Annual rate of inflation at 0.9% in October

09 November 2018

CPI data for October released by the CSO show that inflation fell 10bps m/m, but was still 0.9% higher than a year ago. In terms of the overall narrative, it remains one of imported deflation (likely due to the weak pound) helping to ameliorate upward pressure on the headline inflation rate from rising fuel prices and factors tied to the strengthening domestic economy (higher rents and entertainment prices).

The highest annual growth in prices was seen in the Housing, Transport, Alcoholic Beverages & Tobacco and Restaurants & Hotels segments. Taking those in turn, Housing costs were +5.5% y/y, led by higher utility bills and rental prices; Transport costs were +3.3% y/y, led by higher petrol prices; Alcoholic Beverages & Tobacco prices were +2.6% y/y, due to a hike in tobacco taxes; and Restaurants & Hotel rates were +2.1% y/y, a function of buoyant demand from domestic consumers and visitors from overseas.
The hike in the VAT rate on accommodation announced in last month’s Budget will take effect on 1 January. These pressures were partly offset by falls in Furnishings (-4.3% y/y, likely due to cheaper sourcing from the UK); Miscellaneous Goods & Services (-3.1% y/y, driven by a fall in insurance prices which reflects positive developments in the claims environment) and Food & Non-Alcoholic Beverages (-2.2% y/y, again likely to be influenced by the weak pound) prices. Private rents rose 0.8% m/m and were +6.5% y/y. The annual rate of rental inflation has been range-bound between 6% and 8% since the aftermath of the introduction of a 4% rent cap on in-place properties in late 2016. The differential is explained by mix effects (as new properties and units located outside of ‘rent pressure zones’ are exempt from the cap).

Household balance sheets continue to strengthen

The latest Quarterly Financial Accounts from the Central Bank of Ireland show a further strengthening in household finances during Q2. Household net worth increased by 3% in the quarter to reach a new record high of €757bn, which equates to a net worth per capita of €155,900. Household net worth slumped by 40% during the crisis period, chiefly due to plummeting housing values, but has since recovered all of this ground and is now 5% above the pre-crisis peak. Increasing housing and financial asset values have both contributed to the recovery, and this trend continued in Q2. Also helping is the ongoing decline in household liabilities. Household debt as a proportion of disposable income fell to 128.5% in Q2, a 2.6 percentage point decrease in the quarter and a significantly healthier position than throughout the 2007 – 2012 period when this metric was above 200% (although it remains high by European standards).

NTMA raises another €750m

The NTMA has raised €750m in medium term funding from the tap of two Irish government bonds. The agency raised €350m from a tap of the 3.9% Treasury Bond 2023 at a yield of just 0.033% and a further €400m from a tap of the 0.9% Treasury Bond 2028 at a yield of only 0.993%. The taps attracted demand of €930m (a cover ratio of 2.7x) and €962m (a cover ratio of 2.4x) respectively. This move brings proceeds from bond sales in 2018 to €17.25bn, towards the high end of the guided full-year target funding range of €14-18bn. The bonds sold in 2018 had a weighted average yield of 1.07% and a weighted average maturity of 12 years. There will be one further fundraising act in this calendar year, namely a T-bill issuance next month. 

Federal Open Market Committee Update

The Federal Open Market Committee announced it was holding policy steady last night, with the Federal funds target rate range still at 2.00-2.25%. That was in line with the market consensus and our own expectation. As expected, there were also no new announcements relating to the Fed’s ongoing efforts to reduce its total Quantitative Easing programme holdings. Here the Fed is already allowing maturing assets to redeem, up to its maximum cap of $50bn a month.

There was no press conference following last night’s meeting nor were there any updated economic forecasts available; these will next come alongside the 19 December policy announcement. In the absence of these, the focus was on the tone of the policy statement. In broad terms, last night’s FOMC statement did little to shake market expectations that another 25bp increase in the Federal funds rate is in the offing for the 19 December meeting. Specifically the Fed again highlighted the strength in the labour market, noting a further decline in the unemployment rate. It also observed that business investment growth had moderated from rapid aid growth earlier in the year. The statement also repeated that the Committee “expects that further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity”. That left investors also continuing to bet that the Fed has had no big change of heart on the medium term policy path from its September projections, which see the funds rate on a path to 3.4% by end-2021, according to the median ‘dot plot’.

Midterm elections

Unsurprisingly there was no direct reference to the outcome of the 6 November midterm elections. However we would be surprised if the central bank was not silently relieved that with the Democrats having taken control of the House, there looks to be a reduced chance of the Trump administration loosening the purse strings again in a material way, at a time when the US economy has very little spare capacity. This would have been another headache for the Fed and could well have forced the Committee to move to a more restrictive policy stance more rapidly. Of course, the Fed is still waiting to see how/if the President adjusts his stance on trade policy following the outcome of the midterms and ahead of a crucial meeting with Chinese President Xi Jinping towards the end of this month.

UK GDP figures due

September’s GDP figures are due on this morning. Of course, this being the being the final month of the quarter, we will have an initial estimate for Q3.  August’s figures showed that the 3m/3m pace of activity was running at +0.7%, the same as the (revised) rate of growth in July. However looking specifically at August, the economy registered zero growth over the month. While we would not draw too many firm conclusions from one month of data alone, it does hint that the robust momentum in the economy had begun to ebb a little during the late summer.  Furthermore we are not convinced that the situation will have changed materially in September. It is difficult to second guess the growth of services, but a 0.8% contraction in retail sales during the month hints at a soft reading (we are factoring in a virtually ‘flat’ outturn). We also suspect that manufacturing will have been weighed down by car output and that oil production was constrained by strike action. Therefore industrial production probably fell modestly – we judge by 0.1% (see box below). Meanwhile we are assuming that construction output recouped some of the 0.7% decline recorded in August. In summary the economy recovered from a slow, weather induced start to the year, but that rebound is now beginning to ebb. Overall we are forecasting that GDP was unchanged on the month on September, but that activity increased at a pace of 0.6% over Q3 as a whole, driven by the impetus over the early summer. For 2018 as a whole our forecast remains +1.4%. 

Economic Forecast

09.30 UK GDP
09.30 UK Manufacturing Production
13.30 US PPI
14.05 US FOMC member Quarles Speaks
15.00 US Michigan Consumer Sentiment