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
Asset Allocation Update US equities, bonds and earnings recessions We doubt the recent outperformance of equities vis-à-vis government bonds in the US will persist over the next three to six months, given our view that the economy there is heading for a mild... 25th November 2022 · 5 mins read
Canada Economics Weekly Trigger warning Research from the Bank of Canada suggests that half of all variable-rate, fixed-payment mortgage holders have now hit their so-called trigger rates, which means their payments will rise. This is one... 25th November 2022
Canada Chart Book Construction the next shoe to drop The big surprise so far this year has been the resilience of housing starts which, despite falling from their 10-month high of 300,000 annualised in September, remained at a relatively strong 267,000... 24th November 2022
US Housing Market Update How will banks respond to falling house prices? Banks are likely to tighten credit conditions over the next year to protect themselves from house price falls. But their more cautious approach to lending in this cycle means we don’t think they will... 23rd November 2022
Capital Daily Still no sign of an earnings recession & why it matters for equities Our view that most stock markets haven’t reached a bottom yet is driven by a conviction that the world economy is slipping into a recession. But if we’re wrong about the outlook for global growth... 23rd November 2022
US Housing Market Data Response New Home Sales (Oct.) New home sales have levelled off in recent months, but leading indicators support our view that sales will fall a little further by the end of the year. Looking ahead, we expect stretched... 23rd November 2022
US Economics Weekly Recession odds rising Despite the resilience evident in the latest round of hard data, our recession tracker models suggest the odds of a downturn next year are still rising. 23rd November 2022
US Employment Report Preview Employment growth easing; wage growth slowing We estimate that non-farm payroll employment increased by a more modest 175,000 in November, although that should be sufficient to leave the unemployment rate unchanged at 3.7%. 23rd November 2022
US Data Response Durable Goods (Oct.) The solid 1.0% m/m rise in durable goods orders in October indicates that business equipment investment continues to hold up reasonably well in the face of higher borrowing costs, helped by a boost to... 23rd November 2022
Canada Economics Update What will the Bank make of the October CPI data? Although the annual rates of core inflation increased in October, we suspect the Bank of Canada will point to the declines in the 3-month annualised rates of CPI-trim and CPI-median to justify... 22nd November 2022
Capital Daily Slowing global growth likely to weigh more on equities than oil Supply constraints in key oil producers lead us to believe that the price of oil and US equity indices will diverge if, as we expect, the global economy slips into recession. 22nd November 2022
US Commercial Property Chart Book Capital value falls set to accelerate The sharp rise in Treasury yields this year has finally begun to feed through to the property data. Q3 investment activity fell by more than 20% on both a q/q and y/y basis, with loan originations... 22nd November 2022
US Chart Book Economic resilience won’t stop inflation falling The resilience of consumer spending is keeping hopes of a soft landing alive. Although GDP growth looks to have slowed in the fourth quarter, and most leading indicators of recession are flashing red... 22nd November 2022
Canada Data Response Retail Sales (Sep.) The small fall in retail sales volumes in September appears to have been reversed in October but, more generally, sales volumes have been little changed for the past six months and the low leve of... 22nd November 2022
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
