-
BOND MARKETS CONTINUE TO ADJUST THEIR EXPECTATIONS FOR INTEREST RATES
Data Sourced from FE Analytics, and Bloomberg Finance LP
BOND MARKETS CONTINUE TO ADJUST THEIR EXPECTATIONS FOR INTEREST RATES
This week we saw further adjustments in the bond markets as investors digest stronger inflation and economic data. Through late 2022 and early 2023, bond investors, particularly in government bonds markets, have been at odds with central bank messaging. The US, European and UK central banks have repeatedly given three messages. First, they would be guided by the data; second, they were determined to get inflation under control; and third, that this may take longer and involve rates going higher than expected. Markets managed to stubbornly resist this messaging for a while but the recent capitulation has seen government bond values decline sharply as investors accept rates are going higher.
Meanwhile, London continues to struggle to attract and retain stock market listings. Softbank confirmed it will list Arm in New York when it returns to the stock market, and building materials supplier CRH announced it is moving its listing to the US. Gambling group Flutter has also said it plans to move its listing to the US. The UK continues to look second best, due partly to the higher valuations usually achieved by US-listed firms.
GOVERNMENT BONDS: RESILIENT INFLATION CONTRIBUTES TO SELL OFF
The slide in government bonds has continued due to positive economic data and stronger than expected inflation. Prices in Germany, Spain and France unexpectedly rose in February and this contributed to a smaller drop in the EU’s headline Consumer Prices Index than forecast. Meanwhile core inflation (excluding volatile food and energy prices) increased. Declining bond values have driven yields up sharply. The yield on German 10-year government bonds has risen to its highest levels since 2011 and US 10-year Treasuries now yield more than 4% for the first time since November. The yield on UK Gilts has also risen sharply to around 3.8%, up from 3% at the start of February.
Markets have conceded that rates may rise further than previously expected. In the UK, Bank of England governor Andrew Bailey tried to soothe markets by saying there is no presumption to raise rates, but rising wages and concerns that lower energy bills will fuel spending in other areas have added to the argument in favour of persistent inflation.
CHINA: PRODUCTION BOUNCES BACK AFTER THE END OF ZERO-COVID
Chinese economic activity has recovered quickly after the government abruptly scrapped its strict Zero-Covid policy in December. Official government data shows manufacturing output is growing at the fastest rate in more than 10 years, while the privately produced Caixin China General Manufacturing Purchasing Managers’ Index shows a return to growth as it rose above 50 for the first time since July last year. The increase in Chinese manufacturing has helped boost the outlook for Asian and global economic growth. The International Monetary Fund estimates that each 1% increase in Chinese GDP increases output in the rest of Asia by 0.3%. The forecast for robust growth in India means Asia is likely to be the major driver of global economic growth in 2023.
The positive news has supported Chinese equity markets. The price of oil has also risen as markets look to the expected return of Chinese demand as industrial production ramps up. Brent Crude has risen around 2.5% this week to $85 a barrel.
EQUITIES: HOUSEBUILDERS SLUMP DUE TO POOR SALES OUTLOOK
House prices in February were 1% below the same month last year as slowing buyer demand has put average house prices into reverse. Mortgage borrowing continues to decline as the number of new mortgages for February dropped to the lowest since 2009 during the post-financial crisis housing crash. Average mortgage rates have fallen significantly since the spike following last autumn’s disastrous mini-budget, but they remain elevated and this, combined with high inflation, is severely restricting demand.
The UK’s housebuilders are feeling the effect of falling prices and low demand. Persimmon said sales of its new build homes could drop by 40% in 2023 and Taylor Wimpey says sales could drop from 14,000 to 9,000 as buyers been priced out of the market by inflation and high borrowing costs. The poor outlook has dragged on share prices, with Persimmon down around 11% and Barratt Developments and Taylor Wimpey down between 3% and 4%. This has reversed some of the recent recovery of building stocks after a difficult 2022.
For more information regarding our weekly market reports, we encourage you to give us a call on 01732 746188 or send us an email at enquiries@foxgroveassociates.co.uk.
This document has been prepared for general information only. It does not contain all of the information which an investor may require in order to make an investment decision. If you are unsure whether this is a suitable investment you should speak to your financial adviser. This information is not guaranteed to be correct, complete, or accurate. Financial Express Investments Ltd, registration number 03110696, is authorised and regulated by the Financial Conduct Authority (FRN 209967). For our full disclaimer please visit https://www.fefundinfo.com/en-gb/about/legal-and-policies/.