The low level of inflation in Switzerland compared to the euro-zone mainly reflects smaller contributions from energy and food. But core inflation is lower too, helped by the exchange rate and structural factors. Accordingly, the SNB won’t need to have …
5th October 2022
If interest rates rise from 2.25% to 5.00%, as we now expect, we think the economy will suffer a deeper recession involving a 2% peak-to-trough fall in real GDP. That may result in the unemployment rate rising from 3.6% in July to 5.5% and may …
Continued worries about inflation mean the central bank (BoK) in Korea still has further work to do, and we are sticking with our view that the BoK will raise interest rates by at least 50bp between now and the end of the year. But with inflation likely …
The Reserve Bank of New Zealand hiked the overnight cash rate by 50bp to 3.5% as widely anticipated and the hawkish tone of the statement is consistent with our forecast that rates will peak at 4.5% by mid-2023. However, that aggressive tightening will …
An upward revision to our 10-year Treasury yield forecast and a widening in spreads have led us to upgrade our mortgage rate forecasts. We now expect the 30-year fixed rate will stay close to 6.5% for the remainder of the year before falling to 5% by …
4th October 2022
The scale of the increase in mortgage rates means that a large rise in mortgage arrears and repossessions is probably unavoidable. But substantial capital buffers mean lenders will be able to absorb the resulting losses without causing lasting problems …
Falls in Paris Centre West vacancy are expected to support a further pick-up in prime office rents in the second half of the year. But this will be short-lived, with the deteriorating outlook for employment growth set to weigh on occupier demand and …
Looser-than-expected fiscal policy following the mini-Budget means we now expect Bank Rate and gilt yields to be higher. All else equal, that would push the spread between the 10-year yield and all-property equivalent yields to its lowest since the GFC. …
The Reserve Bank of Australia slowed the pace of monetary tightening by delivering a smaller 25bp rate hike to 2.60% this month, but we still expect rates to peak a touch higher than most anticipate. And the financial markets are now coming round to our …
The latest manufacturing PMIs suggest that global industry has already weakened significantly and is set to perform worse in the coming months as high inflation and rising interest rates take their toll. While higher commodity prices caused price …
3rd October 2022
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 years. …
Industrial metals prices rose following the release of the latest survey data on China’s manufacturing sector. But the average of the headline PMIs continued to decline, as did the average of the forward-looking export order PMIs. This suggests to us, at …
30th September 2022
If the UK government’s “new era of fiscal policy” boosts GDP growth as planned, the UK’s long-term prospects will be much improved. But the action announced so far will not achieve this. It is even possible that, by denting the UK’s fiscal credibility, …
With no end in sight to China’s zero-COVID policy, the dearth of Chinese tourists visiting Europe will suppress a key revenue source for luxury retailers and poses a downside risk to our already-weak prime retail rental forecasts. And even though …
Central banks in Mexico and Colombia delivered further large interest rates hikes yesterday, of 75bp and 100bp respectively, and the backdrop of strong inflation pressures and tighter external financing conditions means that a bit more tightening lies …
The RBI hiked the repo rate by another 50bp (to 5.90%) today and the communications give a clear steer that the tightening cycle still has further to run. But with inflation set to slow, we think the central bank will now revert to hikes of 25bp …
With the winter fast approaching and concern about natural gas supply from Russia looming large, we reviewed the relationship between temperature and gas demand in the EU. The key point is that the temperature, whilst important, will be a weaker driver of …
We now expect lower supply of grains over the coming months as the Russia-Ukraine war continues to reduce Black Sea exports and extreme weather conditions mean global stocks have been drawn down. We have therefore revised up our end-year price forecasts, …
29th September 2022
Higher interest rates are already having an impact in CEE and a large part of the tightening of monetary conditions has yet to feed through. This will add to the headwinds facing growth in the coming quarters. Central banks have raised interest rates by …
We held a Drop-In on Tuesday to discuss the growing turbulence in FX markets and our views on the major currencies. This Update recaps the key questions we addressed in the Drop-In and answers several of the questions that we received but didn’t have …
Thermal coal prices in Asia rose to record highs in early September and have only fallen back slightly since. This was despite no major supply disruptions and in contrast to falls in other energy prices in Asia and Europe. It appears that demand for coal …
Bank Indonesia (BI) has been stepping up its efforts to support the rupiah in recent weeks, and we think further FX intervention and interest rate hikes are likely over the coming months as the central bank continues to try and defend the currency. …
The surge in energy prices this year (particularly gas) will have the biggest impact on Central and Eastern Europe (CEE) and push economies there into recession. There will be an impact in the rest of the emerging world but we expect it to be much smaller …
The UK financial crisis is a self-inflicted wound, but the sell-off in gilts underlines that there is less fiscal room for manoeuvre than there was when policy rates were close to zero. We think the ECB is likely to resume asset purchases too before …
28th September 2022
The Bank of Thailand (BoT) hiked interest rates today by a further 25bp (to 1.0%) and appears committed to raising interest rates gradually over the coming months. But with inflation elevated and the currency coming under further downward pressure against …
