08 Jul 2019

Irish Economy: Construction PMI moderates as Consumer Sentiment improves in June

Two overnight releases, the Ulster Bank Construction PMI and KBC Bank Consumer Sentiment Index, give contrasting messages about how parts of the economy performed in June. 

To start with, the Construction PMI, the latest release shows a moderation in the headline index to 53.1 in June from May’s 54.9 reading. This was in spite of a marginal firming in Housing Activity (to 58.4 from 58.3), while both Commercial (52.8 from 53.1) and Civil Engineering (to 42.3 from 46.3) activity cooled. Civil Engineering’s latest reading extended the sequence of declines for that segment of the construction sector to 10 months, while the Commercial outturn was the softest since August 2013. 

 

Notwithstanding the above, the pace of job creation spiked in June, with the Employment index strengthening to 56 from May’s four-year low of 53.5. Sentiment weakened slightly to a three-month low, but despite this, we note that 39% of respondents still see growth over the coming 12 months.

 

Turning to the KBC Consumer Sentiment Index, this picked up slightly to a three month high of 90.9 in June from May’s 89.9 outturn.  KBC attributed this latest improvement to positive Irish economic news flow and a sense that Brexit risks “may have seemed slightly less immediate as the race to become the next leader of the UK Conservatives began”. On the latter, the report flags that consumer spending has lagged growth in household incomes since the Brexit vote and while we have previously noted the elevated household savings ratio, we wonder if the Central Bank’s macro-prudential mortgage rules (allied to rising house prices) has been a more significant driver of this than Brexit concerns. 

 

The Construction PMI’s moderation to an eight-month low in June rounds off a softer month for Irish PMI readings (Manufacturing fell below 50 for the first time since May 2013, while Services cooled to 56.9 from May’s 57.0 outturn). On a happier note, the first back-to-back monthly increases in two years for the Consumer Sentiment Index is a welcome development. In any event, evolving developments in the external environment are likely to set the tone for Irish PMI and Sentiment releases over the coming months. 


Ocado - Business in transition

When the M&S JV was announced, we opined that the deal was positive for Ocado given the £750m price being paid by M&S. We did however, note that there would probably be execution risks over the next two years, including switch of supplier from Waitrose to M&S, customer preferences and the need to establish new third party supply agreements. The subsequent announcement from Waitrose that it planned to treble the size of its online operations through an agreement with Today Development Partners, showed at least that Ocado’s erstwhile partner is actively looking to compete in the market. We look for an update in the results release. 


UK this week

This week, will see some focus on the Bank of England, with two MPC members (Tenreyro and Vlieghe) set to deliver separate speeches. As with the Fed and ECB speakers during the week, markets will be listening for any hints on policy. In addition to monetary policy, the BoE will also be publishing its latest Financial Stability Report (Thursday), with Governor Carney set to hold a press briefing beginning at 11:00.

 

The most notable data release this week is in the form of Monthly GDP and sector detail for May. 

 

Europe

Speculation has also been rife over the possibility of an imminent easing from the ECB, with consensus swinging sharply towards a rate cut in September, following President Draghi’s comments in Sintra. As such, Thursday’s ECB account of June’s Governing Council (GC) meeting will be scrutinised for the level of debate around policy. Additionally, it is worth keeping an eye out for comments from ECB Chief Economist Philip Lane given the 25 July GC meeting is fast approaching. With regard to data, industrial production figures for May are due from several major member states including Germany and France. April’s figures were weak and another set of poor outturns in May would further fuel speculation over ECB policy action.


US & ROTW this week

In the US, the crucial event is set to be Chair Powell’s semi-annual monetary policy testimony to Congress, with his House appearance set for 3pm (Irish time) Wednesday (note that his remarks maybe published ahead of time). His comments here could provide a key steer ahead of the 31 July FOMC meeting, where markets are currently pricing in a 100% possibility of a 25bp cut.


On the data front, a much quieter week is in store. Of the tier one data, June’s CPI will be the top release. Meanwhile, it is worth noting that on the US-China trade front, White House advisor Larry Kudlow has suggested that face-to-face meetings between US and Chinese officials may take place this week, in a first small step towards progress. The US corporate earnings season also continues this week. 


Turning to Asia, the key question continues to be over the health of the Chinese economy where PMI data released over the last week have undershot expectations, pointing to some softening in June. This week will see the start of the monthly run of official statistics. Meanwhile, credit data is also due and where Total Social Financing is set to be influenced by CNY740bn of local government bond issuance during the month.


UK Parliament and no-deal Brexit

It is expected that pro-remain Tory MP Dominic Grieve will propose an amendment to the Northern Ireland Bill being debated tomorrow which, if accepted by the Speaker of the Commons and passed in the Bill, would prevent the new Tory leader delivering no-deal Brexit by ‘proroguing’ Parliament (i.e. suspending it). The amendment would work by forcing Parliament to sit by law in October, given the government would be forced to make a statement in October on efforts to restore devolved power-sharing in Northern Ireland. Note though, the amendment only seeks to limit the scope for a no-deal Brexit by default - it does not seek to take control of the agenda and therefore seek to drive the direction of Brexit, something pro-remain MPs having been struggling to achieve lately.