UK Property Market Lacks Spring Bounce but A Crash Is Unlikely

Economic

Summary:

It's reasonable to expect a fall in nominal house prices of at least 10%. That's a chunky fall – and a welcome one.

April is supposed to herald the start of a British ritual: the house-buying season. Traditionally, it is the time when demand for homes picks up and the property supplements in the weekend papers are full of suggestions for sellers bidding to attract the interest of buyers.

But not this year. According to the latest bulletin from the Bank of England, repayments on existing mortgages in April were £1.4bn higher than new loans. This is unusual. Apart from during lockdown, it was the lowest figure since records began in 1993. The number of new mortgage approvals – loans agreed but not yet advanced – fell in April and were well below the average in the five years leading up to the pandemic.

There are a number of reasons for the lack of spring bounce in the property market. The availability of mortgages at ultra-low rates meant prices soared in the two years after the start of the pandemic, making it harder for new buyers to afford their first home. The inevitable pause for breath then happened to coincide with rising interest rates and a slowdown in the economy.

These two factors – rising borrowing costs and sluggish growth – will continue to affect the market over the coming months. The Bank has raised interest rates from 0.1% to 4.5% in the space of 18 months – and looks certain to raise them further given the failure of inflation to fall as quickly as expected. Financial markets are pricing in three more quarter-point increases from Threadneedle Street by the end of the year. Mortgage lenders have responded to higher rates by raising mortgage rates and pulling some of their more attractive products.

So far, falls in house prices have been modest, with the average cost of a home down 3.4% on a year ago, according to the Nationwide building society. Even so, this was the biggest annual decline recorded since 2009, during the global financial crisis – and there is more to come. Activity in the housing market is likely to remain subdued for at least the rest of this year, and perhaps longer if – as seems probable – the first cuts in interest rates from the Bank don't materialise until well into 2024.

A full-blown housing market crash of the sort seen in the early 1990s looks unlikely, though. Net migration stood at more than 600,000 last year, and that will underpin demand. What's more, the low level of unemployment means there are few forced sellers. The five-year slump in the first half of the 90s was caused by the dovetailing of 15% interest rates and a jobless total in excess of 3 million. The economy may still fall into recession this year as a result of interest rates staying higher for longer than previously envisaged, but there is no immediate prospect of a wave of newly unemployed owner-occupiers having to sell up.

All that said, it would be reasonable to expect a peak-to-trough fall in nominal house prices of at least 10%, which would amount to a real terms fall of more than 20% once inflation is accounted for. That's a chunky fall. It's also a welcome one.

Even though it's been said before, it's worth repeating that the UK is a country wrongly convinced that inflation-busting increases in house prices are a good thing. They are not. The flip side to over-investment in bricks and mortar is under-investment in other more productive uses of capital. The regular booms in the economy driven by consumers extracting and spending equity from the rising value of their homes are invariably followed by busts.

Those who benefit from rising prices tend to be better off people in older age groups. Those who lose out tend to be two over-lapping categories: renters and the young. Anybody under 35 who is saving up for a deposit on a flat will be glad of a drop in house prices.

Housing is likely to be a central issue at the next general election, with the two main parties each backing a different side. The Conservatives – who have all but dropped housebuilding targets – are lining up behind existing owner-occupiers. Labour has said it would impose targets and be prepared to build on parts of the green belt. It is also drawing up plans that would force landowners to sell plots of land for less than their potential market price in an attempt to stop land hoarding and so increase the supply of new homes.

Even if Labour actually goes ahead with its plan, it looks certain to be challenged in the courts. Currently, if a council wants to compulsory purchase a piece of farmland for housing development it has to pay a "hope" value. That's the value not of the farmland but of the value of the farmland adjusted for planning permission, which is substantially higher.

What is certain is that Labour's approach makes more sense than the government's. The current levels of housebuilding are incompatible with a rising population, and increasing the supply of homes requires reform of the planning system.

