Weekly Update 2nd August 2024

As we wrap up the week and head into the weekend, I’m off for a much-needed haircut. I’ll be asking for a bit more off the top compared to the trim the BoE has done to interest rates…

BoE Base Rate Decision

In it’s August MPC meeting on Thursday, the BoE cut its bank rate by 25bps to 5%, matching the expectations of a small majority of market commentators. However, it did take a lot of us by surprise given the mixed bag of data on the table.

The MPC voted 5-4 to reduce the Bank Rate, the 5 in favour of the cut noting reduced external shock impacts (for example global supply chain disruption, energy price fluctuations etc. list not exhaustive), moderate inflation risks and indicators of declining wage and price pressures. They believed the restrictive monetary policy was still curbing economic activity, despite stronger than expected GPD and the softening of the labour market making it harder for people to find jobs. The 4 members that preferred to keep it the same, cited ongoing services inflation, strong GDP and high wage growth as signs of persistent inflationary pressure. They stressed the importance of maintain the current rate until more evidence showed otherwise.

They will exercise caution on lowering interest rates further because they want to be sure prices won’t start rising to quickly again combined with higher wages. Gov Andrew Bailey highlighted the economies recent strength could lead to higher inflation than expected. The Bank increased its GP forecast from 0.5% to 1.25% for this year. He stressed that they need to be careful not to cut rates too much or too quickly to avoid signalling that rapid rate cuts are coming.

Some market commentators feel this takes a rate cut off the table in September making it more likely to happen in November.

The other interesting part in the minutes was “There remained considerable uncertainty around statistics derived from the ONS Labour Force Survey, making it more difficult to gauge the underlying state of labour market activity. Based on a broad set of indicators, the MPC judged that the labour market continued to loosen but that it remained relatively tight by historical standards.” Which further supports the above cautious future approach.

Source: Bank Rate reduced to 5% - August 2024 | Bank of England

SONIA Swaps

Swaps have reacted well since the announcement. See the latest rates here - EURIBOR, SONIA, and Gilt Rates | Chatham Financial

The bigger question and conversations I’m seeing is why they have gone down if it was “priced in”.

When central banks cut rates, even if everyone expects it, people might feel more confident and less worried about risks. This can push swap rates down. The MPC might also hint at what they’ll do next, this can increase and decrease swap rates. Liquidity and demand dynamics can change, economic data and external factors can change, investor positioning can change and if the market expects the cut to aid the economy without causing inflation to go back up, this can push swaps down also.

But it’s mindful to take into account that while swaps are important, there are other factors to take into account that impacts the end rate a customer gets.. for example, lender pricing strategy, risk appetite, capital adequacy etc.

GBP/USD

Immediate reaction to the cut shows a decline against the dollar which was expected. See previous update that explains the rationale for this. GBP was the biggest mover out of the major currencies, down 0.5% after the announcement as traders and investors digest the news and adjust their positions. The bleeding appears to have stopped in the short term and now eyes move to the coming weeks and months data releases, market sentiment and economies of both the US and UK. In terms of BoE commentary / speeches and monetary policy impacting the pound, given Baileys cautious comments above it appears it could be these other factors that impact any significant movements is the pound.

Source Trading View

Mortgage Approvals (Source Bank of England)

Net mortgage approvals for house purchase dipped marginally but remain stable at 59.98K, down from 60.13K in May. Approvals for remortgage (excluding PT’s) decreased to 27.5K in June from 29.3K in May. For net mortgage lending to individuals, a slightly better story as this rose to ￡2.65bn in June form ￡1.3bn in May. Mortgage approvals is the number of mortgages lenders have agreed to, so intention to lend but deal not completed. This is a leading indicator of future borrowing activity and gives insight into the strength of the housing market. Mortgage lending refers to funds that are completed and drawn down and gives a more concrete view. The BoE monitors both approvals and lending to gauge the health of the housing market, they publish data on both regularly.

