Are negative interest rates coming to the UK?
On the latest edition of Market Week in Review, Chief Investment Strategist Erik Ristuben and Julie Zhang, director, North America sales enablement, discussed the potential for negative interest rates in the UK. They also chatted about the U.S. employment report for January, the potential for additional fiscal stimulus and the state of the U.S. housing market.
Bank of England to study potential impacts of negative rates
Following the conclusion of its monetary policy meeting on 4 February, the Bank of England (BOE) made headlines by announcing that banks should prepare for the possibility of negative interest rates. "It's important to note that the BOE stressed that this should not be interpreted as a signal that negative rates are on the way. Rather, the announcement is the BOE's way of preparing the banking system for the possibility," Ristuben stated.
He explained that moving to negative rates could create some fairly significant stresses on the infrastructure of the UK financial system as a whole. "With this in mind, the BOE is essentially saying that it's going to use these next several months to seriously study the impacts that negative rates could have—and also determine the feasibility of implementing such rates," Ristuben added.
The real takeaway from the central bank's message, he said, is an acknowledgement that the ongoing weakness in the British economy remains a concern for policymakers. The UK has been battered by both the coronavirus pandemic and the Brexit saga, Ristuben noted, and the BOE's announcement serves as a signal that it's committed to doing everything it can to create a softer economic landing in the wake of both crises.
U.S. job growth disappoints, but markets rise on fiscal stimulus prospects
Turning to the U.S., Ristuben said that the nation's employment report for January showed a gain of just 49,000 jobs, which he characterised as a disappointing number. "This was below consensus expectations, which were already weak to begin with," he remarked, adding that December's job losses were also adjusted further downward—from 140,000 to 227,000. The downward revision is a confirmation of the impact that last fall's spate of renewed lockdown measures had on the economy, Ristuben noted.
However, markets also received some more positive news the week of 1 February, he said, with incremental progress made toward additional U.S. stimulus. "The administration of President Joe Biden sent a clear signal that it's willing to move ahead on passage of a $1.9 trillion coronavirus relief bill without support from the Republican Party," he stated. Senate Democrats are preparing to use budget-reconciliation rules to approve the bill with a simple majority of senators, which would prevent the filibuster from being used, Ristuben said.
"Markets are liking the prospects of additional stimulus, and that's been reflected in stock prices recently," he noted, remarking that the S&P 500® Index was up approximately 4% the week of 1 February, as of mid-morning Pacific time on 5 February.
U.S. home prices surge. Is the country in another housing bubble?
Switching to the U.S. housing market, Ristuben noted that soaring home prices across the country have led some to wonder if the nation has entered another housing bubble. The most recent Case-Shiller Home Price Index showed that housing prices rose 9.5% in the 12-month period from November 2019 to November 2020, he said, adding that the increase in prices was broad-based across the country.
"Comparisons have been drawn to the previous housing bubble of the mid-2000s, but it's important to note that there are some key differences this time around," Ristuben said. The dynamics of the single-family real estate market are very different today than back then, he explained, due in large part to the high credit standards required of borrowers. "Today's home loans are not low doc loans. The individuals taking out these loans today are employed and can actually service their debt," Ristuben stated.
In addition, the vast amounts of fiscal stimulus injected into the economy since last March have led to sharp increases in household savings rates in the U.S., he said. "This means that individuals entering the housing market actually have money and aren't overcommitting themselves in terms of debt service," Ristuben explained.
Overall, in his opinion, the current housing market does not look like a bubble. Rather, it looks more like a market that's become very expensive due to an imbalance of supply and demand, with supply being extremely limited, Ristuben said. "Significantly fewer homes have been built since the Great Financial Crisis, but I think we'll see eventually see the supply increase, leading to less appreciation down the road," he concluded.