Key events in developed markets next week

Housing data will be the key story in the US next week. Mortgage rates have surged in response to higher market interest rates, with the average 30Y fixed rate now above 5% having started the year at 3.3%. Coupled with the fact that house prices have risen more than 30% nationally since the start of the pandemic there are clear affordability issues for new potential buyers. Consequently, we suspect that home sales will soon start to top out and with construction having surged over the past 18 months, we sense that the housing market could soon switch from excess demand to one that is experiencing excess supply. With the Federal Reserve only now starting to raise rates and with consumer confidence being hurt by high inflation the risk of this sector experiencing price falls over the next year and becoming a drag on economic activity are undoubtedly growing.

In Canada, inflation is set to move even higher on rising energy costs and given the positive growth outlook from the Bank of Canada following its recent 50bp rate hike, we strongly suspect there will be another 50bp interest rate increase at the June 1st policy meeting.

UK retail sales slipped in February and we could see a further decline for March. The outlook for retailers is undoubtedly challenging, not least because consumer spending on services is essentially back to pre-virus levels, drawing resources away from goods after two years of high demand. At the same time, the sharp rise in household energy and petrol costs suggests consumer appetite for non-essentials will fall. Consumer confidence has already fallen close to the lows of March 2020 and the financial crisis. Taken together with the likely decline in health output now free Covid-19 testing has finished, we suspect second-quarter growth will come in modestly negative. The jury’s out on whether the economy will endure a technical recession, given that the large pool of household savings in UK bank accounts (and perhaps an increase in credit card borrowing) will dampen the fall in consumer spending.