Economic Highlights

November’s money and credit data suggest that the recent falls in mortgage rates have stimulated some new borrowing, although many existing borrowers will soon experience higher rates. After falling by £0.1bn in October (as mortgage repayments were larger than new mortgages issued), the stock of mortgage lending remained flat in November. The rebound in the number of new mortgage approvals, from 47,888 in October to 50,067 suggests that demand for new mortgage lending has stabilised and will probably even rise in the months ahead. Some new mortgage rates have fallen back below 4%, but the interest rate paid by existing mortgage holders will continue to rise as households roll off cheaper fixed rate deals and refinance at higher rates. By contrast, the £2bn increase in consumer credit in November, (consensus forecast £1.4bn), suggests that households remain willing to take on more unsecured credit. Some of this might have been due to the rebound in retail sales volumes in November as households financed that spending by borrowing instead of dipping into savings. The £4.3bn increase in cash deposits in households’ bank accounts in November suggests that higher interest rates continued to encourage households to save. Some of the rebound in households’ retail spending in November may have been temporary owing to earlier-than-usual Black Friday discounting by retailers. With the full effects of higher interest rates on existing mortgage holders yet to be felt, there a remains a risk that the household sector as a whole will rein in its spending further as the year progresses.

Nonfarm payrolls rose 216k in December, which was above consensus forecasts and up from the downwardly revised 173k November increase. The healthcare and government sectors again drove more than half of hiring. Payrolls also rose in the leisure and hospitality, retail, and construction categories, all of which will have benefitted from a mild winter. The household survey was weaker. While the unemployment rate remained unchanged at 3.7% in December, that reflected a 683k decline in household employment offset by a 676k decline in the labour force. The labour force participation rate dropped by 0.3pp to 62.5%. The U6 underemployment rate increased by 0.1pp to 7.1%, reflecting an increase in the number of part-time workers for economic reasons. Average hourly earnings increased by 0.44% in December, above expectations. The year-over-year rate increased 8bp to 4.10%. The market interpreted this as a strong report overall, leading to something of a retreat in the bond market. Futures markets entered the year pricing in six quarter-point cuts in the Fed Funds rate. This looks aggressive unless economic data begins to weaken sharply and soon.

All of the data from Europe still points to a sluggish economy. The final December HCOB PMI readings for Manufacturing (44.4), Services (48.8) and the resulting Composite reading (47.6) all say contraction, although they did at least increase from the preliminary readings. The good news is that weaker economic activity is leading to lower inflation, with the December headline CPI reading coming in at 2.9% (although shifting comparative base data meant this was higher than November’s 2.4%). The core reading fell from 3.6% to 3.4%. The European Central Bank (ECB) is not running any victory laps yet, but the market is already pricing in rate cuts this year.

China’s Caixin PMI delivered a positive signal on Thursday. The Services index climbed from 51.5 to 52.9 in December, beating expectations that it would remain more or less unchanged. The improvement in the Services PMI lifted the Composite index by 1 point to a 7-month high of 52.6.

In particular, an acceleration in the pace of increase in new business to the fastest rate of expansion since May drove the overall services index higher. The new export business, future activity, and employment indices all experienced a pickup in the pace of expansion. However, the alternative NBS services PMI which was released earlier in the week did not confirm the sanguine signal from the Caixin report. It has been steadily weakening since March 2023 and was unchanged below the 50 boom-bust line at 49.3 in December. Importantly, the forward-looking new orders component of the NBS measure was broadly unchanged at 47 – below 50 for the eighth consecutive month. This constitutes a negative signal for the employment outlook in the service sector. All in all, this paints a picture of an economy still struggling to break free of its post-pandemic constraints and the long shadow of deleveraging in the real estate sector. The poor performance of Chinese equities despite a rally in global stocks over the past few months indicates that China’s economy continues to underwhelm, a picture that is confirmed by the still-poor performance of China’s equity market.