03 Oct 2018
Services PMI strengthens in September
The latest Services PMI release for Ireland shows a strengthening in the rate of growth in activity for the sector, with the headline PMI improving to a three month high of 58.7 in September (August: 58.0).
This release extends the sequence of unbroken growth for the sector to 74 months. Encouragingly, panellists said that they had become more optimistic on the outlook, with this positive sentiment backed up by an uptick in the rate at which they are adding to payrolls to the fastest in the year to date. These additional staffing resources will have helped to meet a quickening in the rate of growth in new orders. Within this demand, we note that overseas orders firmed last month, with the UK cited as a particular source of strength by panellists. On another positive note, the rate of increase in input prices moderated to a four month low, with the main inflationary pressures at this time coming from higher salaries and fuel costs. As has been the case for the past four-and-a-half years, companies were able to defray some of these pressures by hiking output prices once again. The composite PMI for Ireland was unchanged at 58.4 for a second successive month in September. On this metric, growth is the best it has been since January, which sets the Irish economy up for a strong finish to 2018.
Irish Economy: Exchequer Returns argue for caution in next week’s Budget
Exchequer Returns for the period to end-September released by the Department of Finance (DoF) are a bit of a mixed bag and, in truth, will lend further weight to what we already viewed as an already persuasive case for the Minister to opt for caution in next Tuesday’s Budget. Tax receipts in the period to end-September of €37.5bn, while +5.2% on the same stage in 2017, are 0.3% or €127m behind profile (guidance). For the month of September alone, receipts were 0.5% behind profile. On the spending side, total net voted expenditure of €36.0bn was 0.1% or €45m below profile. On an annual basis, this discretionary spend was +8.9% y/y. In terms of the main headings, both Income Tax (€14,535m versus a profile of €14,542m) and VAT (€11,571m vs a profile of €11,610m) were effectively in-line; corporation taxes were 6.3% ahead of profile at €5.2bn, Excise Duties were 8.0% behind at €3.9bn; while Stamps were €101m or 9.7% behind profile at €1.04bn. The miss in Stamp revenues is particularly striking given that the Minister for Finance targeted the commercial property market in last year’s Budget, trebling the duty on transactions to 6%. The under shoot in this segment is also interesting given media speculation around a targeting of institutional PRS investors in next week’s Budget.
Given the paucity of housing output from the State sector (and fiscal rules preventing the material increase in new housing provision that some politicians persist in calling for), we argue that penalising institutional pools of money could worsen the current housing shortage (as the build-to-rent sector can play a vital role in addressing unmet housing need). Another consideration is that about a seventh of tax receipts come from volatile corporation taxes. Given the uncertainties around the Brexit negotiations and international trade policies, the high share from this heading warrants caution heading into 2019. And all of this is before one considers that the Irish economy is already expanding at a blistering pace, leading the EU28 growth charts (we see GDP +7.0% this year), which further strengthens the case against pro-cyclical fiscal measures come Budget day.
REITs: GRN markets new office building and a potential opportunity for REITs
According to press reports, GRN is quoting rents of €30psf for its new 100,000 sq ft eight storey office building, Building I at Central Park. Today’s Irish Times also reports that a portfolio of 53 houses, duplexes and apartments in Baldoyle (North-East Dublin) is being offered for sale in a single lot. Building I is due for completion in Q119 and is the only one of GRN’s office developments that is yet to be let. GRN had guided that it would produce rents of €27.5psf, producing an annual rent of €2.9m (an attractive yield on cost of 7.9%), but today’s report suggests that the risks to this lie to the upside.
Once this building is let, we would expect GRN to take advantage of the conditions in the office market and proceed with further development at Central Park, which has capacity (and permission) for a further 400,000 sq ft of office space. Elsewhere, some 77% of the residential units at The Coast development which has just been brought to market are currently rented out and producing an income of €655k, with the ERV for the complex estimated at more than €1m, which equates to a reversionary yield of just over 7.5% off the guide price of €13m. The development is very close to a Dart (light rail) station and well served by bus routes, while it is also within 5km of Dublin’s M50 orbital motorway and the M1 motorway (towards Belfast). The property is close to major employment centres including Dublin Airport.
FBD Insurance: Fairfax deal refinanced by €50m sub debt issue
FBD Insurance yesterday completed the refinancing of its Fairfax convertible buyback via the issuance of €50m in 10 year Tier 2 subordinated bonds to institutional investors. The 5% coupon on the newly issued debt is significantly lower than the 7% that applied to the convertible bonds, and the pro forma improvement in debt funding costs of €2.4m is equivalent to a 6% improvement in FY19E pre-tax profit vs no capital reorganisation or conversion having taken place (though this was an unlikely scenario).
Later today Theresa May will take to the stage at 11:45am at the Conservative Party conference for the annual leader’s speech. Her speech will say that the UK’s “best days lie ahead of us, and that our future is full of promise”. Note however that the Prime Minister was set to unveil her overhaul of the UK’s immigration policy in her speech today. Instead, this was rushed out 24 hours earlier by her Home Secretary Sajid Javid as part of a concerted effort to divert attention away from former Foreign Secretary Boris Johnson’s speech where he stopped just short throwing in a leadership challenge. In its place, the Prime Minister will instead confirm that the Chancellor will freeze fuel duty for the ninth year in a row, though there are also reports in this morning’s press that she could touch on housing policy. Still the principal focus will not be on the content of the speech itself, but rather on Mrs May herself to determine whether she has the support of the party to continue on in her role.
UK Services PMI in focus
The UK services PMI rose from 53.5 to 54.3 in August. Incoming new work picked up slightly on the month, but anecdotes suggested that Brexit uncertainty continued to weigh on demand and led to business optimism easing to a five-month low. While employment growth was the highest since February, there remained continued reports of widespread recruitment difficulties which in-turn put further upward pressure on pay awards. Brexit-related sentiment improved this month in the lead up to the EU leaders’ summit in Salzburg (September 19-20), which saw cable gain as much as 5% from its mid-August lows. Underpinning this was the EU’s chief negotiator Michel Barnier sounding more confident that a deal could be reached with the UK. While the tone of the summit itself was rather gloomier, the vast majority of survey responses are typically received early in the month (i.e. in this case, before the summit) and would not therefore reflect this. As such, this may have helped to lift some of the uncertainty that has been weighing on demand, albeit not completely. We therefore look for a marginal 0.2pt improvement in the PMI to 54.5 for September.
Brent Crude trades over $85/b
Brent Crude is trading near 4 year highs even though Russia is pumping at record levels and other OPEC members are helping to offset Iran's decline in output. The trend looks to be for importers to continue to replace Iranian imports as the sanctions approach, forcing limited spare capacity to be brought on line - the market has reacted accordingly. Brent broke 85 $/b yesterday evening reaching a high of 85.46 $/b while US crude futures finally set a new high of the year having broken 75 $/b.
09.00 EU Services PMI
09.30 UK Services PMI
10.00 EU Retail Sales
10.30 UK Theresa May Speaks at Party Conference
12.00 US MBA Mortgage Applications
13.15 US ADP Employment Change
14.45 US Services PMI
15.00 US ISM Non-Manufacturing Index