Global recession seals real estate downturn In line with changes in our global economic view, we have made significant downgrades to our commercial real estate forecasts for the next couple of years. As a result, we now expect a much bigger drop in property values next year that will cause annual returns to be negative in all our key markets. In view of the wider interest, we are also sending this UK Commercial Property Update to clients of our US and Europe Commercial Property Services. 8th November 2022
Fracturing and financial flows The trend towards ever more “financial globalisation” has already decelerated and will probably slow further as the global economy fractures and policymakers favour resilience over efficiency. While a disorderly rupture of financial relations remains unlikely, links between the US and China will weaken. 6th October 2022
The signs of shifting cycles In recent weeks, attention has shifted from the likely size of rates hikes towards the timing of peaks and the prospect of ultimate cuts. History can tell us little about the likely profile since no two cycles have been quite the same. And central bank communications are not a reliable guide either – they have tended to warn of further tightening to come months after the peak has been reached in the past. Instead, we will have to monitor the incoming data very closely. Weakness in the housing market and signs of a let-up in underlying price pressures in Canada and the US, respectively, support our forecast that they will cut sooner and/or more aggressively than is typically assumed. 10th November 2022
Bonds may outperform equities amid a global recession After moving in broadly the same direction for much of 2022, we think that the returns from “safe” assets will generally diverge from those from “risky” assets between now and around the middle of next year. We suspect that long-dated government bond yields have peaked in most places and will fall back further as inflation eases and the global economy enters a recession. Meanwhile, we expect this to mean that most risky assets continue to struggle, despite lower “risk-free” interest rates. That said, we think that risky assets will generally rebound later on in 2023 and in 2024, as the global economy eventually turns a corner and government bond yields continue to edge lower. EM Drop-In (Thursday 3rd Nov): This 20-minute emerging markets briefing will take in our latest views on how the macroeconomic picture will inform EM financial markets, what Brazil’s election result means for the country’s economic outlook and our forecasts for Hungary’s forint and the Colombian peso. Register here. 1st November 2022
Early zero-COVID exit would hurt economy in 2023 A shift away from zero-COVID would be positive for China’s economy over the medium term. But the immediate disruption of reopening would probably exceed the cost of keeping the policy in place, especially if vaccine coverage among the elderly hadn’t risen substantially ahead of any shift. If China were to abandon zero-COVID now, that would warrant a lower not higher GDP forecast for next year. 10th November 2022
Broad-based decline in core inflation coming soon Despite the unanticipated strength in recent months, there are still good reasons to expect core inflation to fall markedly next year. That moderation will not require a deep recession and/or significant rise in the unemployment rate, although we do expect weak demand and easing labour market conditions to play a supporting role. Most of the coming decline in core inflation is already “baked into the cake” – private sector rent measures and other housing indicators point to a significant drop back in shelter cost inflation, while CPI medical care services will fall as the ridiculous spike in health insurance prices is reversed. The stronger dollar, easing supply shortages and collapse in transportation costs all but guarantee a slump in core goods inflation. We expect core CPI inflation to be below 2.5% by end-2023 and core PCE inflation to be around the 2% target. Both measures should fall below 2% in 2024. 2nd November 2022
Don’t miss the bigger picture in natural gas markets While front-month European natural gas prices have fallen sharply as concerns have eased around shortages this winter, longer-dated futures haven’t fallen by as much. That reflects how difficult it will be to fill storage without Russian gas flows next year. With global gas markets becoming increasingly integrated, this is likely to translate into higher US gas and LNG prices too. In view of the wider interest, we are also sending this Energy Update to clients of our Euro-zone service. 4th November 2022
Gold and silver prices to rise next year Gold and silver prices fell following Chair Powell’s hawkish comments yesterday. But if we are right in thinking US rates won’t rise by as much as markets expect, gold and silver prices should increase next year. We forecast prices to rise from $1,630 and $19 per ounce today to $1,700 and $19.5 by end 2023. 3rd November 2022
Recoveries still lagging in the major coastal markets Q2 data showed a mixed picture across the three sectors. For offices, the northern coastal markets continue to lag, with rent growth turning positive but still weaker than most other markets. Houston had an awful quarter for demand, and new supply in Seattle pushed vacancy up quickly there too. In the apartments sector demand slowed across the markets. Southern metros like Miami and Austin continue to see stronger demand, but there were also decent gains elsewhere, including Boston and D.C. And for industrial, there was a rebound in demand after a slow Q1, but it remains below the levels seen in H2 2021. Phoenix was the big winner here, continuing to benefit from extremely low vacancy in LA, Riverside and San Diego. But capital growth slowed notably in Q2 and we expect an even sharper slowdown in Q3 as cap rates face upward pressure. 24th August 2022
