05 Oct 2018

Focus on US payrolls

After This afternoon's September non-farm payroll report is likely to see some dampening effect on job gains from Hurricane Florence, which hit the US during the survey period for the report. However, we are doubtful that we will see a very sharp drop in job gains as we did in September 2017 in the wake of Hurricane Harvey, Irma and Maria.

One reason is that whilst Hurricane Florence spanned a large area, its impact on large cities was much less. Harvey hit Houston severely, for which non-farm payroll employment amounted to circa 3 million in 2017. With the cities affected (Wilmington NC, Lumberton NC, New Bern NC etc.) this time much less populous, we are betting that the impact this time around will not be nearly as severe as in the wake of Harvey. Our best guess is that we will see a 20k dip on the recent trend rate in non-farm payrolls, such that the non-farm payroll print is seen at 165k. That compares against September 2017 (Harvey, Irma, Maria) which came in 202k below the prior 3m average in the most recent vintage of data. For the unemployment rate, we suspect that hurricane disruption is even less of an issue, given that people who miss work for weather related reasons are counted as employed, whether they are paid for the time off or not. We expected to see a steady 3.9% rate. Pay growth rose to 2.9% in August, a rate not seen since 2009. Note that this time around, we could potentially see some easing back from this, given the step-up in pay growth in last September (amidst the Hurricane which tends to knock out lower paid workers) is unlikely to be repeated this time around.
 

Sterling hits eleven week highs on positive Brexit news:
 

If soundbites, snippets and quotes from our ever reliable ‘EU sources’ are anything to go by it appears that some type of Brexit deal is very near to being thrashed out. With the potential powder keg that was the Conservative party Conference and a potential Boris leadership challenge seemingly out of the way, markets assumed it would revert to the usual UK/EU ping pong match of mud-slinging and finger pointing. Surprisingly enough most if not all of the rolling quotes yesterday were of an upbeat, positive nature particularly from the EU side. With unexpectedly cheery gems such as “the new British proposal for Irish border backstop after Brexit is a step in the right direction and makes finding compromise possible” and “EU Brexit negotiators believe a divorce deal with Britain is very close” it’s no wonder the pound is on the front foot. The benchmark EUR/GBP is sitting pretty at around 0.8825 this morning, the lowest it’s been since mid-July. Here’s hoping the positivity and good will continues.
 

Irish Banks: PTSB upgraded by Moody’s and AIB sells 5yr $ HoldCo    
 

Moody’s yesterday upgraded numerous credit ratings for Permanent TSB (PTSB), upgrading the baseline credit assessment (BCA) to b1 from b2, and the long-term senior unsecured debt rating to Ba2 from Ba3. Elsewhere, AIB yesterday raised $750m from a sale of senior unsecured HoldCo debt. As part of the same action on PTSB, Moody's affirmed the bank's long-term deposit rating of Ba2, upgraded the bank's counterparty risk assessment (CRA) to Baa3(cr) from Ba1(cr) and upgraded the long-term counterparty risk rating (CRR) to Baa3 from Ba1. The short-term CRR was also upgraded to Prime-3 from Not Prime. The effective broad-based one notch upgrade to PTSB’s credit ratings reflect the bank's improved asset risk profile in Moody’s opinion, following a decrease in its stock of problem loans, this coming as a result of the agreement to sell c.€2.1bn in NPLs which the bank announced in August. The upgrades also reflect the moderate improvements in the bank's profitability according to Moody’s analysis. Moody’s has also maintained a positive outlook on the bank’s long term senior unsecured and deposit ratings, driven by an expectation of further improvements in the bank’s asset quality and profitability, and by an expectation that PTSB will issue material bail-in-able debt (ie MREL) in the medium term. Turning to AIB, the group yesterday sold US$750m in 5 year senior unsecured HoldCo debt in its first Yankee offering under the new MREL regime. The AIB issue was priced at T+175bps vs an IPT of T+190bps, giving a coupon of 4.75% and a reoffer yield of 4.8%. The AIB issue comes after a similar US$500m HoldCo Yankee issue by Bank of Ireland last month which priced at T+160bps.
 

Italy bullish on growth forecasts to support deficit
 

The announcement this week of a targeted budget deficit of 2.4% of GDP for 2019 by the newly appointed Italian government was followed yesterday by a publication of growth forecasts to support this outlook.  The 5-Star movement and the League have called for growth of 1.5 percent in 2019, followed by 1.6 percent in 2020 and 1.4 percent in 2021.  Conversely, the coalition forecasts the deficit to narrow to 2.1 percent by 2020 and 1.8 percent thereafter. It is important to note however that the Italian government’s economic outlook is considerably more optimist than other forecasts, with the IMF’s current estimates of GDP growth standing at 1.1, 0.9 and 0.8 percent for 2019, 2020 and 2021 respectively. Finance Minister Giovanni Tria has stood by the Italian estimates saying the “growth targets are ambitious, but not unrealistic and could be exceed..”
 

Economic Forecast
 

13.30 US Non-farm payroll