Market Commentary 2nd January 2024 – from Will Binks

The UK housing market has continued to decline as Nationwide released data showing that the average house price has dropped for 11 consecutive months and is now almost 4.5% lower than the peak in August 2022. The report also suggested that a rapid housing market recovery in 2024 seems improbable.

The British Retail Consortium (BRC) reported that annual food inflation decelerated to 6.7% for December, down from 7.8% in November, marking the lowest level in 18 months. Food inflation peaked at 17.8% in April 2023.

The Consumer Price Index (CPI) in Spain showed annual inflation was 3.1% in December, below economist estimates of 3.4%. Core Inflation, which strips out food and energy costs, slowed to 3.8% from 4.5% the month before.

There was little economic newsflow in Europe throughout the week. Comments from the European Central Bank and falling inflation continued to make headlines. Governing Council member, Robert Holzmann, said it is too early to talk about lowering borrowing costs and such a move in 2024 is anything but certain.

Last week saw a release of employment data in the US which showed that the number of Americans filing for unemployment benefits rose by 12,000 to 218,000, above market expectations of 210,000. On a similar note, continuing claims rose by 14,000 to a one-month high of 1,875,000 and strengthens the argument for cutting interest rates in the first quarter.

The National average house price increased by 0.3% over the month of November compared to 0.7% the month before. The housing market in the US has remained buoyant and prices are up by 6.3% year on year, although the latest data shows a slowdown as higher borrowing costs and stricter lending criteria start to weigh on the housing market.

The Media continues to report on Japan and its ultra-loose monetary policy. The Bank of Japan Governor, Kazuo Ueda, said on Monday the likelihood of achieving their inflation target was gradually rising. Ueda also stated that they would consider changing policy if the prospects for sustainably achieving the 2% target increase “sufficiently.”

China’s five biggest banks cut deposit interest rates as directed by the state to help protect profitability amidst low growth. The cuts have brought deposit rates down to the lowest level since 1996, with five-year savings account rates reaching only 0.6%.

Economic data showing softening inflation and a slowdown in economic growth has led investors to expect larger interest rate cuts this year. Markets are currently pricing in a 1.5% interest rate cut this year.

The German Bund yield is hovering around its lowest level since December 2022, but was fairly stable last week as there was very little newsflow regarding economic data in the area.

Economic data released on unemployment last week backed up the Fed’s previous comments about reducing interest rates and markets are now pricing in an 80% likelihood of interest rate cuts in the next few months.

GBP / EUR – Current 1.1532 Previous 1.1637

The Pound gained 0.39% against the US Dollar last week but declined by 0.90% against the Euro. The Dollar fell generally against most major currencies as expectations for the Federal Reserve to slash interest rates rose.