Sterling finds no reprieve in BoE 0.25% hike

03 Aug 2018

The level of QE gilt purchases was held steady at £435bn as expected. However if anything the information that accompanied the decision was on the more hawkish side of expectations.

For one, the vote to hike interest rates was unanimous, against a consensus expectation for a 7-2 split on interest rates. At the same time members of the MPC agreed that more hikes will be needed.  Whilst one final point is that the BoE has published some guidance on what it sees as being the ‘long-term trend equilibrium interest rate’, which they suggest is about 2-3%, at present, which is a higher estimate than many would have expected. Assuming the BoE is on a glide path to this, this looks to be a pointer to the forward SONIA curve (which is pricing in interest rates rising to around 1.25% over the next few years) being too flat. Following the decision sterling firmed initially, but as is often the case with these well flagged shifts in monetary policy, the move is short lived and as such the pound spent the remainder of the day on the back foot with the benchmark EUR/GBP opening this morning in/around the 0.8900 level.

Trade tensions continue to simmer

It was reported yesterday that the US is now ready to reopen formal trade talks with China as long as they are willing to stop retaliatory trade practices and open up to more competition. It seems the Chinese aren’t as keen at the US at this moment in time with the Chinese Ministry of Commerce going on the offensive saying that “China is fully prepared and will have to retaliate to defend the nation’s dignity”. US Commerce Secretary, Wilbur Ross responded by saying that the US have “to create a situation where it’s more painful for them to continue their bad practices than it is to reform”.

Non-farm payroll preview

US non-farm payrolls rose by 213k in June, the second consecutive month above the 200k mark, but effectively in line with the year to date average. Given the solidity of US economic momentum, we would be surprised to see a major change of fortunes in the July numbers. However we note that the employment components of the Philadelphia Fed and Empire State manufacturing surveys suggest that we may have seen something of a softening on the manufacturing jobs front. Expecting non-manufacturing job gains to hold up more robustly, we look for a +195k non-farm payroll reading overall.

On the unemployment rate, this rose back to 4.0% in June from 3.8% in May as the number of unemployed increased amidst a sharp increase in the labour force. This time around we suspect that we will see total unemployment edge down a bit but with another, albeit small, rise in the overall size of the workforce. Taken together we suspect this would be enough to edge the unemployment rate back down to 3.9%.

IRES REIT: Significant NAV beat the main highlight of today’s H1 results

IRES’ H118 results show a solid underlying performance, while a material upward revision to the book value of its property assets has helped to resolve some of the ‘hidden value’ we have written about previously. In terms of the headline figures, EPRA EPS (3.1c) and DPS (2.6c) were both within our forecasts. The main surprise was on the NAV front, which at €1.33 was ahead of our expectation. So what’s behind the NAV beat? Net assets were higher than we had forecast, with the explanation for this being property revaluations (net assets now stand at €57.0m). IRES’ NAV is very sensitive to changes in the assumed cap rate in particular, with a -1%/+1% change moving the value of the investment properties by +€210.3m/-€138.7m (off a base of €823m) respectively. The weighted average cap rate has reduced by 25bps to 4.98% since end-FY17. The valuers assume a gross yield on fair value across IRES’ portfolio of 6.2%. This is -40bps year to date, but now only sits 10bps inside the national gross yield (as per the latest Daft.ie data) of 6.3%. Moreover, the book value of its investment properties works out at an average of €316k – only a third of properties listed for sale across Dublin on Daft.ie have asking prices at or below that level.

Irish Banks: Ulster Bank sees improvement in H118 on sharply lower costs

Ulster Bank has this morning reported a H118 operating profit of €100m, a sharp improvement on the H117 outturn. The Irish subsidiary of RBS Group, Ulster Bank, delivered a H118 operating profit of €100m, sharply up on the €12m reported for H117, with total income up 4% to €355m, operating expenses -17% to €285m, and a net credit impairment release of €30m (H117 €13m impairment release). However, the income improvement seems primarily related to one-off items (€28m H118 vs €15m H117). Operating expenses were lower on a €45m reduction in strategic costs and a €20m reduction in litigation and conduct costs when compared with H117. Underlying staff costs were €10m or 9% lower on the back of restructuring initiatives and lower pension costs. Cost income ratio remains high at 81% though significantly improved y/y (H117 100%). NIM improved to 185bps (+18bps y/y). Net loans and advances reduced by €0.6bn, mainly as a result of the continued roll off of tracker mortgages. RWAs reduced by €1.5bn or 7.3%, principally reflecting an improvement in credit metrics.

