Important information - the value of investments and the income from them, can go down as well as up, so you may get back less than you invest.

WE started out the week knowing the Bank of England would raise rates to a 15-year high. The question was whether a 0.25 or 0.5 percentage point was most likely.

With the decision in, we finish up the week with a look at the stories which grabbed our attention - with a focus on how interest rates affect the housing market.  Apple and Amazon also made it onto our radar, with unexpected results giving them cause for celebration.

1. Interest rates forecast to be above 5% for two-and-a-half years

Many expected a half-point rise in UK interest rates when the Bank of England met this week. As it turned out, we only got a quarter-point - from 5% to 5.25%.

But any hope that this would signal the beginning of the end of high rates will have been disappointed by the gloomy comments - and data - that accompanied the Bank’s decision. The rate-setting Monetary Policy Committee (MPC) split three ways in August with just one member voting for a pause in rates, two opting for a larger rise and six for the quarter-point rise that prevailed. That shifts the balance to be slightly more hawkish than at the last vote in June.

More worrying for households - and those who need a mortgage in particular - was the chart below. It shows where financial markets expect UK rates to be over the next three years - the solid turquoise line - and compares that to other regions and to previous forecasts for the UK.

The gloomy picture is for rates to continue to rise and not peak until well into 2024 - somewhere near 6%. They will remain above 5% until almost 2026.

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Source: Bank of England Monetary Policy Report, August 2023

2. As interest rates rise, UK house prices fall at sharpest rate for 14 years

Nationwide - the country’s biggest building society - reported that annual property values declined by 3.8% in July. This is the sharpest fall since July 2009 and has many experts predicting that house prices are likely to fall even further. It comes as no surprise after this week’s rate rise to 5.25%. But while many experts believe that rising mortgage rates could lead to a further decrease in house prices, there’s a general feeling that a crash isn’t on the cards. This is largely down to higher income households holding most of the UK’s mortgage debt; the vast majority of mortgages are now fixed rate and finally that the UK banking system is better protected against housing market risks than in the past1.

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Source: Nationwide House Price Index, 3 August 2023

3. And first-time buyers turn to 36-year mortgages. But buyer beware…

Taylor Wimpey, the UK’s largest housebuilder, said that the number of first-time buyers taking on 36-year mortgages has more than tripled. In the first half of the year, 27% of its first-time buyers took out this term, compared to 7% in 2021. Rising interest rates have caused buyers to spread their debt over longer periods to reduce monthly payments. Ultimately, it means they borrow more. Some experts say the trend is concerning as it could have a long-term impact on retirement savings. Data from the BoE showed a slight rise in mortgage approvals in June, but analysts say it predates the increase in borrowing costs. 

4. Apple and Amazon have a bumper week

It seemed that the cost-of-living crisis might finally take its toll on Apple, with sales of high-end ‘essentials’ iPhones, Macs, and iPad lines all falling last quarter. But thanks to Apple’s profitable services business, its revenue and profit exceeded expectations - which more than made up for tapering product sales. Its shares, which have risen more than 50% this year, fell 2.2% in Thursday’s after-market trading.

As for Amazon, it has maintained a not-to-be-sniffed-at single-digit growth for five out of the last six quarters. But investors will be pleased to hear that in the last quarter it’s back in double digits. This march was led by revenue growth of 12% for Amazon Web Service. AWS offers cloud services to businesses and is the main driver of profit for Amazon. But the e-commerce didn’t do badly either reporting 10.5% growth. Overall, it meant that revenue was up 11%. The shares - which are also 50%-ers in 2023, added 9% in after-market trading. Not a bad week - or year - for either of these “FAANG” giants.

5. The US government’s credit rating gets marked down

Stock markets around the world reacted negatively to an unexpected downgrade by a leading agency of the US government’s credit rating from AAA to AA+. Fitch cited an expected worsening in America’s fiscal position over the next three years, high levels of government debt and a deterioration in standards of governance over the past two decades. The downgrade followed a similar move by Standard & Poor’s 12 years ago. The long-term impact for investors is unclear. In the short-term, bond prices rose in value as investors sought out safe havens. Despite the downgrade, US Treasury bonds are considered among the safest investments of all.

Source:

1 Telegraph - 26 July 2023

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.

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