Sterling unmoved after Brexit white paper release

13 Jul 2018

Following on from the plans that were laid out at the crunch Chequers cabinet meeting last week, which resulted in the resignation of two senior cabinet members, the main thrust of the 100+ page document is to ensure that the government achieves “a principled and practical Brexit”.

 The paper in essence sees the UK committing to EU single market regulations in goods but not in services. The most contentious element of the paper is probably the much maligned ‘Facilitated Customs Arrangement’. Without going into too much detail, this system would be see a ‘frictionless’ border which would eliminate UK customs checks and controls on goods but at the same time giving the UK the power to control tariffs for its own trade. From a financial markets perspective, the UK is asking for an ‘enhanced equivalence regime’ which will result in the abolition of financial passporting. Now it’s over to the EU to digest and ruminate on the paper as markets eagerly await their response.
 
ECB minutes
 

At first glance the minutes of June’s ECB Governing Council (GC) meeting (released yesterday) has yielded few real surprises. On the economy, as stated during the press conference the account notes that the Q1 soft patch may have extended into the second quarter in some countries, but the overall expansion was expected to continue into the medium term. There was an acknowledgement of more ‘prominent’ global risks, notably from trade, but that overall the risks to the eurozone growth outlook remained broadly balanced. On inflation, the GC held the view that progress was being made on a sustained adjustment in inflation to target and that they remained confident that this progress would continue. With regard to policy, the account does not reveal any further clues as to the extent of the debate over the decision to end asset purchases by the end of the year and adjust the central bank’s interest rate guidance. It was seen amongst the GC that the new guidance, that interest rates would remain at their current level at least through the summer of 2019, provided a good balance between ‘precise guidance and maintaining adequate flexibility’. In the wake of June’s ECB decision, it has emerged that the policy announcement was a result of needing to strike a delicate balance between the doves and the hawks on the committee. Indeed those differences in views are evident in reports in recent days that have suggested that a number of members of the GC believe that the wording of the guidance was vague enough for the ECB to hike rates as soon as July 2019, should the economic data warrant, seemingly contradicting the broad message from the press conference and market interpretation that rates would not rise until September 2019 at the earliest.
 
Trump blasts Brexit strategy
 
US President Donald Trump has publically condemned Theresa May’s Brexit strategy, saying the UK Prime Minister has ignored his advice with regards to negotiating with the EU by pushing for a “softer” Brexit. In an interview published by the Sun newspaper this morning, Trump has warned May that her approach has likely jeopardized hope of a US trade deal. “If they do a deal like that, we would be dealing with the European Union instead of dealing with the UK, so it will probably kill the deal”, the US President said. Commenting on PM May’s failure to heed his advice, Trump pointed out that he “actually told Theresa May how to do it, but she didn’t listen; I would have done it much differently”. Adding further fire to the flame, in what has already been a difficult week for the UK Prime Minister following the resignation of two senior Brexit figures (David Davis and Boris Johnson), Trump commended Johnson, saying he “would be a great Prime Minister”.
 
Irish Economy: Overall inflation rate remains muted
 
The latest consumer price data from the CSO show that the overall rate of inflation in Ireland remains very muted, with the CPI +0.4% y/y (+0.1% m/m) in June. On Eurostat’s preferred HICP basis prices on average were +0.7% y/y, following a 0.1% increase in the month. The main items influencing the annual rate of growth in the CPI are upward pressure from Housing-related costs (due to higher rents and utility prices); Restaurant and Hotel prices (due to the sugar tax and buoyant conditions in the accommodation and food service arenas); and Transport costs (driven by higher fuel prices which were partly offset by falling air fares); which are being partly offset by deflation in Food and Non-Alcoholic Beverage prices (broad-based deflation here, save for segments captured by the sugar tax) and Furnishings costs (where we suspect that the weak pound is a key factor here). Three sub-indices that we closely track are Private Rents, Accommodation Services and Insurance. Private rents were flat on the month but still +6.1% y/y in June, reflecting the ongoing mismatch between supply and demand in the housing market. Accommodation Services were +4.7% m/m (these can be volatile on a monthly basis) and +2.6% y/y, with the annual rate of growth reflecting the strong trading conditions in the hotel sector between a good tourism market and rising domestic demand. Insurance rates were -0.4% m/m and -6.4% y/y, with the annual drop mainly produced by a double-digit decline in motor insurance rates due to a change in the claims environment. The annual inflation rates for those three sub-indices are in-line with our expectations. With an economy that is creating 1,000 jobs a week (total employment +2.9% y/y in Q118) and wage growth (+2.4% y/y in Q118) that is far outpacing the overall rate of inflation, the outlook for consumer spending in Ireland is positive.
 
Irish Economy: NTMA raises another €1.25bn
 
Ireland’s NTMA yesterday raised €1.25bn from a dual-line auction. The agency tapped the 0.9% Treasury Bond 2028 and the 2% Treasury Bond 2045 in yesterday’s auction. The NTMA raised €950m from the tap of the 10 year bond at a yield of 0.818%, having received strong demand of €1.66bn (cover ratio of 1.75x), while the tap of the 2045 bond brought in €300m at a yield of 1.638% (covered 1.73x by demand of €520m). Yesterday’s auction brings cumulative benchmark bonds sold by the agency in the year to date to €12.5bn, which compares to the full-year target funding range of €14-18bn. We had expected that 2018 issuance would be front-loaded into the earlier months of the year given the outlook for interest rates going into this year, so how things have transpired have chimed with this view. Taking the ECB’s view on price stability at face value, the NTMA yesterday raised more long-term money at negative real rates – a nice funding position for the Sovereign to be in. Some of the funds raised since the start of the year will be used to meet October’s scheduled redemption of the 2018 Treasury bond (€8.8bn outstanding), which carries a hefty coupon of 4.5%. The ongoing refinancing of expensive crisis era debt with cheap post-crisis issuance will help to further trim the cost of servicing Ireland’s national debt.
 
DCC: IMS points to in line trading
 
DCC had issued a short IMS which points to trading being in line with expectations for its Q1, the least significant trading period for the group. No numbers are provided but operating profit growth has been driven by recent acquisitions. The company has also announced two new bolt-on deals within its Technology division for a total EV of £110m and are expected to generate a ROCE of 15% in the first full year of ownership.
 
C&C: Group issues statement on refinancing of its bank facilities
 
C&C Group has today announced completion of the refinancing of its bank facilities. The new facilities will comprise a 5-year multi-currency RCF facility of 450m, and a 3-year Term loan of 150m. The margin, covenants and other material terms have been maintained in line with C&C’s existing RCF facility. The Group has also increased the facility size of its existing debtor securitisation. C&C noted that the increased facilities for the Group gives it flexibility and scope to meet its long term corporate objectives.
 
Economic releases
 
12.30 UK BoE’s Cunliffe speaks

15.00 US Michigan Consumer Confidence