23 Mar 2018
Sterling whipsaws on moderately hawkish Bank of England announcement
The BoE Monetary Policy Committee, yesterday afternoon, maintained its stance of policy as universally expected.
Accordingly the Bank rate remains at 0.5%, where it has been since last November. Meanwhile the QE related targets are unchanged, with the stock of gilt purchases at £435bn and corporate bonds at £10bn, respectively. The vote on rates was 7-2 with Ian McCafferty and Michael Saunders both dissenting, backing a 25bp hike. As usual, the QE related votes were unanimous. The overall tone of the minutes was moderately hawkish, suggesting that ‘an ongoing tightening of monetary policy over the forecast period would be appropriate to return inflation sustainably to its target’. This strongly suggests that the committee’s collective view of interest rate prospects has not shifted since the February Inflation Report (IR). While the two dissenters felt strongly enough to vote for an immediate tightening, it was noted that the May IR would facilitate a more in depth look at underlying economic momentum, the size of the ‘output gap’ and the extent of domestic inflation pressures.
Wage growth crucial
The MPC seemed little fazed by Tuesday’s soft CPI data, which showed inflation falling to 2.7%. Instead it pointed out that several indicators of domestic price pressures had firmed recently. For example it made a reference to Wednesday’s wage data, which showed the growth in headline earnings strengthening to 2.8% and regular pay to 2.6%. The committee did point out that this was in line with expectations in the February IR. But of course the IR made a case for higher rates in due course.
May 0.25% hike
Overall the minutes reinforce the view that key driver of policy is the judgement over the extent of the pick-up in domestic inflation pressures. Importantly the recent signs of a firming in pay growth have reinforced the committee’s view that these are strengthening. Also the decline (back) to 4.3% in unemployment shown in Wednesday’s labour market data supports its view that there is very little spare capacity in the economy. The rebound in hours worked no doubt does the same. This is a clear steer toward the likelihood of a further 25bps increase in the Bank rate at the next meeting in May. Perhaps this is a surprise, but only because BoE Governor Mark Carney recently suggested that markets would not receive a clear steer! All committee members agreed once again that further increases in rates would be gradual and limited. Hence we see no reason to change our longer term view, which is that the Bank rate will rise to 1.25% by mid-2019. Sterling remained well supported in the hours leading up to the 12pm announcement and another knee-jerk jump straight after it where the benchmark EUR/GBP rate ran into the now well documented technical support levels of just below 0.8700. The pair is trading back close to the 0.8750 level as we got to print.
Trade War Update
The negative tone in markets yesterday intensified overnight as we gained further detail from the US and China on their planned tariff announcements. US stock markets closed well down, with the S&P500 2.5% lower and that trend has continued into Asian markets this morning, with the Nikkei 225 one of the worst performers, closing 4.5% lower. On the plus side it now appears that President Trump’s steel and aluminium tariffs seem to be excluding a growing number of countries, which may mean that the EU desists from taking retaliatory action. However President Trump has now announced tariffs on up to $60bn a year of Chinese imports to the US. The Chinese government hit back hours later (technically with the response to the steel and aluminium tariffs), threatening to hit $3bn in US goods (128 US products) with tariffs. The plans include a 15% tariff on US steel pipes, fresh fruit and wine and a 25% tariff on pork and recycled aluminium. The Commerce Ministry there said that Trump’s announcement was ‘typical unilateralism and protectionism’ and set a ‘very bad precedent’. We wait to hear whether the Chinese authorities have more to say or do on the matter and whether this sparks another tit-for-tat response from the US.
Irish Economy: CBI data show declining arrears in Q417
The latest Residential Mortgage Arrears and Repossessions data from the Central Bank of Ireland, released yesterday, show that the banking sector made significant progress in tackling legacy issues in the final quarter of last year. The nominal balance of accounts in arrears fell by €699m in Q417, the biggest improvement in six quarters. The release shows that there were 729,722 PDH (owner-occupier) accounts outstanding at the end of 2017, with an aggregate balance of €98.5bn. Of these, 48,433 (6.6%) accounts with a balance of €9.7bn (9.8%) were in arrears of more than 90 days past due (90dpd). This is the first sub-10% reading for the latter since Q211, and it is also well below the Q313 peak of 17.3%. In the BTL sector, there were 122,366 accounts with a total balance of €22.0bn in existence at year-end, of which 14.9% (volume) and 22.7% (value) were in arrears of more than 90dpd. The latter represented an improvement of 40bps q/q, continuing the steady improvements seen in this segment since the 30.8% peak in Q314. One noticeable figure within the data is the jump in BTL properties in the possession of the banks. During Q417 this rose from an opening balance of 731 units to 1,783, fuelled by the receipt of 1,191 properties that were voluntarily surrendered or abandoned. This was principally due to PTSB’s initiative for assisted voluntary surrender of properties in late 2017. Overall arrears have fallen for 18 successive quarters as the economy has strengthened and lenders and borrowers alike have stepped up their engagement. The direction of improvement is, of course, no surprise given that the country’s largest banks have already reported their FY17 results, but it is nonetheless welcome to get a further reminder of the progress being made.