Irish Economy: Services PMI moderates to a four month low of 57.4

The latest Investec Services PMI report shows that the sequence of growth for the sector now extends to six years. While the headline PMI has moderated to a four month low of 57.4 (from June’s 59.5), it is still consistent with a sharp rate of expansion in activity. The report also illustrates strong growth in demand, with the New Orders and New Export Business components both pointing to substantial expansion in client orders. In terms of overseas business, panellists mentioned the UK, India, France and the Netherlands as particular bright spots last month. Companies are, predictably, responding to this by adding to headcounts. The Employment index recorded its 71st successive above-50 reading. However, despite these additional resources, Backlogs of Work increased again (as they have in every month since May 2013). Turning to margins, Input Costs rose sharply once again last month, with panellists blaming higher beverage, fuel, insurance and rent costs for this latest increase. A number of firms also indicated that salaries and wages had been raised due to a higher cost of living and efforts to retain staff. Companies raised Output Prices in response to these cost pressures, a move that helped the Profitability index accelerate at the fastest pace seen in 2018 so far. The forward looking Business Activity: Expected Levels in 12 Months’ Time index slowed to a four month low, although nearly half of panellists expect to see output growth over the coming year. Unadjusted data for the segments of the services industry that are captured by this report (Business Services, Financial Services, TMT and Transport & Leisure) show that confidence is highest in the technology space, as has been the case now for almost a year and a half. Given that this sector has contributed 37% of Dublin office take-up in the past five years, it is particularly encouraging to see such optimism. Taken together, this week’s PMI releases suggest that while the rate of growth in activity across much of Ireland’s private sector has slightly softened from the multi-month highs recorded in June, it remains substantial.

Irish Economy: Exchequer Returns solid again in July

The latest Fiscal Monitor from the Department of Finance, covering the month of July, shows another solid performance for the public finances. Tax receipts of €4.75bn in July were in line with profile (target) and 6.3% higher than in the same month last year. In the year to date, tax receipts are +5.5% versus last year and 0.6% ahead of profile. A small Exchequer deficit of €277m was recorded in the first seven months of the year. In the month just concluded, small outperformances in VAT receipts and Corporation Tax were offset by minor underperformances in Income Tax, Excise Duties and some smaller tax heads. In the year to date, the most significant outperformance is in Corporation Tax (+9.9% or +€378m vs. profile) which is offsetting lower than expected Excise Duties (-6.3% or -€203m vs. profile) and Stamp Duties (-6.4% or -€52m vs. profile). Disappointing Excise Duties likely reflect the ongoing decline in new car sales. Both Income Tax and VAT receipts are remarkably close to profile in the YTD, but are 6.8% and 4.5% higher y/y respectively. Looking at the expenditure data, net voted (discretionary) spending was 0.5% lower than profile in the period to end-July, but still +8.2% y/y. Current spending was marginally (0.2%) higher than profile, due primarily to increased Health expenditure. Capital expenditure was 8.2% below profile in the first seven months (but underspending in this category typically unwinds later in the year). It is no surprise to see tax revenues performing strongly against such a favourable economic backdrop in Ireland at present, and we would be surprised if this strong performance did not continue through to the end of the year. Spending is also being kept in check, despite the robust y/y increase, which is encouraging given recent media reports of emerging political pressure on the government to loosen its purse-strings.

Economic releases

09.30 UK PMI
10.00 EC Retail sales
13.30 US Non-farm payrolls
13.30 US Unemployment rate
14.45 US PMI