While the market reaction to the Italian election was muted, we think that the worsening economic outlook and concerns about debt sustainability will result in increased risk aversion toward Italian property assets. This means that, after a strong H1, …
With developed market (DM) central banks clearly in hawkish moods, we have revised up our forecasts for the yields of most 10-year DM government bonds. We no longer expect these yields, in general, to fall much over the remainder of this year. But we …
Although the latest sell-off in Gilts has been driven in part by expectations for higher interest rates, the accompanying fall in sterling suggests the risk premia attached to UK assets has risen. In our view, in the absence of a concerted attempt to …
27th September 2022
In response to the government’s loose fiscal plans and the resulting weakening in the pound, we now think that interest rates will rise from 2.25% now to a peak of 5.00% (4.00% previously). Rates at those levels make the housing market look very …
The UK government has not been alone in announcing new fiscal measures in recent days. The French government’s plan to stabilise the budget deficit at 5% of GDP next year looks optimistic, given its overly rosy growth forecasts and continued support for …
After raising its base rate by a larger-than-expected 125bp, to 13.00%, Hungary’s central bank (MNB) announced today that it has now ended its rate hiking cycle and we now forecast the base rate to be left on hold over the coming year. Even so, with …
The rise in market interest rates that has already happened will push up mortgage rates to at least 6% and reduce the size of loans that lenders can offer. The resulting drop in buying power makes a significant drop in house prices inevitable. Many …
The Central Bank of Nigeria (CBN) upped the pace of its tightening cycle today, increasing the benchmark rate by 150bp, to 15.50%, as officials have become increasingly concerned about sky-high inflation and mounting pressure on the currency. We now think …
It is now clear that central banks in advanced economies will raise interest rates even further than our above-consensus forecasts had implied, making the current tightening cycle the most aggressive in three decades. While this may be necessary to tame …
A strong US dollar is a threat to countries with lots of foreign currency debt and/or inflation problems, and is putting pressure on central banks across the region to raise interest rates more aggressively. We recently changed our policy rate …
Long-term fiscal sustainability is governed by what happens to a combination of economic growth, government borrowing costs and the primary budget balance. Since we’re sceptical that the tax cuts announced by Kwasi Kwarteng last week will boost …
The Gulf countries have benefitted enormously from higher energy prices and will run large current account surpluses. But external positions have deteriorated in other parts of the region. That, alongside tighter external financing conditions, has led to …
Investors have revised up how far they expect the Bank of England to raise interest rates as they continue to digest the tax cuts announced on Friday. This Update examines what the impact on the housing market would be, and whether that could prevent …
The surge in bond yields that has accompanied the ratcheting up of rate expectations in the US has soured the outlook for the stock market there in three key ways. First, by raising the required return from equities. Second, by undermining the economic …
23rd September 2022
Another month, another batch of PMIs pointing to Q3 GDP having fallen in major advanced economies. Yet despite the deterioration in real activity, as well as some further signs that pipeline price pressures are easing, September’s PMIs will do little to …
The Chancellor took a rare, targeted approach to Stamp Duty in today’s vast package of tax cuts. The changes will remove the tax altogether for large numbers of buyers while retaining most of the revenue. But the bigger near-term implication of fiscal …
Capital inflows into EMs have dropped sharply over the past few weeks as the US dollar has been on a tear. External financing is likely to remain challenging in this environment, posing a threat to EMs whose current account deficits have widened sharply, …
The Chancellor claimed that this was a plan for growth. But unless the Chancellor’s gamble pays off and the government’s fiscal policy boosts GDP growth by 0.5-1.0ppts per annum, the risk is that once the near-term boost to GDP fades, the legacy of the …
With the Fed still clearly in a hawkish mood, we have revised up our forecasts for the 10-year Treasury yield. We now expect it to be around its current level at the end of this year, in contrast with our previous forecast of a decline. But we still …
The latest data out of Nigeria suggest that economic pain is mounting under the weight of troubles in the key oil sector as well as the country’s unorthodox FX policies. With little reprieve on the horizon, we expect GDP growth of 2.3% this year, well …
With Italy’s general election scheduled to take place this weekend, this Update answers six key questions about what to expect in the days and months following the vote. 1. When will we know the election results? The first exit polls will be released …
22nd September 2022
Direct FX intervention by the ECB to support the euro is not out of the question, but we think that it would take a much bigger depreciation of the single currency to force policymakers to act. The news today that policymakers in Japan have intervened …
The improvement in government budget positions across Latin America over the past year or so has been driven in large part by temporary factors and is likely to reverse before long. As things stand, this is not a major concern for public finances in …
The strength and breadth of inflationary pressure in the euro-zone, together with policymakers’ determination to bring inflation down, has prompted us to revise our interest rate forecasts up. We now forecast the ECB’s deposit rate to peak at 3% even …
The hawkish 50 basis point (bps) hike in interest rates today, from 1.75% to 2.25%, was partly driven by the government’s plans to dramatically loosen fiscal policy and supports our view that the Bank of England will raise rates to a peak of 4.00% and …
