Leading Indicators | Diverging paths: money markets vs economists
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MONEY MARKETS AND ECONOMISTS AT ODDS
Money markets expect the Bank of England’s (BoE) interest rate path to be closely aligned with the US. Since January, market expectations have moderated from six rate cuts to just two currently (the same as the US), with the first expected in August. Last week, following the release of above-expectations UK inflation data, money markets were pricing in just one interest rate cut in November.
While the US Federal Reserve (Fed) has typically been a bellwether for global interest rates, economists argue that the UK’s outlook is more aligned with the European Central Bank’s than the Fed’s. Economists widely expect the BoE’s first 25bps rate cut in June, forecasting the base rate to fall to 4.25% by year-end. In the US, inflation lifted for the second consecutive month in March to 3.5%, while UK inflation fell to its lowest level in two and a half years at 3.2%. This is the first time it has come in below US inflation since April 2022. If the BoE were to diverge, it would be just the second time in nine cutting cycles since 1980 that the BoE moved before the Fed.
YIELDS STABILISE
Across the UK Monthly MSCI index, commercial property yields continue to stabilise. In March, 61% of MSCI sector yields were stable on a three-month rolling average basis, the highest proportion of stable yields since April 2022. Meanwhile, 16% of NIYs in the index were compressing in March, its highest level since December 2023. 23% were softening, its lowest level since November 2023. 90% of Industrial yields were stable in March, while 53% of both Office and Retail yields saw no yield movement. Our latest Investment Yield Guide shows that a greater proportion of prime yields are stable compared to the MSCI index, indicating a lag in correction for non-prime properties. In April, 80% of prime yields were stable, whilst 12% were softening and 8% were compressing. We expect this polarisation in performance of prime and secondary assets to continue. Our Yield Guide points to positive or stable market sentiment for all Industrial and Retail subsectors, and almost all Specialist sectors.
SPIKES IN VOLATILITY SHORT-LIVED
The CBOE VIX volatility index, also known as the “investor fear gauge,” lifted above 20 last week, for the first time since 20th October last year. However, the index has since fallen back below the 19.5 LTA to 16.4 currently. Since the escalation in global geopolitical tension last week, oil prices have also moderated, with Brent Crude futures down 1.4% to $86.04 barrels per day. While volatility continues to fluctuate, overall, markets have so far remained relatively resilient. The level of systemic or financial stress in the UK (-94%), Europe (-78%) and US (-68%) all remain comfortably below their long-term average and close to multi-year lows. Additionally, the FTSE 100 index closed at a record high yesterday.
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