ECB cools on rate hikes, as UK house prices rise and Big Oil delivers

Stocks have opened weaker in Europe, after more volatility during the Asian session, and a mixed performance for Chinese shares. BP has opened higher once again, after its stunning gains on Tuesday. The focus on Wednesday is Totalenergy’s results, hawkish commentary from the ECB and signs that the UK housing market is heating up.

Why the BOE will be keeping a close eye on the UK housing market

There was further evidence that the UK economy started 2024 on a new leaf. The Halifax house price index for January rose by 1.3% in January, the fourth monthly rise in a row, which equates to a £3,900 increase in a month for the price of a typical house in the UK. House prices grew by 2.5% YoY, which is the highest annual growth for a year. Northern Ireland saw the strongest growth, with house prices rising by more than 5% on an annual basis. However, there are still some pockets of weakness in the UK’s housing market, with the Southeast seeing house prices falling 2.3% last month, which equates to a decline of £8,866.

Prices in the capital may be the highest in the country, but in London average house prices declined by 0.4% on an annual basis last month. Although the number of houses sold slowed at the end of last year, they are expected to pick up in the early months of 2024, after the latest BOE figures show that the number of mortgage approvals rose in December by 2.3%. The Halifax report also pointed out that RICS Residential Market Survey for December 2023 showed a gradual improvement to -3% from -13% in November, with agreed sales also showing an improvement rising from -6% from -10%, and new instructions moving into positive territory for the first time since May 2023.

Why rising house prices supports a slower pace of rate cuts from the BOE

At this point in the monetary policy cycle, it is important to look at housing market conditions, especially in the UK where housing makes up a significant chunk of household wealth. The Bank of England will be looking at various indices of financial market conditions, and the relative strength of the housing market will factor into their decision on when to cut interest rates. If house prices continue to rise in the coming months, this could lead to a slower pace of rate cuts from the BOE.

Big Oil keeps dishing out the sweeties for shareholders

Elsewhere, we’re waiting for key US earnings reports later today, including from Uber, Walt Disney and PayPal in the US. However, TotalEnergies, the French oil major reported earnings earlier today. It reported a 31% decline in Q4 earnings on the back of weaker oil and gas prices and shrinking refining margins. The company also announced that it would raise its dividend and continue share buybacks. Total has followed the pack, with big oil companies boosting sweeteners for shareholders in the form of dividends and share buybacks. Total raised its dividend by 7.1%, and plans to buy back EUR 2bn of shares, and retain that level going forward.

This is exactly what BP announced on Tuesday, when its share price rose by 6%. Total hasn’t seen the same share price uplift today, however, as investors question the longevity of the tech rally in the US, big oil could come back into fashion with its old-fashioned mix of dividend pledges and increased hydrocarbon production? Total said that its LNG business was robust and there was scant mention about renewables. Oil majors are shifting away from renewables, for some like BP, this was due to pressure from shareholders.

Can the energy sector take on tech?

The market is warming to energy once more, and after a period of weakness, we could see this sector come back into favour and challenge the supremacy of tech. This may seem like an insurmountable challenge due to how far the rally for some tech stocks has come, and how powerful the AI theme has been to markets this year. However, there is huge concentration risk in the tech sector, and if we see one company slip up in the coming months, for example Nvidia or Meta, then we could see tech fall sharply and quickly.

Renewables can’t compete with Big Oil

Exxon, Chevron and Shell returned $80bn to shareholders last year and there is more to come this year. Oil companies are proving that they don’t need a major geopolitical crisis to boost oil prices, for them to post decent profits and stellar shareholder returns. Added to this, the good news we have heard from oil companies this week is in contrast to news from European Wind giant Orsted, which suspended its dividend this year and next, it also announced that it was exiting several markets and guidance for wind installation was cut by 30%, with 800 job losses also announced.           The Orsted share price is up a touch today, but its hard to see how its share price can manage a sustained recovery after this earnings report.

ECB follows BOE and Fed and pushes back on rate cut expectations

The ECB has adopted the tone of the BOE and the Federal Reserve, after Bundesbank member Isabel Schnabel said ‘the last mile may be the most difficult one’ to bring down inflation. She pointed out that service inflation remains sticky, and she also mentioned the resilience of the labour market, as evidence that the ECB cannot rest on its laurels when it comes to inflation. She was also concerned about the loosening of financial conditions that has already taken place as the market places excessive bets on rate cuts. Interestingly, she also said that the neutral rate for the European Union may be higher in the current environment, due to higher levels of investment to help with the green energy transition and high government debt levels. If the neutral rate is higher than it has been traditionally, then this means that interest rates may not fall as far as some may expect.

Currently the market is still expecting the ECB to cut rates in April, and there is a 75% chance in the market that this may happen, even though ECB President Christine Lagarde said that rate cuts may happen in the summer. There are more than 5 rate cuts priced in for the ECB this year, and interest rates are expected to end the year at 2.61%. Schnabel has pushed back on this expectation in her interview with the FT today, and we shall have to see if the Eurozone overnight index swaps market reacts to her words of caution.

Why a euro recovery could be on the cards.

EUR/USD is having a mini bounce on the back of Schnabel’s comments, after the euro has lost nearly 1% vs the USD since the start of February and is down 1.57% since the start of the year. The ECB is still expected to be the first of the major central banks to cut rates, which is why we have seen euro weakness, however, if Schnabel’s comments turn into a chorus of other ECB members pushing back on the prospect of early rate hikes, then we could see a sustained euro recovery.