Key events
Neil Wilson, chief market analyst at Finalto Financial Services, said:
European stock markets slipped in early trading, pushing the main indices firmly into the red in the first week of trading in 2024 as the data paints a picture of weakening economic activity and higher inflation.
Weak PMI data for the euro area was confirmed, whilst German consumer inflation surged higher as energy subsidies faded. German’s inflation hit 3.8% in December, up from 2.3% in Nov. Final inflation data for the Eurozone as a whole is due at 10am, expected up to 3.0% from 2.4%.
Meanwhile FOMC minutes earlier this week suggested the Fed is not quite so close to cutting rates; the US 10-year Treasury yield broke above 4%, helping the dollar hit its highest since the middle of December and keeping the pressure on risk assets.
Shares in London, Frankfurt and Paris all retreated on Friday morning, with the US jobs report in focus. The Nasdaq notched its fifth straight daily decline on Thursday, whilst the S&P 500 dropped for a fourth session in a row with Apple suffering again on another downgrade. For the week, the FTSE 100 is off about three-quarters of a percent, held up relative to peers with oil firmer, whilst the Dax is down 1.4% and CAC is 2% lower with luxury taking a bit of a bashing on China fears.
Stocks fall; crude oil prices rise over 1%
On the financial markets, stocks are falling while crude oil prices have risen more than 1% amid tensions in the Middle East.
Brent crude futures are up 87 cents at $78.46 a barrel while US light crude is 97 cents ahead at $73.16 a barrel. US secretary of state Antony Blinken is heading to the Middle East for a week of diplomacy to try and prevent the Israel-Gaza conflict from widening. You can read more here:
Attacks by Iran-backed Houthi rebels from Yemen on commercial ships in the Red Sea have also triggered supply concerns.
On the stock markets , the FTSE 100 index has fallen nearly 67 points, or 0.9%, to 7,656, as optimism about interest rate cuts fades.
Germany’s Dax is down 105 points, or 0.6%, at 16,513 while France’s CAC has lost 66 points, a 0.9% drop to 7,384. Italy’s FTSE MiB has shed 184 points, or 0.6%, to 30,221.
NatWest chair: Likely we will see slow reduction in interest rates
Sir Howard Davies, who chairs NatWest, has warned that we we could see a “rather slow reduction in interest rates” this year because “wage expectations are quite high”.
Speaking on radio 4’s Today programme, he explained why lenders have already started to cut mortgage rates in a fierce price war. As financial markets are now expecting a series of rate cuts from the Bank of England this year,
therefore you can, as a bank, fix your interest rate at a slightly lower level than you could even a couple of months ago. And it’s that fixing of the rates in the market that determines what we can offer to customers. So the market expectations of rates are falling, therefore, we can pass that on to people who want a new mortgage.
He said because the Bank of England was criticised for being slow to raise interest rates when inflation shot up mainly due to higher energy and food prices, policymakers will be careful when they reduce borrowing costs.
Even at the last meeting in December, three of the nine members of the [rate-setting] committee still voted for a further increase in rates. So they’re quite a long way away at the moment from a majority in favour of a reduction in rates. And there is a risk of that, having been burned once by reacting too slowly. They are now going to be rather cautious in coming down.
It’s likely that we will see a rather slow reduction in rates during the year. They will of course be influenced by what is going on in retail prices, not rising anything like as rapidly as they were, but still wage expectations are quite high and that if you read the recent speeches from the Bank of England, thats what’s worrying them the most.
Here’s a lookahead to what 2024 might bring in the housing market:
The EY Item Club forecasting group said the 1.1% month-on-month rise in the Halifax measure of house prices in December capped off a year when values proved much more resilient than forecasters had expected.
An average of the Halifax and Nationwide measures was down 1.5% in the fourth quarter on a year earlier, in contrast to consensus predictions last January of a fall of 6.5%.
Martin Beck, chief economic adviser to the group, said:
Two factors have led to a modest correction. Firstly, unemployment has remained low. Secondly, the rise in mortgage interest rates has been much more protracted than in the past, reflecting a shift in the mortgage stock from variable to fixed rate. Both factors have kept forced sales down and limited supply.
The closing months of 2023 saw a recovery in demand for properties, albeit from a low level. Mortgage approvals in December rose to a six-month high. This was probably aided by falling mortgage rates, as investors have priced in a substantial series of rate cuts by the Bank of England this year.
The EY Item Club thinks this recovery should continue as mortgage rates continue to drift down and lower inflation makes for a likely more predictable macroeconomic outlook. The fact that the ratio of house prices to average earnings is down by over a tenth since the 2022 peak, reflecting a fall in prices alongside strong growth in wages, should also support demand.
This can cause a lot of stress and sleepless nights. My colleague Jedidajah Otte has talked to homeowners who fear a sharp rise in mortgage payments as they come off fixed-rate deals this year.
