking cycle, she instead voted to hold (where she had got it wrong, as history now bears out). That doesn’t mean she’s wrong this time, but I actually think she is – she is reading too much into the economic wobble of H2 2023 which I believe there’s fairly clear evidence that it is behind us. 

 

Since the MPC’s previous meeting, market-implied paths for advanced economy policy rates have shifted up. “Stronger for longer” is the message. Why? Because the economies so far have coped with the higher rates better than anyone thought they would, and also because inflation is still embedded in those systems more than most of the commentators thought that it would be. The strength of those economies means that rates can stay higher for longer.

 

In the United States and the euro area, inflationary pressures have continued to abate, though by slightly less than expected. This isn’t strictly true, and really interested me. Inflation in the states has ticked back upwards again, for example, and is blatantly struggling to get below the 3% barrier – that struggle is now 9 months old, since it first touched 3%.

 

Material risks remain, notably from developments in the Middle East including disruption to shipping through the Red Sea. As discussed, 0.2% impact on inflation – not nothing, 10% of the target – but not material. As long as things stay “as they are” or thereabouts.

 

Having declined through the second half of last year, UK GDP and market sector output are expected to start growing again during the first half of this year. Q1 is a shoo-in now, as discussed – Q2 would need pretty serious decay in services to not show some growth. March has that final bank holiday to take into account (which usually falls in April) so might not look that good compared to some March results, but I’d expect Q1 2024 to show 0.4% growth overall or so, perhaps even 0.5%. 

 

Business surveys remain consistent with an improving outlook for activity. True, as analysis here has discussed. “Improving” – but not necessarily positive, just better than the last 12 months!

 

The fiscal measures in Spring Budget 2024 are likely to increase the level of GDP by around ¼% over coming years. These are large claims. I have limited faith in the OBR as regulars will know, and thus their measures here I would question. However, politically, the Bank has to accept what the OBR and the ONS say, to a large extent – those are the official qualified sources, rightly or wrongly.

 

As the measures will probably also boost potential supply to some extent, the implications for the output gap, and hence inflationary pressures in the economy, are likely to be smaller. Good news if it is true – on paper, it is.

 

Reflecting uncertainties around the ONS’s Labour Force Survey, the Committee is continuing to consider a wide range of indicators of labour market activity. The labour market has continued to loosen but remains relatively tight by historical standards. Although still elevated, nominal wage growth has moderated across a number of measures. Going in the right direction, yes, but not particularly quickly it would be fair to say. This really understates where the true figures are at this time, frankly. Politically perhaps the committee are feeling the pressure with Jeremy Hunt’s confidante joining the committee from July, dare I suggest?

 

Contacts of the Bank’s Agents continue to expect some decline in pay settlements this year and to report greater difficulty in passing on cost increases to prices. Sounds true, but at what rate – I am not seeing a particularly fast rate of decline here, nor is any weight being given to how hard other economies like the US are finding it to get inflation below 3%.

 

Twelve-month CPI inflation fell to 3.4% in February from 4.0% in January and December, a little below the expectation in the February Monetary Policy Report. True.

 

Services consumer price inflation has declined but remains elevated, at 6.1% in February. I’m not sure what other word they can use, but “elevated” is not really emphatic enough for >6% really, is it. Over 5 is a real problem. Over 4 is too high. I have often said that 3-4 is the truly ideal range at this point for the Government post-pandemic, for a decade or more. I suspect that range is the range which will encompass “inflation for the 2020s”, when we get to 2030. 

 

Most indicators of short term inflation expectations have continued to ease. True, consumers are at this sort of 3.5% level as their best guess for the next 12 months. CPI inflation is projected to fall to slightly below the 2% target in 2024 Q2, marginally weaker than previously expected owing to the freeze in fuel duty announced in the Budget. This is also “drop-out”/base effects, and energy prices down significantly – as above, not sustainable – I don’t see it averaging under 2% over the 3 months, but I’ve been wrong recently on this so it could be a low print for April and May, but I expect it to start coming back from June if that does happen.

 

In the February Report projection, CPI inflation was expected to increase slightly again in Q3 and Q4, accounted for by the direct energy price contribution to 12-month inflation. Agree with this as discussed.

 

Services price inflation is expected to fall back gradually. Have said the same myself today – this omits the “47% of CPI is services inflation” fact and the numbers stop adding up once energy stops moving CPI down and instead starts moving it up again. How can inflation be under 2.5% in those circumstances? With difficulty (this year). 

 

The MPC’s remit is clear that the inflation target applies at all times, reflecting the primacy of price stability in the UK monetary policy framework. It does – and it has to, or at least the international markets need to believe this. Remember – the target applies at the end of the forecast period, which is 3 years away – there’s carte blanche for inflation to be above 2% as long as the models show it is 2% or lower in 3 years time!!

 

The framework recognises that there will be occasions when inflation will depart from the target as a result of shocks and disturbances. Here come the excuses – although, let’s face it, with a pandemic, at least some of them are valid!

 

Monetary policy will ensure that CPI inflation returns to the 2% target sustainably in the medium term. Judged as 3 years here, as discussed. The 3 year target moves just as the months move with us, of course, so we “never” get to the target if you follow.

 

At this meeting, the Committee voted to maintain Bank Rate at 5.25%. Headline CPI inflation has continued to fall back relatively sharply in part owing to base effects and external effects from energy and goods prices. As I’ve said already.

The restrictive stance of monetary policy is weighing on activity in the real economy, is leading to a looser labour market and is bearing down on inflationary pressures. The actual impact on inflationary pressures is only achieved by killing off some activity – that is the brutal reality of the blunt tool that is the interest rate. We had a near-15 year respite from that blunt tool – and still many of us are incredibly surprised how robust the economy has been after what is an unprecedented rise in interest rates in relative terms. 