The politics are also interesting. Onward, a right of centre thinktank, produced a report last week in which it said the current crop of 25- to 40-year-olds was the first not to become more rightwing as it grew older, and housing is one reason for this.

Current Conservative housing policy will help those in their 50s and 60s who have already benefited from house-price inflation rather than those in their 20s and 30s struggling to get on the housing ladder. If Labour has concluded this is dumb economics and dumb politics, it is right on both counts.

Source: The Guardian

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Warren Takunda

In response to mounting concerns over a potential new supply glut and the recent decline in oil prices towards the $70 per barrel mark, OPEC and its allies are reportedly engaged in discussions regarding the deepening of oil production cuts. According to reliable sources, these cuts could amount to as much as 1 million barrels per day (bpd), supplementing the existing cuts of 2 million bpd and voluntary cuts of 1.6 million bpd that were unexpectedly announced in April.

The Organization of the Petroleum Exporting Countries (OPEC) and its allies, collectively known as OPEC+, collectively account for approximately 40 percent of global crude oil production. Therefore, any policy decisions made by this alliance can have a significant impact on oil prices worldwide.

While OPEC+ ministers are scheduled to gather in Vienna at 2 pm on Sunday to discuss various options, including potential production cuts, OPEC ministers will convene at 11 am on Saturday to lay the groundwork for these discussions.

If the proposed cuts are approved, they would result in a total reduction of 4.66 million bpd, which represents approximately 4.5 percent of global demand. This move comes as Western nations accuse OPEC of manipulating oil prices and thereby impeding global economic growth due to high energy costs. In response, OPEC officials and insiders argue that the West's extensive money-printing practices in recent years have contributed to inflation, necessitating actions to safeguard the value of oil exports.

Iraq's Oil Minister Hayan Abdel-Ghani emphasized their commitment to achieving global oil market stability, stating, "We will never hesitate to take any decision to achieve more balance and stability (on) the global oil market."

The surprise announcement of production cuts in April initially drove oil prices up by approximately $9 per barrel to exceed $87. However, market concerns over global economic growth and demand have since exerted downward pressure on prices. As of Friday, the international benchmark Brent crude was trading around $76 per barrel.

Saudi Arabia's Energy Minister Prince Abdulaziz previously warned investors who were shorting the oil price to "watch out," which many interpreted as a signal for potential additional supply cuts. Conversely, Russian Deputy Prime Minister Alexander Novak indicated that he did not anticipate any further measures from OPEC+ during the Vienna meeting, according to Russian media reports.

The International Energy Agency predicts a potential increase in global oil demand in the second half of 2023, which could help bolster oil prices. However, analysts at JP Morgan have criticized OPEC for not responding quickly enough to adjust supply levels in light of substantial US fuel output.

In a note, JP Morgan analysts stated, "Demand growth continues to be robust. Rather, there is simply too much supply... The alliance waited too long to reduce supply. The alliance - or at least some members - would likely need to cut more."

Analysts at Rapidan Energy Group estimate a 40 percent likelihood of further production cuts, emphasizing the ministers' determination to prevent a repeat of the 2008 scenario. During that period, a sudden collapse in global economic and financial stability caused crude prices to plummet from over $140 to $35 per barrel within six months.

As the OPEC+ meetings unfold in Vienna, market participants will closely monitor the decisions and announcements made by the alliance. The potential deepening of production cuts holds the key to rebalancing the global oil market and stabilizing oil prices in the face of prevailing concerns of oversupply.

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Cohen

OPEC+ members Saudi Arabia, the UAE, Iraq, Kuwait, Oman and Algeria will extend their voluntary oil production cuts until the end of 2024 as economic growth concerns weigh on the outlook for crude demand.

Saudi Arabia, the world's largest crude exporter, will make an additional voluntary output cut of 1 million barrels per day in July, which could be extended if required, the kingdom's energy minister said during a press conference after Sunday's OPEC+ meeting.

