11 May 2018

Sterling drops as BoE pulls inflation projections back

The UK’s Monetary Policy Committee opted to hold policy steady (7 hold – 2 hike) yesterday with Bank rate maintained at 0.50%, the targeted QE total at £435bn and the corporate bond purchase programme total kept at £10bn.

After a sharp adjustment in market pricing of the likelihood of a May rate rise following a run of economic data that fell short of BoE expectations, yesterday’s decision matched revised expectations. The shape of yesterday’s policy communications suggests the Committee has not ditched its policy tightening plans on a permanent basis. The MPC now looks to be awaiting confirmation that growth momentum is intact and that the soft run of economic releases over recent weeks is, as the BoE suspects, temporary and largely due to poor Q1 weather.


Inflation cooling


Yesterday’s policy communications suggests the BoE MPC has not ditched its policy tightening plans on a permanent basis. The MPC now looks to be awaiting confirmation that growth momentum is intact and that the soft run of economic releases over recent weeks is, as the BoE suspects, temporary and largely due to poor Q1 weather. The first clue that the Committee’s tightening momentum had not dissipated came as two members of the MPC (Ian McCafferty and Michael Saunders) again favoured enacting a rate rise at today’s meeting. Beyond this, today’s policy communications broadly indicate that if we see a sufficient recovery in economic data releases through Q2, the BoE would be content to get on with the job of normalising Bank rate again, with the next hike even as soon as August. As the inflation projections were published at midday, markets focused on the projection for 2.0% inflation at the end of the forecast period, with inflation actually back at the BoE’s 2% target two years from now. This triggered the sharp sell-off in sterling, catapulting the benchmark EUR/GBP rate well over the 0.88 level.


August hike a go


Our own view, along the lines of that expressed by the BoE yesterday is that we will see a pick-up momentum as 2018 goes on. In the press conference today, Deputy Governor Ben Broadbent highlighted the pitfalls of early official data releases, particularly for the construction sector and particularly in snow affected months where revisions are often positive. We share this caution and indeed suspect that weather was a greater influence on the soft early estimates than the reports from the Office for National Statistics suggest. We therefore expect a Q2 rebound, particularly given that we do not see a broader global slowdown afoot. We remain comfortable with our view that the BoE will move ahead and raise the Bank rate later this year and continue to see the next 25bp increase to 0.75% in August.


US rate expectations also drop on poor CPI data


While the dovish BoE dominated most of the headlines yesterday, US rate hike expectations also took a slight hit as April inflation came in slightly below expectations. Core inflation came in at 0.1% vs 0.2% expected, the 3rd consecutive month of below expectation price growth. Year on year core inflation now stands at 2.1%, only marginally above the Fed’s 2% target. While the Fed tend to focus on the PCE measure (which came in at 1.9% for March), rather than CPI, we will have to wait until 31 May for the April release. In the meantime yesterday’s numbers were enough to nudge back rate hike expectations slightly and give the dollar its first major reversal after 3 weeks of persistent gains against the Euro.


Irish Economy: CPI falls as the NTMA raises more money


The CPI slipped back into negative territory in April, falling 20bps m/m while it was -0.4% y/y (the first annual decline since July 2017). These falls were mainly down to lower transport (air fares and motor cars) related expenses. Three sub-indices within the CPI that we closely monitor are Insurance, Accommodation and Private Rents. Insurance prices fell 30bps on the month and were -5.9% y/y, with lower motor (mainly due to the change in the claims environment) and health insurance rates having a roughly equal impact on the annual rate of change. Accommodation prices were +1.6% m/m and 2.8% above year-earlier levels, reflecting strong domestic spend and rising visitor numbers. Private rents rose 0.6% m/m and were 6.5% above year-earlier levels – the annual rate of growth here has cooled since the introduction of rent inflation caps in most urban markets in December 2016 (when the rate of inflation in private rents was +9.7% y/y). Muted overall inflationary pressures are underpinning meaningful growth in real wages in Ireland. Other CSO data show that average weekly (nominal) earnings rose 2.5% y/y in Q417, while the continued tightening in the labour market (unemployment recently fell to a 10 year low of 5.9%) should ensure ongoing upward pressure on wages. In other economy news, the NTMA raised €1bn from a tap of the 2022 and 2028 Treasury bonds yesterday. The NTMA raised the €1bn from taps of the 0% Treasury Bond 2022 (€0.5bn raised at a yield of 0.02% and cover ratio of 2.91x) and 0.9% Treasury Bond 2028 (€0.5bn raised at a yield of 0.958% and cover ratio of 2.48x). These results bring cumulative funds raised on the bond market since the start of 2018 to €11.25bn, or 63-80% of its FY funding target range of €14-18bn. Accessing medium-term funding at negative real rates is good business, particularly given the high coupons on nearly all of the scheduled (legacy) bond maturities out to the middle of the next decade.


Irish Banks/RBS: Ulster Bank launches €1.6bn Project Scariff NPL sale


Ulster Bank has announced the launch of its €1.6bn Project Scariff NPL disposal, which will be made up of owner occupier (55% by value) and buy-to-let (45%) residential mortgages. Project Scariff is set to include c.€900m of owner-occupier home loans across c.3,600 accounts, and c.€700m of BTL mortgages across c.2,900 accounts. The average owner-occupier loan is in arrears of €52,000 and has missed an average of 43 payments, and 73% of them first entered arrears between 7-9 years ago. The BTL cohort have missed an average of 15 payments and are in average arrears of €31,000. There is no indication as to what level of provisioning currently applies to the portfolio, but there is standard industry levels of between 40-50% for owner occupier loans and between 50-60% for BTL.


Datalex: New platform announcement with major Brazilian loyalty network


Datalex has announced it has reached agreement to provide it’s digital commerce platform to Multiplus, the leading loyalty network company in Brazil. Multiplus has c.20m members and 305 company partners. The new platform will allow them to offer a better customer experience across their main delivery channels – online, mobile and call centre. Multiplus allows members to accrue points in one account by transferring them from credit cards, airline points, car re-fueling and a wide range of goods and services. Points can be exchanged for goods and services including airline tickets. Company partners include LATAM Airlines, LATAM Travel, Pontofrio.com, Ipiranga, Netshoes, Dafiti, Accor, Booking.com, Hotels.com, Vivo and Airbnb. “This multi-year, multi-million-dollar deal opens up the global loyalty sector for Datalex” according to Aidan Brogan, CEO of Datalex. Multiplus has a market cap of c.$1.7bn, 2017 Rev of $720m and 2017 Net Income of $162m.


Economic events


13.30    US     Fed’s Bullard speaking

14.15    EC     ECB’s Draghi speaking

15.00    US     Michigan consumer sentiment