Supplement 28 Apr 24 – Mixed signals?

Apr 28, 2024

“Don’t let mixed signals fool you. Indecision is a decision.” – Nitya Prakash

Before we get started, I wanted to say thanks to everyone who attended our Property Business Workshop this week. It was a content-packed day and a super room, with feedback that was the best I’ve ever received for anything I’ve been involved in. Very motivating, and some fantastic conversations on the back of it including a meeting booked in for an 8-figure deal on the back of it. As far as results go, that would be pretty sweet……


Save the date for the next one – Thursday 4th July, in a Central London location. Full details next week.


Welcome to the Supplement, everyone. We had another week where the immediate outcomes look wobbly, but the real time data that’s in the Supplement week in, week out bore the fruit that we were expecting that it would. So the “slightly-backward-looking” indicators look great – but this looks temporary, is how I would define that.

Gilt yields just continued to drift upwards without too many reasons to snap the current direction of travel off  – but if you think some of the UK forecasting has had a bad week/month/year/half-decade, spare a thought for the US which printed some incredible surprises including GDP growth at 1.6% against an expected 2.5% (down from 3.4%), and PCE (their inflation alternative, that some prefer to CPI) moving from 2% to 3.7% (3.4% expected). Revisions might be expected, but that’s some miss, especially on GDP – and their 10-year bond nearly touched 4.75% this week, which looks massive when compared to – say – Vietnam at 2.85%. Tough to get your head around, sometimes, for sure! Markets right now don’t see the first rate cut until DECEMBER in the USA – so it is a coinflip as to whether there will be a rate cut at all in the USA this year. I’ve hinted that I don’t feel particularly differently about the UK – I’m not ready to predict no cut this year as yet, though, as we have some different dynamics and are at a different point in the cycle – but will definitely flesh this out over the coming weeks. 


Anyway – this week’s macro focuses on the PMI flashes (the real-time estimates for April), Confidence and Optimism indices (both business and consumer), Distributive trades which really missed a barn door, and the bond yields, of course, with a hat-tip to what the Bank of England have said this week. 


The PMI flashes have not been letting us down, of late, in terms of talking about the direction of travel. The expectations were fairly tempered for this month, but the Services PMI – which really determines the overall direction of the economy, since services are so massive – printed 54.9 against an expected 53. S&P Global (who own and distribute the data) put it succinctly in their press release – “UK flash PMI signals accelerating economic recovery but price pressures surge higher”.


Listen. I know I need to resist the temptation to say I told you so. No-one reading or listening to this will be surprised – the only surprise is that others might be surprised. They are seeing (roughly) GDP growth of c. 0.4% per quarter currently, with a 0.3% increase in Q1 (Q1s increase looks more like 0.4%-0.5% to me, but let’s see). Still, this looks very helpful for absorbing the hike in the minimum wage this month.


The headlines other than that from the PMIs – this was an 11-month high, 6 expansions (readings above 50) in a row. Financial services and tech did particularly well in April according to the survey, with transport and hospitality reporting falling output (I’d expect those were hit the hardest by the minimum wage rise, of course). 


Measures of optimism over the next 12 months also remained high amongst the purchasing managers, well above the pre-pandemic average. In the details, manufacturing exports fell lower for the 27th month in a row (not a great trend!) although services sentiment continued to lift higher. 


As with a lot of these graphs, it is better to just ignore 2020-2022 or so – but this week’s image is just there to back up quite how well the PMIs and the GDP measure correlate. Fairly scary how strong that correlation tends to be, but not surprising.  


Good news for employment too (although not for rate cuts) – hiring picked up in the services sector, so the slide on the official numbers doesn’t look particularly accurate although the 2023 slide in the Flash PMI composite employment index is being borne out in the figures at the moment. Still – it doesn’t suggest an unemployment tsunami coming, at all, which will buoy those who think the minimum wage should continue to be cranked up and up. The loss of jobs accelerated in factories, however, so what this really does for inequality I would question. Either way the indices are hovering around the middle for services, just on the right side of 50, when it comes to employment – not roaring forward like the overall index is. 


Price increases still look consistent with a 4% inflation rate, rather than a 2% inflation rate, and tend to be around 5 months ahead of where CPI is. That’s in the services sector (47% of CPI, as I say most weeks, it seems!). 


