EU Summit and Brexit

17 Oct 2018

The EU Summit begins today in Brussels when UK PM Theresa May speaks ahead of a dinner attended by EU27 leaders. There seems no progress on an Irish backstop. Indeed some stories suggest that Westminster is dragging its heels on its own proposals until after the Budget on 29 October, in order to ensure that the DUP votes for the Finance Bill, expected to be presented on 1 November.

It’s rumoured that one idea that the EU has floated to the UK is to possibly extend the length of the transition period beyond December 2020, perhaps by a year to ensure everything is in place for a cohesive deal. Nonetheless this would confer few tangible benefits to the process (note that the UK has already floated the idea of a temporary period in a customs union after 2020) and a firm backstop on RoI/NI would still be required. 
 
While no-one expects a breakthrough to be reached over the coming days, markets will watch carefully to see if the EU feels sufficiently positive about prospects for a deal to schedule an emergency Summit during the weekend of 17/18 November. The more upbeat Brexit tone pushed the benchmark EUR/GBP lower by about 0.50% on the day however some of that move was also down to some positive UK labour market data of which we go into more detail below.
 
US results puts a floor on equity sell-off
 

Risk sentiment rallied yesterday as some positive US (3rd quarter) earnings results appear to be smoothing some furrowed brows. Some big American blue-chip names such as Netflix, United Health Care, Goldman Sachs and Morgan Stanley all beat consensus estimates. The three main US indices all closed significantly higher on the day with the tech heavy Nasdaq posting just below +3% at an impressive 2.89% on the day. All the major European indices closed in the green too with gains of anywhere between 0.43% and 1.69%. Asian markets while not as impressive as Europe and the US closed in the green with the Japanese Nikkei leading the charge at +1.29% on the day. The US earnings numbers continue today with data from Alcoa and Northern Trust due to be released later today.
 
Irish Economy: Trade surplus moderates to €3.7bn
 

Goods Exports and Imports data for August, published by the CSO, show that the seasonally adjusted monthly trade surplus has moderated to an eight month low of €3.7bn. This outturn was driven by a 3% m/m decline in the value of exports (to €11.5bn), which was part-offset by a 2% m/m fall in the value of imports (to €7.8bn). These data can be volatile on a month-to-month basis reflecting the composition of Irish goods exports (e.g. batch production runs of pharmaceutical products). To this end, we prefer to analyse performance over a longer timeframe and, in this regard, we note that unadjusted data for the first eight months of the year show that the value of goods exports is +12% y/y (to €92.0bn), while imports are +9% y/y (to €56.8bn), producing a 17% higher trade surplus of €35.2bn. Six of the nine major commodity groups are showing annual growth in exports, while seven of the nine show annual growth in imports. In terms of geographic trends, we note that year to date exports to Great Britain are -5.2% y/y at €9.1bn, while imports from GB are +4.0% y/y. 
 
Within the data, however, we see that the dip in exports to Ireland’s next door neighbour is chiefly down to a slide in chemicals exports (likely to be reversed towards the end of the year as the NHS has signalled plans to stockpile medicines), while much of the headline increase in imports is explained by rising fuel prices. Ireland ran a trade deficit of €2.6bn with GB in the first eight months of the year, a situation that is worth bearing in mind given some of the commentary from Brexit enthusiasts in the UK about Irish policymakers’ objectives in the ongoing divorce talks. 
 
UK labour market data
 

UK labour market data released yesterday morning showed that unemployment remained steady at 4.0% in the three months to August in line with consensus estimates (Investec 4.1%). But the principal news was on pay which was stronger than expected. Headline earnings growth firmed to 2.7% from 2.6% (consensus and Investec 2.6%), while ex-bonuses, the series moved up to 3.1% from 2.9% (consensus and Investec 2.9%). Although the latter is a small move upwards, it nonetheless represents the highest pace of regular pay growth since January 2009. This tends to vindicate the Bank of England’s view that the tightness of the labour market is beginning to have a bigger influence on pay trends, and also our call that the BoE will raise rates twice over 2019. Sterling strengthened against the euro following the release, with the currency pair trading back below 88p. 
 
Economic Forecast
 

09.30 UK CPI
09.30 UK Retail Price Index
10.00 EC CPI
14.15 UK BoE’s Cunliffe speaks