"We continue to set the example of how much one needs to be transparent in order to achieve the most … dominant and more important priorities, which is seeking stability and sustainability," Prince Abdulaziz bin Salman said.

The UAE, OPEC's third-largest producer, will have its voluntary cut of 144,000 bpd in place until the end of December 2024.

This is "a precautionary measure, in coordination with the countries participating in the OPEC+ agreement, which had previously announced voluntary cuts in April", Suhail Al Mazrouei, the UAE's Minister of Energy and Infrastructure, said on Twitter.

"This voluntary cut will be from the required production level," Mr Al Mazrouei said.

Russia will also extend its voluntary output cut of 500,000 bpd until the end of next year.

In a separate statement on Sunday, the OPEC+ alliance of 23 oil-producing countries said it set a new production target of 40.46 million barrels per day for next year.

The decision was taken "in light of the continued commitment … to achieve and sustain a stable oil market, and to provide long-term guidance for the market, and in line with the successful approach of being precautious, proactive, and pre-emptive", OPEC+ said.

The group will hold its next meeting on November 26 in Vienna.

The announcement comes as Brent, the benchmark for two thirds of the world's oil, lost about 11 per cent of its value this year on weak economic growth in the US and China – the two top oil-consuming nations.

Brent settled 2.49 per cent higher at $76.13 a barrel on Friday after the US Senate passed a debt ceiling agreement, averting what would have been a first-ever default.

West Texas Intermediate, the gauge that tracks US crude, was up 2.34 per cent at $71.74 a barrel.

The international benchmark crossed $85 a barrel in April after some OPEC+ producers surprised markets by announcing combined voluntary output cuts of 1.16 million barrels per day from May until the end of the year.

The move took the group's total production curbs to 3.66 million bpd, or 3.7 per cent of global demand.

At an event in Qatar, Saudi Arabia's Energy Minister told oil market short sellers to "watch out" amid volatility in the market.

"I keep advising them that they will be 'ouching'. They did 'ouch' in April," Prince Abdulaziz bin Salman said.

Short sellers strategically position themselves to make a profit if prices decline, by selling borrowed assets in the hope of repurchasing them at a lower price.

The Saudi minister's comments helped to lift prices before a sudden turnaround after Russia's Deputy Prime Minister, Alexander Novak said OPEC+ was likely to stick to existing production targets at their meeting.

Traders are looking for signs of falling Russian exports after the country extended its output cut of 500,000 bpd until the end of the year.

Russian exports surged to 8.3 million bpd in April, the highest since Moscow's invasion of Ukraine last year, the International Energy Agency said in its latest oil market report.

The agency, which attributed the rise in exports to higher production volumes, said that Russia did not adhere to the output curbs.

Swiss lender UBS said the discrepancy between Russia's stated production cuts and resilient seaborne exports may be due to changes in pipeline exports, domestic oil demand and exports of refined products.

The IEA has predicted that global crude demand will hit record levels this year on the back of an economic recovery in China, the world's second-largest economy and top crude importer.

But economic growth in the Asian country has been largely uneven since it lifted Covid-19 restrictions earlier this year.

"The non-synchronised recovery in Chinese economic growth is perhaps the biggest challenge for the oil market," Energy Aspects, a London-based consultancy, said.

"Not all sectors have risen and definitely not at the same pace."

Oil prices fell more than 2 per cent in a single session last week after a key gauge of China's manufacturing sector came in lower than market expectations.

China's manufacturing purchasing managers' index (PMI) for May fell to 48.8 from 49.2 in April, according to data from the National Bureau of Statistics, its lowest in five months.

It marked the second consecutive reading below the 50-point mark that separates expansion from contraction.

Analysts and oil industry executives expect the market to tighten in the second half of 2023 on higher Asian consumption and lower output from OPEC+ members.

"This is primarily the winter effect in Asia … but also a strong view that we still have that pre-Covid demand yet to come," Mike Muller, head of Vitol Asia, said at an event in Dubai last month.

