16 Jul 2019

Irish Economy: NTMA announces T-bill sale details

Ireland’s NTMA has provided the details of Thursday’s scheduled T-bill auction. 

Somewhat unusually, the agency will tap an existing T-bill, IE00BH3SQC39 (maturing 22 June 2020, €500m currently outstanding), raising €500m from this exercise. 

This T-bill was first auctioned on 20 June, with the then €500m sale attracting €1.8bn of demand (3.67x covered) and pricing at -47bps. Since then it has tightened to -51bps. 

This is the first ‘tap’ of a T-bill since the NTMA re-started issuing these instruments in the summer of 2012 as part of the country’s re-engagement with the capital markets. Such innovation is, however, not a particular surprise given that the agency has experimented with a range of different funding options in order to maximise the potential constituency of investors in Irish debt. 

Irish Economy: Trade surplus widens to €6.5bn in May 

Goods Exports and Imports data from the CSO show that the seasonally adjusted trade surplus widened to €6.5bn in May from April’s €5.3bn outturn. This was produced by a 5% m/m rise in seasonally adjusted exports (to €13.2bn) and an 8% m/m decline in seasonally adjusted goods imports (to €6.7bn). 

Unadjusted data show that year to date exports are +13% y/y to €64bn while imports have increased by ‘only’ 3% y/y to €34.5bn, producing a €30bn trade surplus which compares favourably with the €23bn recorded in the opening five months of last year. Interestingly, these growth rates are quicker (across the board) than what was recorded in Q1. We would have expected a moderation in the annual growth rates given the bounce to exports that came from inventory build by UK customers ahead of the original end-March Brexit deadline (not to mention a slower global growth profile). 

In any event, reflecting the buoyant conditions for Irish exporters, seven of the nine commodity groups posted an annual increase in exports, while eight of the nine saw annual growth in imports. In cash terms (these are nominal data), Chemicals & Related Products accounted for more than half the annual increase in exports, while strong growth was also recorded in sales of Machinery & Transport Equipment and exports of Electric Current. 

Year to date exports to the UK, at €7bn, are +9% y/y, while imports are +11% y/y, although energy-related items (including sales of Electric Current) are a key factor behind the headline growth in exports. 

Ireland’s merchandise export performance continues to impress, notwithstanding a trickier international backdrop. The national accounts measure of exports (both goods and services) rose 13.8% y/y in Q119, helping to produce headline GDP growth of 6.3% y/y. We hinted at the time of their release last week that the national accounts suggested upside risks to our current FY19 GDP forecast of +4.3% y/y – May’s merchandise trade performance adds to this narrative. 

Sterling slides as Brexit talks disappoint

EUR/GBP reached its highest level since the turn of the year, as the latest round of talks with the EU have failed to make any progress and comments from the Tory leadership hopefuls have become even more negative. 

While expectations were not high ahead of Stephen Barclay’s meeting with Jean Michel Barnier, especially given the leadership vacuum in the UK, the latest round of talks were described as the most difficult in the last three years by negotiators on the EU side. The EU are still clinging to the hope that an agreement will be reached, so much so that incoming commission president Ursula von der Leyden, has already offered a short extension if it would help complete negotiations before the UK crash out without a deal at the end of October. Stephen Barclay however, was at pains to make clear that the deal agreed between the EU and Theresa May’s government was dead. Recent comments from both Jeremy Hunt and Boris Johnson have added to concerns in the EU. Both Jeremy Hunt and Boris Johnson have declared the NI backstop “dead”, and promised to remove it from any deal they negotiate with the EU.

The tone of the latest meeting and recent comments from the Tory leadership hopefuls add to concerns that a no-deal Brexit is increasingly likely. The EU are already wary of Boris Johnson, who is perceived as a populist, and seen as largely responsible for both the outcome of the Brexit vote, and Theresa May’s difficulties in getting a deal done. His position to pursue a No Deal, or at least use it as a threat to squeeze concessions out of the EU, is likely to lead to further fraught negotiating sessions between now and October.

On a related note, the Tory party have confirmed that they expect the next leader of the Tory party to be announced at 11am on 23rd of July.

UK unemployment data

The UK unemployment rate held its 44-year low of 3.8% in the first three months to April. However, April's single month observation rose to 4.0% (from 3.7% in March). For now, we ascribe this to data volatility. Indeed, these figures are very sensitive to the characteristics of the specific sample used for each month, hence why the ONS uses a three-month average. For May’s data, released this morning at 9.30am, we are on the lookout for any signs of reversal of labour market tightness, especially as jobs growth slowed to an eight-month low of +32k (3m/3m) in April. For May, our forecast is that the jobless rate remains steady once more at 3.8%. 

On the pay side, the headline measure of weekly earnings growth slowed to 3.1% (3m y/y), this was a beat on expectations. Bonus payments were subdued and weighed down on the overall figure. Indeed, regular pay growth was recorded at 3.4% (3m y/y), within the narrow 3.0%-3.5% range prevailing since the end of summer last year. Perhaps significantly the single month, ex-bonus number jumped to 3.8%, a near decade high. While again this could reflect the vagaries of the data, we suspect that the strength could at least in part be a product of the rise in the minimum wage, which was raised by 4.9% in April (against an increase of 4.4% a year ago). Hence, we are forecasting further increases in wage gains this time, to 3.2% on a headline basis and to 3.5% for regular pay. 

Oil market update

It was a mixed week last week for oil markets with prices moving significantly higher on tensions in the gulf and falls in US inventories, despite bearish news from the International Energy Agency.

Looking to 2020, the IEA has cut its estimate of the call on OPEC to 28million barrels/day, the lowest since 2003 (largely thanks to booming US production). Meanwhile, the IEA estimates that OPEC production fell by a modest 100kb/d in June to reach 29.9million barrels/day. Despite the agreed extension in OPEC+ cuts, OPEC needs to reduce output by a further 2million barrels/day, into Q120 to balance the market. This suggests extensive over supply into Q120, which the market may not be able to remove in the next summer driving season.

A large draw in US stocks combined with Hurricane Barry (caused 73% of gulf production to shut down, but seemingly left no lasting damage) helped Brent trade over 67$/b last week. The technical picture is potentially strong, however not conclusive.

Economic Releases

09.30 UK Average Earnings Index

09.30 UK Claimant Count Change

09.30 UK Unemployment Rate

10.00 EZ ZEW Economic Sentiment

13.00 UK BoE Gov Carney Speaks

13.15 US FOMC member Bostic Speaks

13.15 US FOMC member Bowman Speaks

13.30 US Retail Sales

17.20 US FOMC member Kaplan Speaks

18.00 US Fed Chair Kaplan Speaks