However, mortgage costs are still much higher than they have been in recent years after the Bank of England raised interest rates to 5.25% to fight stubbornly high inflation. (Financial markets expect it to cut rates to below 4% by the end of the year.)
As a result, homeowners are facing a £19bn increase in mortgage costs as millions more fixed-rate deals expire and borrowers are forced to renegotiate their home loans after the toughest round of interest rate increases in decades, writes our economics correspondent Richard Partington.
Despite an escalating price war between lenders cutting the cost of remortgaging in recent days, economists at the US investment bank Goldman Sachs said many UK households would still experience a dramatic leap in repayments compared with the deals they were leaving behind.
In what has been described as a Tory mortgage timebomb by Rishi Sunak’s critics, just over 1.5m households are expected to reach the end of cheaper deals in 2024 – with an increase in annual housing costs of about £1,800 for the typical family, according to the Resolution Foundation thinktank.
As fixed-rate deals expire and households absorb the biggest hit to their finances in the postwar age, with inflation and tax rises taking their toll on spending power, borrowers are turning to a range of measures to cope with the increased costs, from renting out rooms in their homes to drawing down pensions early and even postponing having children.
Anthony Codling, housing analyst at RBC Capital markets, said:
The demise of the UK housing market is somewhat over reported. The Halifax reported today that house prices rose by 1.7% in 2023, an increase of £4,800. Most, including us, thought house prices would fall during 2023, and most think they will fall in 2024, but not us.
With rising wages, falling inflation, falling mortgage rates, and increasing talk of election related housing stimulus packages we expect house prices to rise in 2024. Our pessimism was misplaced in 2023, and we don’t want to make the same mistake twice.
Introduction: UK house prices rise for third month amid property shortage
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
House prices in the UK rose for the third consecutive month in December, reflecting a shortage of properties on the market, according to mortgage lender Halifax. It added that with mortgage rates easing, confidence among buyers may improve in the coming months.
The cost of an average home rose by 1.1% to £287,105, just over £3,000 more than in November and the highest level since March, Halifax said. This comes after monthly gains of 0.6% and 1.2% in November and October.
Compared with December 2022, values were up 1.7%, the first annual growth in eight months, following a 0.8% drop in November.
Kim Kinnaird, director of Halifax Mortgages, said:
The housing market beat expectations in 2023 and grew by 1.7% on an annual basis. The average property price is now £4,800 higher than it was in December 2022. Whilst it’s encouraging that we saw growth in the last three months of the year, this was preceded with property price falls for six consecutive months between April and September.
The growth we have seen is likely being driven by a shortage of properties on the market, rather than the strength of buyer demand. That said, with mortgage rates continuing to ease, we may see an increase in confidence from buyers over the coming months.
Across all the UK regions, Northern Ireland recorded the strongest house price growth in 2023, as properties increased in value by 4.1% to £192,153. Scotland saw property prices increase by 2.6% to £205,170. At the other end of the scale, the south east fell most sharply, houses there now average £376,804, a drop of £17,755 or 4.5%.
Halifax expects prices to fall by between 2% and 4% this year as many still struggle to afford the sharply higher mortgage costs compared with recent years following a series of Bank of England rate hikes. The question is when will the central bank start cutting rates? Financial markets are betting that the first reduction will come by May.
Kinnaird explained:
As we move through 2024, the UK property market will continue to reflect the wider economic uncertainty and buyers and sellers are likely to be naturally cautious when considering making a move. While wage growth is now above inflation, helping to ease cost of living pressures for some and improving housing affordability, interest rates are likely to remain elevated for as long as inflation remains markedly above the Bank of England’s target.
Mark Harris, chief executive of mortgage broker SPF Private Clients, said:
The housing market saw a remarkably strong finish to the year, as buyer and seller confidence was boosted by three consecutive interest rate holds and the growing belief that the next move in rates will be downwards.
Increased competitiveness among lenders leads to lower mortgage rates and we find ourselves in the midst of a price war. With HSBC launching the headline-grabbing 3.94% five-year fix and reductions from Halifax, NatWest, TSB and other lenders, the gloves really are off.
With 2023 being a disappointing year in terms of amount of business done, lenders are keen to get this year off to a cracking start. Increased competition, rates aside, may also lead to lenders broadening criteria to attract business with longer mortgage terms or greater flexibility to allow certain variable incomes. Although those remortgaging this year will still see an increase in their payments, the pain will not be as bad as it could have been.
Later today we will get the US non-farm payrolls report for December, which is expected to show that the economy added 150,00 jobs following November’s 199,000 increase.
The Agenda
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9.30am GMT: S&P Global/CIPS Construction PMI for December
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10am GMT: Eurozone inflation for December (forecast: 2.9%)
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1.30pm GMT: US Non-farm payrolls jobs report for December (forecast: 150,000)