There are a lot of "green shoots" for oil bulls in the summer amid production cuts and projections of strong crude demand growth in China, Energy Aspects said.

"But, fundamentals are not going to drive crude's flat price higher until strong inventory draws are blindingly obvious," the consultancy said.

Source: The National News

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Thomas

Economic

China's services activity picked up in May, a private-sector survey showed on Monday, as a rise in new orders shored up a consumption-led economic recovery in the second quarter.

The Caixin/S&P Global services purchasing managers' index (PMI) rose to 57.1 in May from 56.4 in April. The 50-point mark separates expansion from contraction in activity.

The reading contrasts with the official PMI released last week that showed a slower pace of expansion in the services sector.

Some economists warn the pent-up demand for in-person services may fade due to slowing income growth and mounting unemployment pressures, raising headaches for policymakers already struggling with weak foreign demand and an uneven post-COVID recovery.

The Caixin survey showed service companies reported a rise in new business last month when the first May Day holiday following China's COVID reopening boosted orders for hotels, restaurants and travel agencies.

Increased workloads led firms to grow headcount for the fourth consecutive month, although the speed of job creation slowed.

Average prices charged by service companies rose by the fastest since February 2022.

The survey also indicated that capacity pressures persisted, as highlighted by sustained growth in outstanding business.

Caixin/S&P's composite PMI, which includes both manufacturing and services activity, picked up to 55.6 from 53.6 in April, marking the quickest expansion since December 2020.

Even if firms in the services sector remained upbeat with business activity over the next 12 months, the level of optimism eased to the lowest since December 2022 when Beijing lifted anti-virus curbs.

China's economy rebounded faster than expected in the first quarter but lost momentum at the beginning of the second quarter as April data broadly undershot forecasts.

Factory activity in May shrank faster than expected on weakening demand, reinforcing the unbalanced feature in the economic recovery.

"In general, it remains a prominent feature of the Chinese economy that the services sector is stronger than manufacturing," said Wang Zhe, senior economist at Caixin Insight Group.

"This divergence highlights that economic growth is lacking internal drive and market entities lack sufficient confidence, underscoring the importance of expanding and restoring demand," he said.

Source: The Edge Malaysia

To stay updated on all economic events of today, please check out our Economic calendar

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Warren Takunda

Traders' Opinions

As the month of May draws to a close, Euro bulls find themselves nursing wounds inflicted by a 3% decline against the US dollar, marking the Euro's worst performance in a year. However, financial analysts are eagerly looking ahead to a potential relief in the form of a pause by the US Federal Reserve, which could provide the much-needed catalyst for a Euro rebound.

The Euro's recent struggles can be attributed to a combination of factors, including concerns about the economic recovery in the Eurozone, political uncertainties, and the strength of the US dollar. Investors have been increasingly cautious, opting for safe-haven assets such as the greenback, leading to a downward pressure on the Euro.

Despite these challenges, prominent financial institutions like Paribas and Lombard Odier are maintaining an optimistic stance on the Euro's future prospects. They anticipate the Euro to gain momentum and push above the $1.10 level, based on several key factors.

Firstly, the potential for a pause in the Federal Reserve's tightening cycle has become a significant driver for the Euro's rebound. The Fed's recent signals of a more cautious approach to interest rate hikes have eased concerns about a strengthening US dollar, thus creating an environment conducive for Euro bulls to regain their confidence.

Moreover, Paribas and Lombard Odier point to underlying strengths in the Eurozone economy that could contribute to its recovery. Despite some recent economic setbacks, the Eurozone continues to show resilience, supported by robust manufacturing activity, steady employment rates, and improving business sentiment. These factors, combined with potential fiscal stimulus measures, may act as a springboard for the Euro's resurgence.

In addition, political developments within the Eurozone could also play a role in shaping the Euro's trajectory. With the resolution of certain political uncertainties and an increasing focus on unity and stability, market sentiment towards the Euro may experience a positive shift, potentially leading to increased demand and upward pressure on the currency.

