16 Mar 2018

Irish border still contentious ahead of EU Summit

Following yesterday’s stories about rapid progress towards a Brexit transition deal, the FT cites Brussels sources claiming that the issues connected with the Irish border continue to pose problems, with even British sources quoted to be concerned over a possible last minute flare up.

Regarding the matter, there was no change in text in the EU’s latest version of the draft legal wording around the Brexit withdrawal agreement, with the EU maintaining the view that it needs to remain part of the Single Market and customs union. However there does seem to be more of a general climate of optimism over an agreement being struck in time for the EU Leaders’ Summit on Thursday and Friday next week, with reports suggesting yesterday that David Davis was predicting a transition deal period as soon as next week.

More change at the White House?

The Washington Post is reporting that President Trump has decided to remove H.R. McMaster as his national security adviser and is actively discussing potential replacements. White House press secretary Sarah Huckabee Sanders pushed back late Thursday saying ‘there are no changes at the NSC’. If however the Washington Post story proves to be correct, then following the recent removal of Gary Cohn (chief economic adviser) and Secretary of State Rex Tillerson, this would clearly add to worries that Trump is closing ranks and ousting some of his arguably more level headed advisers.

Market Orders a useful tool for the week ahead

Next week looks set to be a busy one in terms of economic and political events. Starting with the FOMC meeting on Wednesday 21st, we are expecting a series of rate hikes from the FOMC in 2018 – the first of which is likely to fall at the March meeting. With the market already pricing in a 99% of a rate hike, focus will be firmly on the preceding press conference held by new chair Jerome Powell for further hints on the Fed’s outlook for future interest rate hikes.

Next, the Bank of England’s March decision will take place on Thursday 22nd. With markets currently pricing in the next hike in Q4 2018, any suggestion from the BoE that rates could rise earlier than that or by more than two hikes over 2018 and 2019, would be taken as a hawkish sign – which could ultimately see the pound strengthen.

Lastly, key negotiations over the potential for a future trade deal between the UK and the EU are expected to commence between the 22nd and 23rd of March at the European Council in Brussels. Both sides in the talks are said to believe they are getting closer to a deal on a transition package, which bodes well for sign-off at the Summit next week.

Such a series of major events will likely lead to further volatility. In such cases, Market Orders can be a useful tool to take advantage of market moves, particularly if you are not in the office after the St Patrick’ bank holiday weekend. Wish to know more, please call the treasury team.

AIB Group: Roadshow ahead of potential 5yr Senior Holdco issuance

Bloomberg reports that AIB Group (AIBG) will hold a series of fixed income investor meetings across Europe next week, ahead of its inaugural HoldCo senior debt issuance. AIBG has previously guided that it expects to issue €3-5bn in new senior HoldCo debt over the next few years in order to meet compliance with its required level of eligible liabilities for the new MREL regime. The initial issuance under this plan is expected to be a benchmark sized 5 year fixed rate bond, with AIBG having previously suggested that it assumes hypothetical pricing of around MS+125bps. We expect BIRG to also issue HoldCo debt in the coming months and PTSB has guided for €900m in HoldCo debt issuance over the next few years.

Irish Banks: Mortgage price competition re-emerges as Ulster Bank and KBC cut rates

Renewed signs of competitive agitation in the Irish mortgage market have re-appeared this week. Ulster Bank and KBC Ireland have both announced relatively modest price cuts to their fixed rate mortgage products, but it again suggests that the increase in competitive behaviour that we saw last year, from almost all of the banks operating in the Irish mortgage market, has not yet fully abated. Given the increasing tendency for Irish borrowers to choose fixed rate rather than variable rate products, as fears of ECB rate hikes start to come into consumers’ mind-sets, competition in this product category is more intense than in the variable rate market.

Irish Economy: GDP +7.8% in 2017

Preliminary estimates from the CSO show that Ireland topped the EU28’s growth charts for the third time in the past four years in 2017, with growth of 7.8% in GDP terms (GNP +6.6%). The expenditure side of the accounts show personal consumption +1.9%, government consumption +1.8%, investment -22.3%, exports +6.9% and imports -6.2% in 2017. The abnormal move in investment is chiefly down to intangibles (-40.6%), driven by the multinational sector, which also dampened the import figure cited above. Modified gross domestic fixed capital formation, which adjusts for multinational-related distortions and therefore better reflects underlying investment, rose 10.0% last year, with strong growth in building and construction offsetting a drop in machinery vehicles (this mirrors other CSO data). Balance of Payments data released alongside the national accounts show a remarkable current account surplus equivalent to 12.5% of GDP in 2017 (versus 3.3% in 2016), but this is flattered by the intangibles transactions mentioned previously (R&D imports were €27bn last year versus €47bn in 2016). While the national accounts headline data are, once again, distorted by the multinationals, within the release we see evidence of a robust performance by the underlying economy, with modified final domestic demand rising 4.0% last year. The data also confirm what our Services and Manufacturing PMI releases had suggested, namely that the economy exited 2017 with a strong tailwind behind it, with GDP +3.2% q/q in Q4.

Irish Economy: CPI +0.5% y/y in February

The CPI increased by 0.9% m/m in February, with the annual rate of growth in prices rising to 0.5% from 0.2% in January. The main contributors to the sharp monthly increase were Clothing & Footwear (+6.7% m/m due to the end of New Year sales); Transport (+1.7% m/m due to higher air fares); and Restaurants & Hotels (+0.9% m/m primarily due to a 5.2% m/m rise in hotel accommodation rates). The main divisions contributing to the annual increase in prices are Housing (+4.0% y/y, due to higher rents and utility costs); and Restaurants & Hotels (+2.3% y/y, due to rising visitor numbers and the domestic economy strengthening). These have been partly cancelled out by falling Food & Beverage (-1.8% y/y, reflecting deflationary pressures); Clothing & Footwear (-2.8% y/y, likely reflecting online competition); and Furnishings (-3.5% y/y, we suspect imported deflation from stores sourcing in the UK is a big factor here) prices. Three sub-headings that we closely monitor are Private Rents, Insurance and Accommodation. Taking those in turn, Private Rents were +1.1% m/m and +6.2% y/y in February, reflecting the mismatch between supply and demand in the housing market, although the annual rate of inflation has cooled on the back of the late 2016 introduction of rent controls. Insurance was flat on the month and -3.1% y/y due to positive developments in the claims environment; while Accommodation was +5.2% m/m and +4.2% y/y due to the factors discussed above. Overall inflationary pressures remain contained in Ireland, notwithstanding the blistering rate of economic growth discussed elsewhere in this note. This, in turn, is underpinning a marked rise in real wages and supporting private consumption here.

Irish Economy: NTMA raises €500m from T-bill sale

Ireland's NTMA raised €500m from the sale of T-bills yesterday. The T-bills, which have a maturity of 12 months, were sold at a yield of -0.53%. The sale attracted €1.44bn of demand (2.88x covered). These metrics were little changed from the preceding sale of 12 month T-bills in December (-0.52% yield and that €500m sale was 2.95x covered). Little read-through for the Sovereign given the small size of the issuance and the short maturity, but raising money at a negative yield is good business in anyone's book.

Economic events

10.00      EC      Eurozone CPI

13.15      US      Industrial Production

14.00      US      Manufacturing Production