AIB Group: Inaugural senior HoldCo issuance
AIB Group yesterday issued its inaugural senior HoldCo bond, selling €500m in 5yr paper at a coupon of 1.50%. The 1.5% 03/23 bond issue yesterday is the first in the guided €3-5bn of holding company (HoldCo) issuance which AIB will need to conduct over the next 2-3 years as a result of the incoming MREL regime. The bonds issued yesterday are eligible liabilities under MREL, and were issued out of the new HoldCo structure (AIB Group Plc), rather than the operating company (OpCo) AIB Banks Plc which would have issued legacy debt previously. The HoldCo was formed last year to replace the OpCo in terms of primary debt issuance going forward and to be the single point of entry bail-in under the Single Resolution Board’s (SRB) preferred resolution strategy.
SKG: Media reports that IP may propose a London listing and second offer above €38
It is understood by the Irish Independent this morning that International Paper has considered a secondary stock market listing in London in order to overcome any issue SKG shareholders may have in accepting shares in the US listed company as part of a takeover deal. The same article suggests that IP could raise the cash element of its indicative offer for SKG to €26 from €22, which taking the IP spot price would imply a bid price of €38.56. While we would not rule out the possibility of a London listing, we do not necessarily consider it essential for the success of an offer given the liquidity of IP stock. We believe investors would be able to sell their US stock without much difficulty.
Datalex: FY 2017 Results
Datalex has reported FY 2017 results – adj. EBITDA level was $14.2m, while EPS level was 9.32c with reported revenue for the period of $63.9m. Total cash balances are down to $16.7m from $24.3m in 2016. This can be mostly attributed to the build-up of working capital in the Lufthansa product set but the company expects this situation to start reversing as the products are deployed across the Lufthansa Group from Q3 this year. While platform revenue growth of $800k to $27.2m was modest for the year, underlying growth was closer to +10% when finished contracts are excluded. Growth in platform revenue could be c.10% this year and should accelerate over the following two years as current projects get deployed over that time frame. The Online Travel Agent (OTA) Platform is expected to go live in Q2 and the first customer, Jetblue, has extended its contract to the end of 2022. The company has also expanded into the customer loyalty programme market, leveraging capabilities it has already deployed with airline customers – it expects to announce more details of a significant customer within the next two months. Datalex also announced its seventh Chinese customer – the first one secured through its partnership with Neusoft. They expect to begin deployment for this customer in the first half of this year. The dividend has been held at 5c for the year and may also be the same this year but “the Board anticipates that 2019 will see a return to dividend growth”. The company says “we are confident that we will continue to deliver double-digit growth in revenue and Adjusted EBITDA in the period 2018 – 2020.”
INM: CCPC to carry out Phase 2 investigation into Examiner deal
The Competition and Consumer Protection Commission (CCPC) has announced that it will carry out a Phase 2 investigation into the proposed transaction by The Irish Times of the holding company behind The Irish Examiner media group. Back in December The Irish Times announced that it had agreed to acquire national broadsheet The Irish Examiner and related media assets, compromising a portfolio of seven regional newspapers, three websites, stakes in two local radio stations and advertising sales businesses. The acquisition excluded a portfolio of four regional titles in Co. Wexford, to which a provisional liquidator had been appointed in June. Following a preliminary investigation, the CCPC has determined that “further analysis is required to establish if the proposed transaction could lead to a substantial lessening of competition for goods or services in the State”. A final decision must be delivered by the CCPC on or before 01 August, unless the Commission issues a Requirement for Information.
12.00 UK BoE Quarterly Bulletin
12.10 US FOMC member Bostic speaks
12.30 UK MPC member Vlieghe speaks
12.30 US Durable Goods
14.00 US New Homes Sales
14.30 US FOMC member Kashkari speaks
23.00 US FOMC member Rosengren speaks