The Fed and the Fate of Cities

March 31, 2021
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As part of our ongoing efforts to provide you with relevant and important market information, please find an update from Knight Frank regarding the Coronavirus.

Who believes the Fed?

A couple of weeks ago Knight Frank covered the moment inflation replaced Covid-19 as the key concern for global investors, who began expressing those concerns by offloading government debt. Explosive growth and fiscal stimulus tends to fuel inflation, which makes government debt with fixed interest payments less attractive, so prices fall and conversely yields rise.

Well, yesterday the US 10-year Treasury yield hit its highest level since January. You can see why: earlier this week President Biden pledged that by mid-April, 90% of US adults would be eligible for a vaccine. Today, the president will lay out plans for a $2 trillion infrastructure package, fresh off the back of the signing of the historic $1.9 trillion stimulus bill. Consumer confidence is at its highest level since the onset of the pandemic and the dollar is hitting fresh highs.

With the economy likely to run hot for the foreseeable future, it's clear investors are becoming skeptical of the Fed's commitment to hold interest rates close to zero until at least 2024. This debate is likely to seep into other western economies as recoveries take hold.

The new global economy

Much remains uncertain about the pandemic's lasting impact on living and working patterns, both of which are coming into sharper focus as vaccination rates climb and economies edge back to reopening.

Bloomberg covers a new report by global consultants McKinsey that suggests the decade-long stagnation in productivity could be at an end as the huge amount of capital flowing through the US economy prompts a new wave of funding for research, development and investment. The report sees “early evidence of dynamic changes” to the economy as businesses have been forced to take extraordinary measures to deal with the fallout from efforts to contain the pandemic.

They range from increased automation of warehouses and more online marketing to wider use of telemedicine and digitization. All of this points to a new economy in which big business decisions are taken at a faster pace - more than half of North American and European company executives surveyed by McKinsey said their speed of making and implementing decisions was somewhat or significantly faster compared with December 2019.

The fate of cities, continued...

Despite travel bans, lockdowns and a global clamor for space and greenery, house prices across 150 global cities climbed 5.6% during 2020, up from 3.2% in 2019, according to new analysis by Kate Everett-Allen.

The performance of urban house prices is becoming increasingly polarized. The gap between the strongest and weakest-performing city is now 42 percentage points, up from 36 in June 2020.

Emerging markets are amongst some of the strongest performers, Turkish and Russian cities amongst them – albeit Turkish price growth is largely linked to high inflation and the lira’s trajectory.

A number of North American, Australasian and European cities are performing strongly while some Asian cities are trailing. It suggests some correlation with the length and stringency of lockdowns: markets that have experienced the strictest measures are seeing stronger pent-up demand released, which is fueling price inflation.

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