 

Nonetheless, key indicators of inflation persistence remain elevated. Monetary policy will need to remain restrictive for sufficiently long to return inflation to the 2% target sustainably in the medium term in line with the MPC’s remit. Agreed. No other way makes any sense, anything else would send our cost of debt as a nation spiralling uncontrollably.

 

The Committee has judged since last autumn that monetary policy needs to be restrictive for an extended period of time until the risk of inflation becoming embedded above the 2% target dissipates. Took them long enough to work it out, but they are right. However – restrictive does not mean 5.25% – it just means “above the natural rate” at which the economy does not grow or shrink thanks to the interest rate. At the moment there is a squeezing effect of this 5.25% rate.

 

The MPC remains prepared to adjust monetary policy as warranted by economic data to return inflation to the 2% target sustainably. It will therefore continue to monitor closely indications of persistent inflationary pressures and resilience in the economy as a whole, including a range of measures of the underlying tightness of labour market conditions, wage growth and services price inflation. On that basis, the Committee will keep under review for how long Bank Rate should be maintained at its current level. As we would expect them to.

 

That’s the end of the exec summary – note, absolutely no mention whatsoever that rates might need to go up. That is in my opinion a political decision. The Federal reserve made it clear at the FOMC this week that they would cut, hold or raise as necessary – whereas this language CLEARLY signals cuts as the next move on the horizon. This explains the bond market moves since Thursday midday for sure!

 

It’s also, of course, wrong. There is still this small chance that rates might need to go up, and language like this just means if that did have to happen, it would be much more of a shock. It is a fine balance here between telling the truth (which I’d always favour – no matter how hard it sounds) and trying to bolster a relatively fragile economy. Not an easy decision, but I believe the truth should always out, and if you aren’t truthful, then your integrity is questioned when it is most needed.

 

There are 6 Bank meetings left this year – in: May, June, August, September, November and December. I have said for some time we first of all need this meeting where no-one votes upwards. Speculation will now be rife of when the cuts are coming. Some will be slavering for cuts in the May meeting – personally I’d give that under 10% chance at this time. By the time we get there (9th May), we will only have April’s releases (most of which are from February data) – and that’s exceedingly unlikely to show enough to encourage a cut. By June’s meeting, however (20th June) we will have 2 more data releases on top of that, which are all expected to be trending in the right direction still (even if those are temporary moves). 


Politically it will look difficult NOT to cut in June. The central bankers will need to show strength and conviction. What will they take into account, ignoring international pressures (which they do refer to, of course):

 

  1. Growth – which is expected by then to look OK. That means rates could hold up. If it is a lower or limper print for Q1, that might indicate a cut
  2. Inflation – as discussed, the next couple of prints are going downwards, any other direction of travel would be very unlikely. But where will core be, rather than CPI….Important to note here that after a long time of focusing on core, it got ignored in the summary this week by the Bank, because it doesn’t fit the narrative
  3. Wages – as before, major volatility would be strange and I’d be surprised if we went into June’s meeting with wage growth sub-5%
  4. Unemployment – likely to be trending upwards and above the 4% mark, which isn’t really material but will add pressure to cut

 

They won’t be watching or at least not putting as much weight as I am on services inflation particularly. It’s very hard to determine what Bailey’s politics are – he speaks well in terms of keeping those very close to his chest, and has no issue with making some Conservative MPs look like idiots (It helps him when they are, of course) – or whether he really would bow to any particular pressure. When his Deputy Governor for Monetary Policy is straight out of Jeremy Hunt’s treasury though, she is going to be voting down on rates. Whether it is the right thing to do or not. That’s one thing I’m absolutely convinced of. That happens from July.

 

So. I am going to reframe my prediction. Base rate SHOULD end this year at 4.75%, IF everyone on the committee does the right thing and acts independently. However, if we cut in June, it is much more likely to end the year at 4.5%. There will be a wobble, and the hawks will make it difficult for the rest to keep voting down if indeed they will do that – they will also want “clear water” between rate cuts, so “cut, pause, cut, pause, cut” in order to take stock (in my opinion). Anything else looks like they waited too long for the first cut.

 

The reality is, though, I don’t expect inflation to play ball. I still can’t see why it would. We’ve got this energy dropout that the US didn’t have, because they didn’t have the spike in the first place. But – if the economy is going to do OK, which it looks like it is – with all these inflationary pay rises and pay rises continuing at over 2x inflation – is the expectation that people won’t spend this money? Because that’s what it sounds like – and that doesn’t look realistic to me.

 

We will see. To round it back to the most important part – property – the stage is still set for healthy rent rises (which are needed, to improve yields and bring investors back to the market). Gilt rates are still yet to lower more, and make mortgages 0.5% or so more affordable, perhaps a bit more quickly than I thought, after this past week. Wage rises improve affordability as long as employment doesn’t suffer materially from all this.

 

However – let’s not forget this is a huge balancing act, and the “soft landing” or even “no landing” look more likely than they ever have. It still feels economically unlikely – and if we’ve “got away” with this (this being the pandemic and response) it is, frankly, more luck than judgement. Long may we keep getting away with it, but I will keep searching for that Black Swan that seems to remain just out of sight at the moment (but we all know it is there).

 

Congratulations as always for getting to the end – don’t forget the Property Business Workshop on Wednesday 24th April – tickets for you, or anyone you know who might want one, here: https://bit.ly/pbwtwo . Onwards, upwards, as we lurch toward Easter – Keep Calm and Carry On!