Source Money and Credit - June 2024 | Bank of England

Nielsen Report Weekly News Summary:

Other economic:

Deloitte survey has found that confidence among senior executives at some of the UK's biggest companies has increased after the Labour Party's general election victory. Overall, a net 23% of respondents were more positive about the outlook for their businesses now than they had been back in the spring - this is the fourth quarter in a row that sentiment has improved. Deloitte's CFO Survey | UK CFOs gear up for growth following the election | Deloitte UK

FCA has set out a package of measures designed to help strengthen the UK’s capital markets and position as a global financial centre. The regulator is also consulting on proposals for a new activity of operating a public offer platform. These platforms will offer an alternative route for companies to raise capital outside public markets including from retail investors. FCA sets out rules and proposals to build up UK wholesale markets | FCA

Federal Reserve policymakers have held interest rates for the eighth consecutive meeting. However, traders are betting on a 95% chance of a 25bps rate cut being announced in September 2024, with two further similar-sized cuts coming in November and December. ?

RICS' quarterly construction monitor has revealed activity in the industry in Q2 2024 remained flat. The Royal Institution of Chartered Surveyors pointed to financial constraints, planning issues and labour shortages as the key issues that are stifling growth. ?RICS Construction Monitor Q2 2024

Mortgages:

Paragon Bank research has found that 51% of mortgage intermediary firms are expanding, reflecting growing optimism among brokers. The group's Mortgage Intermediary Insight Report noted the percentage was up on the 38% quoted in its previous MIIR. In addition, the proportion of firms scaling back has fallen from 7% to 5% over the same period.

Zoopla has forecast that house prices will increase by 2% in 2024 after average house prices increased by 0.1% year-on-year to ￡265,000 in June 2024. House Price Index: July 2024 - Zoopla

Santander UK research has found that 67% of first-time buyers have bought properties in areas they have never been to. Additionally, despite moving to a new area, 40% spend less than two hours getting to know their neighbourhood before buying a home there. In response to the research findings the bank has teamed up with actor and TV presenter Ryan Thomas, to share his experience of moving to a new neighbourhood, with a new video series to help FTBs feel at home quickly. Two-thirds of recent first-time buyers bought in a neighbourhood they had never been to?before | Santander UK

Nationwide has reported that average house prices increased by 0.3% in July 2024 compared to June 2024 and by 2.1% year-on-year. This is the third month in a row that house prices have increased. House price growth edged up in July (nationwidehousepriceindex.co.uk)

Protection:

Bank of England has warned the life insurance industry that unless the industry improves the controls protecting pension savers it will introduce restrictions on assets being channelled overseas through reinsurance deals. Bank of England threatens curbs on use of 'funded reinsurance' | Reuters

Pensions & Investments:

Vanguard research has found that investors have saved around ￡77.4bn in fees in European domiciled funds since 2011 by opting for passive investments instead of actively managed funds. Subscribe to read (ft.com)

Fidelity has launched a crypto exchange-traded product for investors in the UK. Fidelity's Physical Bitcoin ETP listed on the London Stock Exchange on the 31st July 2024, with 0.35% ongoing charges. It is only available for professional investors to buy. ?Fidelity Physical Bitcoin ETP

Octopus Money research has found that access to financial advice for clients with lower investable assets is shrinking, as firms tend to focus more on clients with higher assets. The analysis found that 54% of advisers’ clients' books have under ￡100,000 of investable assets on average, but 75% of advisers say supporting these smaller portfolios is increasingly challenging. Further, 45% of financial advisers have redirected their focus to onboarding clients with higher assets in the past year, with another 45% planning to do so, potentially narrowing client access to advice. ?Access to advice 'shrinking' as firms focus on clients with higher assets | Money Marketing

Royal Mint has reported sales of gold and silver coins has risen 14% year-on-year in April 2023 to June 2024, as high net worth individuals look to avoid a possible future capital gains tax increase by the Government. ?UK investors look to silver and fractional coins as precious metals prices strengthen: The Royal Mint - IFA Magazine

ESG:

Daily Telegraph has reported that the number of homes installing solar panels fell to 63,000 in H1 2024 compared to 83,000 in H1 2023. Solar panel installations drop 25pc as energy prices fall (telegraph.co.uk)