Housing Market and Leisure Sector continue to lead recovery ...
Nationwide House Prices
House prices increased at a rate of almost 6% in October according to the Nationwide House Price Index. Access to finance, a result of FLS and H2B have improved the willingness of buyers to step into the market. The housing market is up, up and away as our October review of the UK Housing market confirms.
Is there a boom in prospect? Robert Gardner, Nationwide's Chief Economist, points out that “while house price growth has picked up - prices remain 7% below their 2007 peak.” Houses are generally affordable - ‘typical mortgage servicing costs remain modest by historic standards thanks to the ultra-low level of interest rates. A typical mortgage payment for a first time buyer is currently equal to around 29% of take home pay, in line with the long term average.”
Well it won’t take long for the price lag to be wiped out, even on the Nationwide index. The “real cost of borrowing” is negative - borrowing rates are lower than asset price rises. The essential conditions for market expansion. We expect transactions to increase above one million this year, still well below the peak of 2007. No boom in prospect but a healthy recovery is in train, the house market is up, up and away on a sustainable growth path.
Service Sector Growth
The service sector continues to provide the back bone of growth in the economy, with growth accelerating to over 2% for the year as a whole. The leisure sector is now the fastest growing sector of the UK economy. Distribution, hotels and leisure have expanded at a rate of 4% in the year. Check out our Service Sector Update for November. Six slides to explain just what is happening in the UK economy.
Not the march of the makers, that’s for sure. The latest Markit/CIPS UK Manufacturing PMI® survey was released on Friday. The index slipped to 56.0 in October, down from a revised reading of 56.3 in September. “The UK manufacturing sector continued a strong third quarter performance into the final quarter of the year according to the summary”. Yet manufacturing growth in the third quarter was pretty flat. Nevertheless we still expect growth of over 2% in the final quarter of the year (in manufacturing). Last year was such a dismal quarter, even the stumbling marchers can make progress.
So what does this all mean?
The economy is recovering and growing at a much faster rate into the final quarter. We still think base rates are now more likely to rise by around 50 basis points in 2015 rather than 2016. We still say this, despite the decision by the Fed this week to hold rates and continue with QE. Growth in the US is weak, inflation is below target and the housing market is confusing analysts. We expect tapering will be back on the agenda in the New Year as we migrate to Planet Janet.
What happened to sterling?
It was all about the dollar this week. Sterling slipped against the dollar but moved up against the Euro. The pound closed at £1.5912 from £1.6166. Against the Euro, Sterling closed at €1.1814 from €1.1713. The dollar moved up against the yen closing at ¥98.7 from ¥97.4, closing at 1.3484 from 1.3803 against the Euro.
Oil Price Brent Crude closed at $105.91 from $106.93. The average price in November last year was almost $110. We expect Brent Crude to average $110 - $115 in the month, with no material inflationary impact.
Markets, pushed higher - The Dow closed at 15,616 up from 15,570. The FTSE closed at 6,7351 from 6,721. The rally continues.
UK Ten year gilt yields closed at 2.66 from 2.63 US Treasury yields closed at 2.62 from 2.51.
Gold closed at $1,312 from $1,352. The bulls may have it but are pegged and penned for the moment.
That’s all for this week, don’t miss The Sunday Times and Croissants out tomorrow and watch out for news of our Friday Financials Feature with Monthly Markets updates coming soon.
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The material is based upon information which we consider to be reliable but we do not represent that it is accurate or complete and it should not be relied upon as such. We accept no liability for errors, or omissions of opinion or fact. In particular, no reliance should be placed on the comments on trends in financial markets. The presentation should not be construed as the giving of investment advice.