While the road to recovery may not be without its challenges, the Euro bulls are finding solace in the belief that the worst may be behind them. However, it is essential to acknowledge the inherent uncertainties in the financial markets, which could affect the Euro's performance in the coming months.

In conclusion, after a challenging month marked by a 3% decline against the US dollar, Euro bulls are looking to a potential pause by the Federal Reserve as a catalyst for relief. Financial institutions such as Paribas and Lombard Odier maintain an optimistic outlook, anticipating a Euro rebound and a push above the $1.10 level. Factors such as a potential Fed pause, underlying strengths in the Eurozone economy, and positive political developments within the region provide the groundwork for a possible Euro recovery. Nevertheless, investors should remain vigilant and mindful of market uncertainties that may impact the currency's future performance.

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Devin

Commodity

Saudi Arabia's decision to deepen its crude oil production cuts, without matching contributions from its allies, underscores how the market is being skewed by a series of contradictory influences.

The world's biggest oil exporter said it will cut about 1 million barrels per day (bpd) in July, even though the rest of the OPEC+ group decided against any further joint action at its meeting in Vienna on Sunday.

It had been widely expected that OPEC+, which consists of the Organization of the Petroleum Exporting Countries and allies including Russia, would stand pat on output cuts at its weekend talks.

What was a surprise was Saudi Energy Minister Prince Abdulaziz bin Salman's revelation at a news conference that the kingdom would trim its production from about 10 million bpd in May to about 9 million bpd in July.

"We wanted to ice the cake. We always want to add suspense. We don't want people to try to predict what we do ... This market needs stabilisation," the minister said.

These comments represent just one of the contradictions in the current oil market.

The desire for a stable oil market is extremely difficult to reconcile with being unpredictable.

The very nature of being unpredictable detracts from stability, with market participants having to adjust to Saudi "surprises", or even the threat that one of the global oil market's key players is effectively a rogue actor.

If the aim of OPEC+ is stability, as opposed to defending a price level, then being unpredictable is probably the wrong way of achieving the goal.

The unexpected 1.16 million bpd supply cut OPEC+ agreed to at its April 2 meeting is an example of unpredictability undermining stability.

That move led to global benchmark Brent futures jumping as much as 8.4% higher when trading resumed, although the price only took a few weeks to slip back below the levels prior to the April 2 meeting.

The latest Saudi surprise also sent Brent higher, with the front-month contract gaining as much as 3.4% to $78.73 a barrel in early Asian trade on Monday.

But the risk is that the increase isn't sustained, largely as a result of another oil market contradiction.

Saudi Arabia's unilateral move to cut its output in July is a tacit admission that global oil demand isn't as strong as most analysts and groups such as the International Energy Agency (IEA) have been forecasting.

If demand was indeed as robust as had been predicted, the price of Brent would be able to hold above $75 a barrel with ease, and would likely be biased towards eyeing the $100 level predicted by some analysts.

Instead, Brent keeps slipping towards the $70 level, and it takes extraordinary actions, such as the Saudi solo cut, to keep a positive price bias going.

In effect, the oil market is still operating under the view that demand may be struggling a little currently, but will come roaring back in the second half of the year.

Second Half Optimism

Much of this optimism is built around expectations of sharply higher fuel consumption in China, the world's biggest oil importer, and to a lesser extent strong demand in India and other developing Asian nations.

The one factor that tends be ignored by the oil market is the role of prices and inventories in shaping Asia's crude oil import volumes.

China has shown in the past that if refiners believe that prices are rising too fast and too high, they will trim imports and turn to their plentiful stockpiles.

They will also seek out the cheapest global crudes available, and they are already doing so by buying as much Russian, Iranian and Venezuelan oil as possible.

It's another contradiction for the oil market to resolve as those three exporters are all under some form of Western sanctions.

This means effectively their oil is disconnected from the pricing of the rest of freely available and tradable crude grades.

