Deluge of weak UK data weighs on sterling

02 May 2018

Sterling has been notably weak over the last few days with the benchmark EUR/GBP rate now trading at near seven week highs at 0.8825, that’s close to 150 points higher than last Friday’s open of in/around 0.8680.

Clearly the weaker than expected manufacturing PMI (note below) released yesterday morning has had an impact, with markets now only assigning a 60% probability of an August 2018 BoE hike, with markets already effectively ruling out a move next week. Note that whilst we have pushed back our expectation for the next BoE rate move from May to August, we are not of the view that the BoE will cancel all rate rise plans for the next few years completely. Indeed, over a longer horizon we note how flat market pricing for BoE rate rises now is, with a further flattening evident after today’s UK manufacturing PMI data. However, yesterday’s sterling move should also be put into the context of wider USD strength, with EUR/USD falling below the pivotal $1.20 level yesterday for the first time since early January. There does not appear to be one specific reason for yesterday’s dollar strength but it is worth noting the more positive news on trade (the US has extended the tariff exemption window) and US Treasury yields have firmed again with the 10yr nearing 3% at 2.985%. This evening’s FOMC meeting is now also on the horizon and whilst no change in policy is expected, the tone of the statement is set to be couched amongst a slightly firmer than expected outturn for Q1 GDP and the Fed’s preferred measure of inflation (PCE) reaching 2%.
FOMC preview
The FOMC will announce its latest policy decision at 7pm tonight. We and the market expect no change in Fed Policy, with the Federal Funds target rate range held steady at 1.50-1.75%, having enacted a 25bp hike at the last meeting. Similarly there should be no change to the Fed’s QE roll-off plans, with the current pace of balance sheet normalisation set at $30bn a month. There will be no press conference, nor a set of new economic projections released alongside the decision. With no change in policy expected and no new forecasts, interest for investors will be the tone of the FOMC statement, particularly the language around inflation and the economy. Data since the last FOMC meeting has seen Q1 GDP reported at 2.3% and the Fed’s favoured measure of inflation (PCE) rising to 2%. As such, markets will be closely following any hints of a possible second 2018 hike coming in June.
UK manufacturing disappoints
IHS Markit reported yesterday that the UK manufacturing PMI fell to a 17-month low of 53.9 in April (consensus 54.8, Investec 54.9) from a downward revised March outturn of 54.9. In terms of the detail of the survey, export order growth was the slowest in 10 months while the employment component indicated that workforces were rising at the weakest pace since February 2017, while business optimism was the lowest in five months. Figures from the Bank of England showed that 62.9k of mortgages were approved for house purchase in March (consensus 63.0k, Investec 63.4k), down from the 63.8k reading in February. Alongside this, net consumer credit lending slowed sharply to just £0.3bn during the month from £1.7bn previously. The weaker than expected figures cast further doubt that the BoE will hike rates in May, with sterling dropping from $1.373 to $1.368 following the release. We shifted our view for the May meeting to ‘on hold’ yesterday and now expect Bank rate to remain at 0.50% on 10 May.
CRH: Phase 1 of buyback commences

CRH has detailed that phase 1 of its wider €1bn share buyback programme starts today. Phase 1 consists of a €350m programme and will end no later than 22 August 2018 having entered into arrangements with UBS. In connection with the buyback programme CRH’s board has approved the suspension of the scrip dividend. The final 2017 dividend to be paid on 4 May 2018 will not be affect by the scrip dividend suspension.
Rockwool: Q1 results and raised profit guidance

Yesterday Rockwool pre-released details of Q1 earnings and raised guidance for the year. The company has raised EBIT margin guidance for the full year from “at least 11%” to “close to 13%”. The company cites strong demand for its products across all its major markets. Sales in Q1 were up +17%, boosted by FX +4%, acquisitions +3% and some stocking or hoarding by distributors of c.+2%. The operational benefits of the restructuring program started in late 2015 are still working their way through the Rockwool system. Some competitors have run out of capacity and Rockwool has successfully passed through price increases which they started to signal in Q4 ’17. While Rockwool are also facing capacity constraints, it is confident that ongoing de-bottlenecking can allow them to grow revenue at high single digit rates for the next couple of years. It has new capacity coming on stream in 2020 (US and Romania).
Irish Economy: Unemployment rate hits a 10-year low

The CSO’s latest Monthly Unemployment release shows another 10bps downward movement in the unemployment rate to 5.9% in April, the lowest rate in exactly 10 years. The seasonally adjusted number of persons unemployed was 140,300 last month, a 3,200 decrease m/m and a 16,700 (10.6%) reduction from one year previously. Unemployment in Ireland peaked at 16.0% in 2012 and has declined steadily in the six years since then. Lead indicators such as the employment component of the PMIs indicate that there is further reductions in the unemployment rate to come. This would also put further upward pressure on wages following a 2.5% increase in average weekly earnings in 2017.
Paddy Power Betfair: Q1 trading update guiding FY EBITDA below consensus

Paddy Power Betfair reports Q1 Revenue -2% y/y and EBITDA -8% impacted by new betting taxes, levies and start-up costs for the US business. There were also punter friendly results in March along with cancellation of racing events due to weather which impacted Exchange revenue in particular. Management is guiding for FY EBITDA in the range of £470m-£495m. The company is also initiating a £500m buyback which is to commence shortly.
Ryanair: Monthly traffic stats released

Ryanair April traffic stats are robust with passenger growth of 9% to 12.3m with a 96% load factor. Rolling 12m passengers were 131.4m, growth of 8%.
Economic Releases:
09.00 EC Manufacturing PMI

09.30 UK Markit Construction PMI

10.00 EC Unemployment Rate

10.00 EC GDP

13.15 US ADP Employment Change

19.00 US FOMC Rate Decision