17 Jun 2019

Irish Economy: Trade surplus widens in April

The latest Goods Exports and Imports data from Ireland’s CSO shows that the nominal trade surplus widened to €5.4bn from March’s €4.0bn outturn. This was driven by a 13% m/m jump in seasonally adjusted exports (to €12.5bn), while imports advanced at a more pedestrian pace of +2% m/m to €7.1bn. 

 

Unadjusted data show that in the first four months of 2019 merchandise exports totalled €50.5bn (+12.7% y/y), goods imports €27.5bn (+3% y/y) and the trade surplus of €23bn was +27% y/y.

 

This is a very strong result against the backdrop of a slowing world economy, although it is likely to have been somewhat flattered by MNC items and a one-off export boost for certain items ahead of the originally scheduled Brexit date of end-March 2019. Nonetheless, the CSO data show that eight of the ten commodity groups posted annual growth in exports in the year to date, while nine of the ten groups recorded an annual increase in imports.

 

In the year to date exports to Great Britain have increased to €4.8bn from €4.4bn in the same period of last year, but this appears to be chiefly accounted for by higher exports of electric current through the interconnector. 

 

Our forecasts assume only modest growth in exports in 2019 given the trickier international backdrop, but the strength of the year to date performance by the merchandise sector suggests that the risks are skewed to the upside. With that being said, events in Westminster and Washington have the power to shift the needle once again.

 

Tesco Note out: Solid performer in uncertain times

At Thursday’s results, management highlighted the company’s outperformance in a subdued UK market, noting that the UK business was ahead of the market on both volume (+0.2%) and value (+1.3%). This was despite UK LFL growth coming in at the lower end of market expectations (0.4% versus a 0.2% to 2.0% range).

 

Given the Q120A outturn and with Brexit uncertainty weighing on consumer spending decisions, we pare back our LFL growth forecasts for the UK for FY20E to 0.6% from 2.0% previously. Leaving margin assumptions unchanged at this time, these adjustments drive a 0.7% dip in our forecast FY20E adj. EPS (-1.2% pre FX adjustments) to 16.81c from a 0.6% pullback in group operating profit to £2.45bn and 0.8% dip in revenue to £6.50bn.

 

Tesco is trading at 13.9x CY19E P/E and 6.4x EV/EBITDA, a 12.8% discount to its European supermarket peers.

 

US this week 

Wednesday evening sees the FOMC announcement, together with the committee’s ‘projections materials’ and Fed Chair Powell’s press conference. The committee looks set to maintain the Fed funds target range at 2.25%-2.50%. However while the Fed Chair is likely to craft the statement carefully to keep his policy options open, he will almost certainly allude to the downside risks based from further trade frictions. It will be interesting to view the ‘dot plot’ to the see the extent of the support on the FOMC for easing, and when.

 

Otherwise we will watch for evidence of economic jitters from the data, especially Monday’s Empire State and Thursday’s Philly fed surveys. Trade issues will probably take a back seat to the Fed this week but we should gain a clearer impression of whether Presidents Trump and Xi are set to meet at the Osaka G20 Summit on 28/29 June, thus rekindling the trade negotiations and avoiding a further escalation in the tariff war. But while Washington is claiming that the talks will take place, Beijing is refusing to confirm. True, the US reached an accord with Mexico in its immigration based dispute at the weekend. News reports assert that relatively few preparations have been made for any possible meeting, implying that expectations for progress are low.

 

Against this background, perhaps it is not surprising that concerns over global growth are mounting and that numerous yield curves, including those in the US, Euro area and now the UK, are downward sloping, signalling the view that the next move in rates is likely to be down.

 

UK this week

In the UK, politics, as per usual, is centre stage. Round 1 of the Conservative Party leadership contest resulted in Boris Johnson (BoJo) winning 114 of the 313 Tory MP votes. We note that by maintaining this level of support in subsequent rounds (Rounds 2-4 are scheduled next week, on Tuesday, Wednesday and Thursday), BoJo would progress to the final two and therefore the run-off among Tory party members.

 

While the political angle will be all consuming, there are also a number of UK ‘economic’ events. The MPC will announce its policy decision on Thursday and will almost certainly maintain the Bank rate at 0.75%. Indeed we see so much uncertainty from various areas that we are calling rates remaining on hold until November next year, when we are forecasting a 25bp hike. Both Chancellor Hammond and BoE Governor Carney are set to speak at the Mansion House dinner that evening. But we doubt that Mr Carney would be able to deliver many clues on monetary policy given a notable lack of clarity in economic prospects.

 

Europe this week

In the Eurozone, last week heralded near constant jawboning in Italy on fiscal policy. Thursday’s European Council meeting, will gain some relief from Brexit but will concern itself with whether to accept the Commission’s proposals to place Italy in the Excessive Deficit Procedure (a final decision needs to be made by Ecofin). We note that the ECB conference in Sintra, Portugal, has yielded clues to ECB policy strategy in the past. This year’s begins on Monday. And last, flash PMIs for June are due on Friday. We are not optimistic over the prospects for a rebound in the overall composite index.

 

Raab takes Brexit heat as Boris stays home

Yesterday saw the first televised debate between Tory leadership hopefuls on Channel 4. Boris Johnson was criticised for his decision not to partake, and the organisers made sure the audience didn’t forget it, leaving an empty podium for Boris to highlight his absence.

 

His decision to sit out the debate seems to have done him no harm at the bookmakers whose odds continue to show him commanding a significant lead. In BoJo’s absence, Dominic Raab, the most hard-line Brexiteer drew criticism from the remaining debaters for his stated policy of shutting down (proroguing) parliament to force a no deal Brexit through by the October deadline. Rory Stewart probably gained the most from the debate. As the only candidate who has ruled out a No Deal Brexit, he was able to set himself apart in the debate by questioning how the other candidates would implement a “No Deal” Brexit. The outsider, who has the lowest amount of first round votes of all survivors is currently 2nd favourite at the bookies to win the Tory leadership.

 

Boris has committed to turn up to the next debate, which will place more significance on tomorrow’s BBC debate. Tuesday’s debate will take place after the second round of votes in the Tory leadership contest, which could see a reduced field.

 

Sterling is trading slightly weaker from Friday’s close.

 

Economic Releases

13.30    US        Empire manufacturing survey
17.00    EU        ECB president Draghi speaking