Preview of Friday's (31 March) key economic releases

UK Nationwide House Price Survey

Home ownership in the UK is a national aspiration that is probably stronger than in any other developed economy. A consequence of this is that mortgage costs and house price movements have a bigger impact on consumer behaviour than they do in many of the UK’s peers. Tomorrow we get the latest house price data from the Nationwide Building Society, where expectations are for the report to show house prices declining at a quickening pace, showing a fall of -2.2% on the year in March. This is double the -1.1% decline seen in February and which itself was the first time growth slipped into negative territory since June 2020.

The fall in house prices is very much mirroring the decline being seen in mortgage applications and approvals, the rising cost of borrowing making mortgages – and concomitantly home ownership – increasingly expensive. A key factor behind this fall is attributable to the turbulence seen in financial markets last September, when the fallout from the mini-budget saw yields – and concomitantly mortgage rates – spike higher. But even though financial conditions have now normalised, housing market activity since then has remained subdued, likely reflecting an on-going lack of consumer confidence as well as the increasing financial pressure household budgets are under. And with real earnings likely to fall further as inflation continues to outpace wages growth, and interest rates remain on an upwards trajectory, the outlook for the housing market looks difficult.

Further downwards pressure on house prices can be expected this year as shorter-term fixed rate mortgages, taken out before the Bank of England started to hike rates, mature and borrowers find they are required to re-mortgage at interest rates some 300-400bps higher than previously. Moreover, around 1.7mn households are on tracker mortgages that are exposed immediately to any changes in Bank rate. Taken together, the proportion of disposable income taken up by monthly mortgage payments looks certain to continue to rise. Not only does this leave the outlook for the housing sector looking difficult, but it will continue to hammer an increasingly large dent in both consumer confidence and overall demand.

Euro-zone CPI numbers

Friday brings the March CPI print for the euro-zone, where the annual headline rate is forecast to fall from 8.5% to 7.1%. However, this large fall is not necessarily indicative of a sudden easing in inflationary pressures; rather it is largely attributable to favourable base effects within the energy components of the CPI basket. In March last year, energy prices rose strongly following the Russian invasion of Ukraine, driving up transport and household fuel bills by 15.6% and 9.9% respectively over the month. However, global energy prices have fallen substantially since then, to the extent that both categories are expected to show reductions this month compared to February. These falls, when aggregated with the large jumps seen March 2022 now falling out of the calculations, are expected to deliver a circa 1.5% downwards push on headline inflation. This misleading picture of inflation should be highlighted by the annual core reading, which is forecast to move in the opposite direction, rising from 5.6% to 5.7%, a new record high. And this figure will not include the sharp rises that are being seen in food prices, which are excluded from the core calculation, but which are continuing to rise strongly.

For the ECB the picture is likely to remain concerning, a fact that has already been elaborated on by a number of Governing Council members, including the President of the ECB Christine Lagarde herself, who only last week said that the ECB will continue to raise interest rates into the summer in order to bring inflation back to target, the caveat to this being that financial stability in the euro-zone is assured. With fears over the banking crisis now starting to ease it would appear this assurance is currently being provided, for now at least. This removes a potential impediment to raising interest rates further and leaves the Governing Council in the position of being able to continue to tighten policy until they see evidence of a sustained reversal in inflationary pressures. However, the fact that the headline and core readings are pulling in opposite directions will fuel the ever-present intellectual battle between the ‘hawks’ and the ‘doves’ on the Governing Council. The ‘hawks’ will argue that underlying price growth demands a robust monetary response; the ‘doves’ will claim that it is the overall headline measure that is being targeted and which is calling for a more cautious approach.

The March CPI print from Spain highlighted clearly the dilemma the ECB is facing. While the headline annual rate for March fell from 6.0% to 3.3%, predicated almost entirely on falling energy prices, the core rate retreated by only 0.1%, from 7.6% to 7.5%. The level of interest rate required to bring the headline rate back to its 2% target would potentially allow the core rate to accelerate unchecked. Going forward, with Largarde herself positioning herself on the side of the ‘hawks’, the stubbornness in core CPI to move lower looks certain to see the ECB continuing to tighten policy into the summer.

US PCE Deflator

Friday also brings the PCE deflator print from the US, the inflation indicator most closely watched by the Fed at the moment. This reading was clearly not available for the March FOMC reading, when the Committee voted to hike interest rates by a further 25bps. But the fact they opted to tighten rates anyway points to the CPI and PPI numbers – both of which were available to the FOMC and are close analogues to the PCE number – suggesting that Friday’s number will come in at a level that remains uncomfortably strong for the Fed.

Forecasts are for the PCE are to print at 0.4%, or 4.7% on an annualised basis. Even though this will be a slowdown from the 0.6% reading seen in February, an annual rate of 4.7% is still more than double the Fed’s 2% inflation target. And adding to the Fed’s pain is the fact that inflationary pressures are declining painfully slowly. But it is probably now the case that the numbers have to be read in the context of the US economy being at the start of a disinflationary cycle. Economic indicators are already suggesting a slowing in economic activity and while inflationary pressures are receding only slowly, they are at least moving in the right direction. This suggests that inflation will move lower going forward. Accordingly, last week’s FOMC decision to hike rates by just 25bps reflects a Fed that remains alert to the inflation threat, but which is also willing to remain patient and wait for the medicine it has delivered so far to take effect.