Financial Markets Take Breather, Rates Edge Lower but Outlook Stays Unsettled
The tariff turbulence has calmed for now but any downwards pressure on mortgage rates is not guaranteed to last
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So, are we all feeling 46% calmer?
If you were paying attention to global volatility indices last week, you might be.
So-called ‘fear gauges’ have fallen after the tariff turbulence of early April, helped by the natural pause of the Easter break.
The CBOE VIX, which is calculated using the S&P500 US stock market index, closed at just under 33 on Wednesday, which is 46% below where it peaked on 7 April.
After the initial tariff-induced instability, nerves settled as Donald Trump declared a 90-day pause for most countries, with the notable exception of China. Following the de-escalation, the FTSE100 had recovered more than half of its lost ground by Wednesday last week.
Lower-than-predicted UK CPI numbers on Wednesday helped lift the mood further. Headline inflation of 2.6% and services inflation of 4.7% both narrowly beat expectations. It means a quarter-point cut by the Bank of England next month feels increasingly likely, which if markets are right, will be the first of three this year.
As economic slowdown risks have grown, the SONIA five-year swap rate, which lenders use to price mortgages of the same length, closed below 3.7% on Wednesday, compared to above 3.9% at the start of the month. Some mortgage lenders have already responded by dropping their rates.
Combined with the improving weather, it will support buyer demand as the spring market gets underway, as we explored last week.
Despite the mood of relative calm over Easter and the downwards pressure on borrowing costs, tariffs still pose a risk. And not just for the price of chocolate eggs in the US next year.
“It is quite obviously too early to sit here and sound the ‘all clear’,” said Michael Brown, a senior research strategist at financial broker Pepperstone.
“Sectoral tariffs on computer chips, and pharmaceuticals are on the way; a 10% blanket tariff is still in place on the vast majority of US imports; Sino-US trade is still essentially blockaded, with China having now halted deliveries of Boeing jets; and, even if it’s still early days, progress towards trade deals to eradicate the ‘reciprocal’ tariffs altogether seems rather slower than most would like.”
If the instability leads to global supply chain disruptions or higher energy costs, the risk for the UK housing market is stronger inflation, which would keep upwards pressure on mortgage rates. Particularly in the context of stubbornly-high UK wage growth of 5.9%, which was also reported last week.
If the Bank of England cuts further from the current rate of 4.5%, it also risks stoking inflation by pushing real rates (stripping out wage growth) further below zero, said Savvas Savouri, chief economist at Quantmetriks.
“If the MPC continues to be mandated to contain the CPI to within 1-3%, then, I am convinced it will for the foreseeable, more often than not, fail in its task,” he said, blaming the inflationary impact of wages, rents and services.
“As for (the inflationary impact of) goods, though 1-3% is a reasonable range, one cannot be sure what effect the higher labour costs pushed through by Labour, will have on pushing matters above 2%. After all, even goods must be handled and delivered by labour.”
In short, policies being pursued on both sides of the Atlantic could ultimately hold inflation higher.
For anyone buying or re-mortgaging, it means headlines about lenders cutting rates are not guaranteed to last throughout the rest of this year.
For now, while the sun is shining, some will see an opportunity to make hay.