The Cambridge Weekly – 5th June 2023

The Cambridge Weekly – 5th June 2023

Markets take good news in their stride

Last week, we noted how the absence of specifically good news meant markets reacted more negatively than expected to the relatively low probability of a US debt default. We pointed out that the more notable event of the week had been bond yields once again surging.

Last week, not only did we get a resolution to the US debt ceiling brinkmanship, but also the welcome news that inflation pressures across Europe were declining faster than expected, while the US jobs market remains paradoxically both vibrant and, at the same time, showing signs of slowing down (with unemployment going back up). Unsurprisingly stock markets staged a brief relief rally on the debt ceiling resolution, but began wobbling again when Chinese, US and European manufacturing sentiment data showed sure signs of contraction.

UK’s housing market under pressure

Britain’s housing market has fared reasonably well over the last year or so, all things considered. There was some price stagnation through the middle of 2022 (as shown by the flat mid-year performance of the UK house price index), and an almighty wobble following Liz Truss’s October mini-budget disaster, but neither of these were as bad as they could have been. Last year saw the sharpest rise in interest rates in a generation, while Britons’ spending power fell drastically at the same time thanks to surging inflation. This double whammy could have dragged demand (and hence prices) down with it – particularly given the UK’s stretched affordability metrics – but as of March, average UK house prices were 4.1% higher than a year before. The fallout from the mini-budget that rocked mortgages in the autumn proved short-term too, with lending and prices recovering in the following months.

The Eurozone’s inflation fight

Things turned out to be better in Europe than feared. In the run-up to last winter, the energy crisis was handled more efficiently than expected, which meant economic growth did not implode. Now, inflation numbers are coming down even more quickly across the continent than had been expected. German inflation fell to 6.3% in May, below the forecast figure of 6.8% and substantially lower than the previous month’s 7.6%. France, meanwhile, saw annual price increases drop to a rate of 6%. For the Eurozone as a whole (6.1% year-on-year), inflation is back to levels seen at the beginning of last year. So, all looks bright, if it wasn’t for the European Central Bank (ECB) having raised interest rates by 3.75% since last summer.