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Market Update

BoE hikes base rate again, carefully awaits key economic indicators

August 4, 2023


Fitch downgrades the U.S., central banks continue their tightening cycle, and more in today's fortnightly.

Market update

Economic news

  • Fitch downgrades the United States' long-term rating to AA+ (stable) from AAA (negative).
    • The sudden downgrade was on the basis fiscal deterioration of growing debt burden and ‘erosion of governance’ relative to peers over the last decade. In particular, Fitch’s report focused on repeated brinkmanship in Congress around the debt ceiling — currently suspended until the start of 2025.
  • The Nationwide House Prices Index saw a -0.20% decline in July, down -3.80% year-over-year.
    • Housing transactions were down 15.00% in June, compared to the same month in 2022, with overall activity down c. 20.00% since 2019.
    • While the downturn in house price growth represents a break in trend from increases seen between 2009–2022, it is still not material in the context of long-term growth.
  • The past fortnight saw several central bank rate hikes:
    • The Bank of England (BoE) raised its base rate to 5.25%, a 25-bps increase. This was in line with market consensus. MPC members voted 8 to 1 for the rate rise.
    • The Federal Reserve raised its upper limit to 5.50%, increasing it by 25 bps after a short pause in June.
    • The European Central Bank (ECB) raised its main refinance rate to 4.25%, a 25-bps hike in line with market consensus.
  • Central bank communication across all three banks has reinforced the data-dependence narrative, opening the door for future pauses in rate hike cycles if economic data proves more resilient and inflationary pressures ease ahead of current expectations. The Fed will keep a close eye on labour market indicators due to its broader mandate and a higher current unemployment rate at 6.70%.

    Source: Bloomberg

    Sterling bond market

    • The BoE raised its base rate by 25 basis points on Thursday.
      • Initial market reaction saw gilts sell off following the news across all tenors greater than five years while the short end of the market rallied.
      • Trading on Friday saw the short end give up some of these gains and a small rally in longer-dated gilts. This left yields around five bps higher across maturities of 10 years and above.
    • Markets had a stronger reaction to the flash PMI data release. Composite, services, and manufacturing PMI came in below consensus.
      • While this may be a positive sign to cooling inflation in the short-medium term, it brings into question the long-term outlook for the economy and if the risk of a recession is still looming.

    Source: ONS

    Housing association spreads

    Source: Bloomberg

    • Housing association (HAs) spreads are at the tightest levels seen this year.
    • Over the past fortnight, they have tightened four basis points across all three tiers.
    • There has been slightly more spread compression for higher-rated names (tier 1) than lower rated credits in the sector (tier 3).

    Capital markets

    • Places for People (PfP) issued HKD905m (c. GBP90m) from their EMTN programme unsecured at 10 years, with a coupon of 4.87%.
      • This is the fifth issue from PfP this year.
      • It is the second HKD issue, and PfP has also raised funds in GBP and EUR.

    Mergers and Acquisitions

    • Stonewater and Mount Green Housing Association have agreed to a partnership, where Mount Green will become a subsidiary of the Stonewater Group.
    • Poplar Harca is also exploring a partnership with Tower Hamlets Community Housing.

    *including on cost

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    This material has been created by Chatham Financial Europe, Ltd. and is intended for a non-U.S. audience. Chatham Financial Europe, Ltd. is authorised and regulated by the Financial Conduct Authority of the United Kingdom with reference number 197251.