The final paragraph in the S&P report is underreported, I think, but says it very succinctly indeed. “Not a rate cutting environment” (similar to what the Bank of England hawks have been saying in recent weeks). I was stunned that a 50/50 bet was still available for June (no longer is that the case) on a rate cut – but I was equally stunned in December that there was a 50/50 bet for March. May have to start getting stuck into the betting markets on this stuff, because I think this mistake could be repeated over and over again during this cycle.


In that paragraph there’s a nearly incendiary piece of commentary – “…..suggest that business conditions are more consistent with rate hikes rather than rate cuts. Both the composite flash PMI output index and input cost index are above their long term averages, and rising.” Their words, not mine, but worth heeding.


OK – better news in the confidence indices? The Business Optimism Index for manufacturers was at its highest since July 2021, even though orders have dropped, as it printed +9 up from -3, and well above the long run average of -7. Output expectations rose to a 6-month high. The cost of living crisis is over (on average). The softening of the labour market has also helped – recruitment has got easier, by the sounds. 


The consumers? -19 was the GfK print, which is the equal highest print for the past year. Over the next 12 months, the +2 for how consumers feel about their personal financial situations was preserved from last month. The only metric that is positive. Everything has improved or stayed the same, by a couple of points, on the survey. More of that cautious optimism that I’ve been talking about. The last 12 months have been nowhere near as hard – according to the survey – as the 12 months before that. The savings index is also higher – so we will be watching the savings ratios carefully as people still fear a harder landing, geopolitical tensions, and the likes – and this is keeping consumption down. This is no bad thing, in an inflationary time, to be honest. Savings are like tax – in that both are “not consumption” but they stay in our pockets, so let’s be clear that we vastly prefer that outcome!!!


Why are all of these important – because they are, historically, VERY good bellwethers of anything other than true Black Swans. They are leading indicators. The point here is that – at the moment – the health of the economy looks solid going into the election, in spite of relatively tough trading conditions and interest rates designed to slow the economy down.

That provides us a stable housing market until the pre-election jitters set in. We need to prepare our businesses accordingly (and also get on with it, rather than waiting for rates to drop). Deals MUST stack at the current rates, which are not set to be edging downwards any time soon – we should be TAKING prices now for loans, not waiting for them to drift upwards which they will very soon need to do (it is happening already). This is not advice – this is what I am doing across my group.


If you are sticking around waiting for it all to go wrong so you can sweep up (I doubt you are unless you are a first time reader or listener) – go back and broaden your horizons, that’s not happening any time soon and inflation is organically going to drag prices UPWARDS, not downwards (and so are wage increases, still expected to be around the 5% mark by the end of 2024). 


A quick nod to the distributive trades – because the headline also caught the eye. Retail sales fell sharply in April – as everyone predicted, because Easter was in March. However, it was more than expected even bearing that in mind. The expected print was -2, and instead it was -44 (not a typo, a bloodbath prediction miss). Let’s face it – retail is struggling anyway, minimum wage will have had a major impact, and just because inflation has come down doesn’t mean the high cost bases have gone away. Business rates for larger businesses are also going up, and that could mean some higher profile administrations/busts/Wilko-style deals in the coming months, is what I take away from all of this. 


That leaves the yields. Another week upwards, I’m afraid – opened at 4.14%, touched 4.295% on Thursday, closed Thursday at 4.266% and Friday at 4.246% (all on the 5-year gilt, our usual sweat). The wobble was after the US numbers were released around their growth and the US 10-year yield moving upwards dragged all of ours upwards, rightly or wrongly. However, if you take the words from before from the S&P PMIs survey, you’d think the yields were right to be doing what they were doing….these still feel on the high side, though – I don’t think there’s too much upside above this in the yield (remember, I’m not and have never been a bond trader!).


The Thursday night close for the 5-year swap was 4.186%, so still in that range below the actual gilt, where we need it to be – and don’t expect that to change too much. There’s no premium at the moment, and the higher the rate goes, the less the demand will be for money.


Again – just as an aside – why obsess over these so much? What are they telling us, week on week – they are telling us that rates are not moving downwards particularly soon on mortgages, and then by extension they are telling us that investment mortgages are still highly likely to form a low percentage of overall mortgage debt, and new units are going to be fewer and further between than they would be if the interest rates were lower. Stock won’t be coming online in large numbers over the next 6 months – this is effectively a guarantee – and even if business is relatively tough at the moment, with a constantly expanding rental demand in terms of a growing population and also a demographic that is increasing over the next 10 years (20s-30s) – we have a safe bet in terms of rental demand. That’s a macro view – it varies area to area of course – but that’s where we are. 


