HPI jump UK eases housing fears, while markets await Fed guidance on potential December hike

• European markets kick off in the green
• UK housing concerns ease after Nationwide HPI jump
• Federal Reserve in focus as we look for December guidance

European equity markets have maintained their upbeat but cautious approach this morning, with the likes of the FTSE 100, DAX, and CAC all trading in the green once again. Coming off the back of yesterday’s sharp decline in the eurozone CPI reading, there is a hope that the UK and eurozone are going to stabilise and gradually drive down inflation in a bid to cut rates in late-2024 or early 2025. Tomorrows Bank of England meeting should provide plenty of insight over the perceived trajectory of the economy, with todays downgrade to the UK manufacturing PMI serving to highlight ongoing weakness.

The UK housing market took a welcome albeit surprise step forward in October, with the Nationwide house price index gaining 0.9% for the month after stripping out seasonal effects. With interest rates sharply higher this year, there is a fear that we could see a sharp collapse in the housing market as soaring mortgage rates force sales. However, the Nationwide see few signs of forced selling, with the low availability of properties helping to drive prices higher amid strong labour conditions and historically low mortgage arrears. This will help allay fears around a potential housing market collapse, with the strength of the jobs market clearly key to avoiding such a downturn. Nonetheless, it is worthwhile noting that the ‘higher-for-longer’ approach at the Bank of England will raise the likeliness of a prolonged period of stretched finances, with affordability concerns likely to keep a lid on house prices for years to come.

Looking ahead, the Federal Reserve look to dominate as markets seek clarity on whether we will see an additional rate hike this year. The strength of the US economy has become abundantly clear of late, with big beats across GDP, retail sales, and PMI surveys signalling to the Fed that they are dealing with an economy able to withstand additional tightening if necessary. The committee will be well aware of the risk posed by rising energy prices, with headline inflation totaling 1% for the past two-months alone. Their preferred core PCE inflation gauge does continue to move lower, with the latest annual figure of 3.7% representing the lowest reading since May 2021. Markets are currently pricing a near 100% chance that the Fed will hold today, with the real volatility likely to come around expectations for a December hike (currently 27%).