Will property be a problem again? The UK property market has a long history of either causing or worsening recessions. But that history has taught both banks and regulators a lesson. So while higher debt payments, falling property prices and a slump in construction will play a major role in dragging the economy into recession, we don’t expect the sector to trigger a banking crisis. Banks have far less exposure to commercial property today compared to the past, while more cautious lending practices have reduced the riskiness of mortgage debt and lenders have plentiful capital buffers to absorb losses. In view of the wider interest, we are also sending this UK Housing Market Update to clients of our UK Commercial Property and UK Economics Services. 19th October 2022
Global Markets Update China’s zero-COVID stance and global markets If China’s authorities were to accelerate the abandonment of their zero-COVID policies, we think it could actually prove a headwind for global asset prices. But we doubt they will do so for a while... 2nd December 2022 · 4 mins read
Global Markets Update We think Bund yields will fall by less than Treasury yields Although we think the yields of high-grade, long-dated government bonds will fall in general in the next couple of years, we expect those of Bunds to fall by less than those of Treasuries, as... 21st November 2022
Global Markets Update EM sovereign bond yields may be nearing their peak Having increased sharply throughout the year, we think that emerging market local currency sovereign bond yields will probably only increase by a little more in the first half of next year, despite a... 18th November 2022
Global Markets Update We still think recession will derail the equity rally We’re sticking with our view that the equity market rally will go into reverse as the world economy slips into a recession. 14th November 2022
Global Markets Update Yield curve control pressure may ease further We don’t expect the 10-year JGB yield to rise above the top of the Bank of Japan’s tolerance band, and think it may even fall back to the middle of that band next year as yields continue to decline... 11th November 2022
Global Markets Update We don’t expect China’s stock market recovery to last China’s equities have received a boost recently from speculation that the country will ease its strict zero-COVID policy, but we don’t think this marks the start of a more sustained rally; we forecast... 10th November 2022
Global Markets Update Tougher times may lie ahead for Brazil’s markets Brazil’s financial markets have been some of the world’s best performers lately, supported in part by the prospect of centrist policymaking by incoming president Lula. With the presidential election... 8th November 2022
Global Markets Update What the latest central bank signals mean for markets The differing tones of the Fed, ECB and BoE at their recent meetings have seen yields rise in the US more than elsewhere and reignited the rally in the US dollar. That pattern could last a few more... 3rd November 2022
Global Markets Update The changing drivers of this year’s sell-off in the S&P 500 Downward revisions to expectations for earnings have taken a toll in the second half this year so far on the S&P 500, which had been under pressure in the first half from a discount-rate-driven drop... 2nd November 2022
Global Markets Update Market strains create new dilemmas for central banks As the recent breakdown of the UK Gilt market illustrates, policymakers face an increasingly difficult trade-off between combating inflation, supporting economic growth and maintaining financial... 26th October 2022
Global Markets Update Will the UK’s new PM still be faced with a risk premium? Although the extra risk premia on the UK’s sovereign bonds and currency that emerged in the wake of the UK’s “mini”-budget have partly unwound, this doesn’t necessarily mean Gilts and sterling are set... 20th October 2022
Global Markets Update We think EM Asian equities may drop further We think benchmark equity indices in Taiwan, Korea and India will fall a bit further over the remainder of this year and into 2023, as the global economy slips into a recession. 14th October 2022
Global Markets Update What still-hot inflation means for US Treasuries Despite the hot September US CPI print from yesterday, we still expect Treasury yields to drop back over time. And we think the drop will mostly be driven by falls in the real yield, rather than... 14th October 2022
UK Economics Update BoE’s gilt operations – easy to start, harder to end Given that the surge in gilt yields that has forced the Bank of England to intervene in the market was initially driven by the government’s loose fiscal policies, it makes sense that the Bank may not... 11th October 2022
Global Markets Update S&P 500 may fall even further than we’d thought With the Fed seemingly still in a hawkish mood and the US and global economies struggling, we now expect the S&P 500 to decline further than we’d previously thought. 7th October 2022
Global Markets Update What Lula could mean for Brazil’s financial markets Investors seem to have taken the prospect of a second Lula presidency positively so far, but we suspect returns from the country’s dollar bonds and equities will disappoint over the next couple of... 3rd October 2022