The price of credit will keep property investors away, even if they can get over all of the hurdles that are in place that weren’t there 10 years ago. The other side of the fence is that if rents increase faster than mortgage rates don’t go down – or, more technically, if yield grows faster than capital growth as has been happening over the past 18 months – then people will be more incentivized to get back to the market. So it is the chicken and the egg – rents will go up because there is less stock (all else being equal) – there’s also wage inflation. Increasing yields will finally bring more stock, but where do yields honestly need to be to tempt investors when the cost of debt is really around the 6 – 6.25% mark, fees included? 8%+. 


Sensible conclusion – the North/South divide that we’ve seen over the past 18 months in the property market, with prices in the South falling and those in the North rising, even in relatively small differences and terms, may well persist because the only investment property you can buy at the moment is in the North (that’s a general public statement, not a Supplement reader statement – you can still layer on active asset management strategies such as HMO on top in the South and force yield that way, of course – but standard BTL is very difficult or simply not viable outside of studio flats or multi-unit freehold blocks). 


Next week we’ve got the US FOMC meeting, but the Bank of England rates meeting is not until May 9th. So, a gap after the Fed dot plot inevitably reveals that their members will follow the same pattern and let the cat out of the bag (that’s not in it anymore, really) that rates might not be cut in the USA this year. As an aside, this gives them a major debt servicing problem – a really major one – but of course there’s still at least one-and-a-half eyes on the Trump court case. Anyway – let’s draw the macro chapter closed for this week.


I wanted to close this week with a tip towards the Renters’ Reform Bill. For those unfamiliar with the process, it has had its third reading in the Commons this week. There were over 200 amendments put forward – most very minor, others are not minor at all and quite contentious. You will know by now that the position is very clear from the NRLA – lose section 21, sure thing, but ensure there is a functioning court system for rent arrears and antisocial behaviour. The extra (estimated) 30,000 section 8 court cases each year need extra resources in an already stretched system, or an entirely new court.


It’s easy to see what the outcome has already been, of all of this. Investors hate uncertainty so they stop buying, or dispose of property. This continues while all of this continues. Any that read the Telegraph, predicting “annihilation” for landlords – obviously not feeling overly positive about a very likely Labour government, warning that the last 10 years of hostility towards landlords will be nothing more than a warm-up. 


The article says “The war on anyone who rents out property is not going to end. Quite the opposite: it’s only going to intensify. From price controls, to compulsory purchases, to higher taxes, this is not going to stop – perhaps until landlords are completely wiped out.” The report concludes: “Anyone who thinks that the tax rises and regulations of the last 10 years were as far as the state could go is kidding themselves.”


Now the Telegraph are not the bastion of media they once were. Instead, they prefer scaremongering and clickbait these days, so I wouldn’t look for the nearest cliff to jump off. However – imagine how many others ARE being put off, and imagine the market when there are yet fewer, but more vocal and powerful (from a lobbying perspective) landlords in that market thanks to consolidation. Also – I hope Labour realise that damaging the market in transition is damaging the tenant, first and foremost, and the public purse second. Even those I speak to who may have to sell up because of higher rates, and section 24, before we even consider section 21, have got a pretty penny in reserve after all of their taxes – they just don’t want to crystallise and pay them all (nor do they want to get out of the game, but feel they are being forced out by legislation and by circumstance).


We NEED great private sector landlords. The institutions are still a long way away from picking up the secondary market stock, with confidence. A LONG way. I’ve heard realisation of all of this on the left side of the commentary I take in on a daily and weekly basis. I hope that doesn’t change and ideology doesn’t take over, because, I repeat, the first and largest damage will be to the tenant. 


Once the third reading is over of the Renters’ reform bill, the bill will go to the Lords to follow the same process as it has in the Commons. Timeline wise, with elections looming, it will be close, and it won’t be something that defines when the election is called (which is still feeling like late October, mid-November, or something like that, in my view).


Well done as always for getting to the end – remember to save the date for the next Property Business Workshop on Thursday 4th July – it will be at least as good as the last one from this week. 

There’s only one way to deal with all of this noise that’s going on at the moment, of course – Keep Calm, ALWAYS read or listen to the Supplement, and Carry On!