Interest rate lift-off for the ECB but question marks remain around just how aggressive it can be, central bank uncertainty hits equity and bond markets and Dublin office market recovery continues in Q1 2022. All these stories and more are covered in this week’s insights update from BlackBee.
The European Central Bank (ECB) was the big headline grabber last week as it announced that interest rates would increase by 0.25% in July and signalled that another hike was on the way in September with the size of the September move likely to be influenced by the trend in its staff macroeconomic forecasts for inflation at that time. Markets again moved quickly to reprice expectations for Euro area interest rates – our chart of the week shows that investors expect around 1.25% of rate increases by the ECB before the end of the year.
In previous Insights we’ve outlined our view that the ECB will face challenges in aggressively increasing interest rates, particularly as the Ukraine war saps economic momentum. But elevated debt levels in the Euro area is another factor in the background which will likely make it very difficult for the ECB to embark on a sustained rate hiking cycle. In a world with higher debt levels, rising debt costs could squeeze consumers even more and lead to question marks about borrowers’ debt sustainability. Debt sustainability even came into sharp focus last week as the ECB made its move, with the difference in borrowing costs between Italy (one of the Euro area’s most indebted countries) and Germany reaching their highest levels since the initial COVID market crisis in 2020.
Elsewhere, it was interesting to see how the Euro traded last week around the ECB move. In recent times the stronger currencies have tended to be those where the relevant central banks have been increasing interest rates and tightening monetary policy – a key reason behind the US dollar’s gains this year for example. Yet the euro sold off after last week’s ECB decision and press conference which points to some currency market reticence around just how far the ECB can push the boat out on interest rates.
Concerns around higher interest rates and weaker economic growth reasserted themselves last week, leading to falls across many equity markets. Investors seemed particularly unnerved late in the week with the possibility that the ECB could increase interest rates in increments of 0.5% in September and beyond were the trajectory of inflation not to improve. The uncertainty around the outlook for US inflation and the read through from this for the Fed also kept equity market investors on tenterhooks during the week.
Not surprisingly government bonds bore the brunt of the hawkish tone to the ECB’s decision and subsequent comments last week with Euro area sovereign bond yields rising notably and prices falling. As we noted earlier, borrowing costs in the region also tended to rise more for countries in the periphery of the currency zone (where debt sustainability is more of an issue) compared to the core nations of France and Germany. Credit markets also struggled given the nervous backdrop across equities.
Commodity markets again seemed immune to last week’s bearish backdrop with a number of markets making gains even in spite of renewed dollar strength. Oil prices continued to benefit from a very tight global supply demand picture with concerns around a tight supply outlook winning out over demand concerns as economic momentum slows in key economies. Precious metals on the other hand were slightly weaker in the face of US dollar gains.
Dublin office recovery continues in Q1 as impact of hybrid working grows more evident
Savills’ first quarter update on the Dublin office market showed that office demand continues to recover as we exit the pandemic. Between Q4 2019 and Q1 2022 Dublin based office employment managed to grow by 9% despite the COVID headwinds. Interestingly, the impact of hybrid working is also starting to come through in employment data with those in office based employment in the mid-east of the country (including commuter areas such as Meath and Kildare) increasing by 24% over the same period. So, the initial evidence emerging suggests that the Dublin market has remained resilient thus far to changes in work practices.
This resilience was also visible in take-up which reached 478,000 square feet in Q1 2022, the second highest quarterly figure since the pandemic began. The central business district in Dublin again absorbed the vast majority of Q1 take up (81%) with technology firms remaining most active despite a volatile recent equity market backdrop for the sector. In another sign of confidence prime headline rents moved back towards €60 per square foot in Q1 although they still remain slightly lower than pre COVID peaks.