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US Labour Market Data

A stronger than expected result for US payrolls numbers on Friday sent the dollar into the weekend on the front foot. The report said that 339,000 jobs were added in the month of May, which was 30% higher than analysts had expected. The print is a double-edged sword for the US economy, with strong job creation meaning that consumption is still strong and therefore inflation is likely to linger for longer. A high employment rate also leads to faster wage increases and with wage growth making up a part of “core inflation”, there is a greater probability that increased costs become embedded into goods and services, because this is an input cost that doesn’t come back down again. The Federal Reserve had been of the mind that they’d put a pause on the rate hiking cycle until after the summer, but in broadcasting those thoughts to the market, they may have shot themselves in the foot a little; as they may want to consider a July hike on the back of this news, but won’t want to be accused of being unreliable when it comes to telegraphing their intentions. Interest rates in the US sit at 5.25%, with major banks expecting another couple of hikes to come by the end of the year – though if they get one in before the summer, we could see the terminal rate start with a 6.

UK Housing Market

Rates in the UK are also a bone of contention, with the knock-on effects of uncertainty over how far they could rise pushing banks to withdraw thousands of mortgage deals over the weekend: Santander withdrew a number of products, whilst TSB has stopped offering ten-year fixed deals altogether. Other banks and building societies have said that they will be updating their products and prices this week. This comes hot on the heels of other property news, where house prices fell at their fastest pace in more than a decade, falling by 3.4% in May. The pace of decline comes squarely because of affordability, which will have been dealt a further blow by this news from the banks. Interestingly, the average rate term in the UK is 3.5 years, which means that the recent rate spiral will still take plenty of time to be fully felt across the market. In countries where the average term is a lot shorter, such as Sweden, we’re seeing much faster price declines, having already fallen more than 15% over the last 18 months. Capital Economics are forecasting UK house prices to fall a further 8% from where they are now.