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The Marketplace - December 9th 2014
09/12/2014
The Bank of England further fuelled the interest rate hike debate yesterday as a new report from the central bank outlined that the majority of households would be able to cope with an interest rate hike up to 2% despite half a million households being put at risk of falling behind on their credit commitments. The report stressed unlike previous tightening cycles, the risk to more expensive credit could have a severe risk to the private sector rather than the consumer.
Figures for November’s UK manufacturing output are expected for release this morning, following a buoyant PMI survey reading recorded last week that continued to show optimism in the sector. Markets will be looking to see whether the sector can remain in positive growth, following a strong year that has seen only a single month of contraction.
Bank of England Warns House buyers of Future Rate Rise
The Bank of England fuelled the interest rate debate yesterday by issuing a warning that half a million UK family would be at risk of falling behind on their mortgage when rates start to rise from their emergency level of 0.5%. The central bank said the number of households running into difficulties would increase by a third to 480,000 in the event of a 2% increase in the bottom-line cost of borrowing.
The Bank stressed the proportion of borrowers having trouble paying their home loans should remain well below the levels of the early 1990s – when Britain suffered its worst post-war property crash – provided incomes rose alongside interest rates. The findings were based on a survey for the Bank conducted by NMG consulting. It found that the average outstanding mortgage debt was £83,000 per household, with average household income of £33,000 a year (£43,000 for those with a mortgage) and unsecured debt £8,000.
The Bank has used its forward guidance policy to stress that interest rate rises, when they come, will be gradual and limited in size. The markets do not anticipate the first rise to come before the second half of 2015 but the Bank is exploring the impact of tighter policy on households where more than 40% of income is spent on mortgage repayments, since these house buyers are most likely to fall into arrears.
Euro meetings and Greek bailout
The guessing game over the timing of the Eurozone money printing will intensify as the European Central Bank unveils a closely watched gauge of policy in the coming week, the highlight of a calendar dominated by Europe's malaise. On the other side of the Atlantic, investors will continue placing their bets on a different but equally crucial event: when the U.S. Federal Reserve might raise interest rates. US data and several Fed central bankers will give a sense of the speed of the recovery and when a rate rise might be merited, while oil prices and Chinese data will provide plenty more for the markets to digest.
On Monday and later today, the ministers of the Eurozone and the whole EU 28 meet to discuss current affairs. Among the contentious issues we find the French and Italian budgets, which are not consistent with the EU guidelines, the ongoing tensions with Greece about a potential third bailout the Juncker plan to boost growth, which has raised a few eyebrows about its viability. Any serious effort to boost growth would lift the euro, but this isn’t likely.
Fed’s New Labour Market Index Shows Job Market Growth Near Two Year Low
Looking Through the Numbers
Friday’s payroll data seemed to show on the outset that America’s economy, in particular it’s labour market, is leaping from strength to strength. To recap, the non-farm payroll release surpassed forecasts of 231,000 by 90,000 new jobs in November. The payrolls data has always traditionally been seen to be particularly important as job creation is an important leading indicator of consumer spending, which accounts for a majority of overall economic activity.
Naturally, a positive release such as Friday’s further fuels fed rate hike speculation that analysts now expect to occur in the first half of next year, as the US central bank look to secure more normalised monetary policy without unhinging a strong recovery path. However looking into the Federal Reserve’s new multifactor model of the US jobs market shows growth sliding to just 2.9% month on month, which is almost the slowest growth since August 2012. The Federal Reserve Labour Market Conditions Index is calculated as a weighted average based on 19 monthly labour market indicators to gauge improvements in the labour market.
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