A further contradiction is the possibility that even as Saudi Arabia cuts output in a move largely viewed as more about boosting prices than achieving stability, the state-controlled exporter Saudi Aramco will actually be cutting its prices.

Aramco releases its official selling prices (OSPs) around the fifth of each month, and a Reuters survey found that Asian refiners are expecting a cut of about $1 a barrel to the benchmark Arab Light grade for July-loading cargoes.

While output cuts are largely a political decision driven by the energy ministry, the OSP levels reflect Aramco's view of actual physical market conditions.

If the OSPs are trimmed for July, it adds to the view that demand is not living up to the bullish expectations that OPEC, the IEA and others are still espousing.

It may well be the case that the second half of this year sees a huge pick-up in crude oil demand.

But the contradiction that will have to be overcome is China's economy will need to shake off its so far lethargic recovery, and the rest of the global economy will somehow avoid the recession that most current indicators are pointing towards.

Source: Reuters

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FastBull Featured

Daily News

[Quick Facts]

1. OPEC and non-OPEC oil-producing countries reach an agreement on oil output cuts.

2. The Fed may raise rates by 50bps in July if no rate hikes this month.

3. Non-farm payrolls in May show the labor market remains strong.

4. U.S. debt crisis comes to an end.

[News Details]

OPEC and non-OPEC oil-producing countries reach an agreement on oil output cuts

OPEC and non-OPEC oil-producing countries held a meeting in Vienna on June 3-4, local time, reaching an agreement on oil output cuts after difficult talks. The oil output cut agreement already reached between OPEC and non-OPEC oil producers in 2023 will be extended to the end of the year, according to the statement issued after the meeting. Those countries agreed that OPEC and non-OPEC oil producers would adjust their daily crude oil production to 40.463 million barrels per day (bpd) from January 1, 2024, to December 31, 2024, which is a downward adjustment of about 1.4 million bpd compared with the current production.

The Fed may raise rates by 50bps in July if no rate hikes this month

Lawrence H. Summers, former U.S. Treasury Secretary, said the Federal Reserve should be open to raising its benchmark interest rate by 50 basis points in July if the central bank pauses its round of policy tightening this month. The overheated economy is once again the main risk the Fed needs to watch out for. Summers said the employment data in May released last Friday was generally strong. While the unemployment rate jumped to 3.7% from 3.4% in April, data from the household survey from which the jobless figures are drawn can be noisy, especially in May when schools let out.

Non-farm payrolls in May show labor market remains strong

The U.S. non-farm payrolls added 339,000 jobs in May, significantly exceeding market expectations, indicating that demand in the job market remains strong and that the marginal slowdown did not ultimately lead to a cooling of demand. Continued job growth shows that the market remains resilient.

Overall, it was a strong non-farm report on jobs. While the labor force, unemployment, and illegal immigration increased, the number of newly unemployed people decreased. It suggests that most of the newly unemployed people got jobs, so the unemployment rate was not driven up. The number of the re-unemployed (the unemployed who have worked before and who can be easily replaced) increased. This depends on how tough the policy is on illegal immigration. Perhaps the supply side will continue to improve, but this one-legged approach can not fully address the current imbalance in the job market.

U.S. debt crisis comes to an end

U.S. President Joe Biden signed a bill on the federal government's debt ceiling and budget on June 3, local time, making it official and temporarily preventing the U.S. government from falling into debt default. The bill suspends the debt ceiling until the beginning of 2025 and limits spending in 2024 and 2025. It was the 103rd adjustment of the debt ceiling since the end of World War II.

Biden's signing of the bill gives the Treasury permission to resume new debt issuance after a hiatus of several months, allowing the Treasury to resume its cash in hand to a more normal level. It's a replenishment process that could involve well over $1 trillion in new debt issuance and could have unintended consequences. For example: draining liquidity from the banking sector, raising short-term financing rates, and tightening the economy. At the same time, many economists believe the U.S. economy is headed for recession.