08 Oct 2018
Up this week
Monthly GDP figures for August should provide the latest update on the health of the economy. We suspect that GDP growth would have witnessed another healthy expansion this month and we forecast month on month growth of +0.2% and +0.6% 3m/3m.
US this week:
The benchmark US 10 year (Treasuries) yield reached over 3.24% on Friday, its highest since June 2011. A few things seem to be behind last week’s move. Firstly, US data including September’s ISM non-manufacturing index and a continuing tightening of the US labour market point to buoyant US growth. Secondly, comments from various Federal Reserve officials were perhaps the bigger driver. It is notable that a number of FOMC members such as Chair Jerome Powell and a number of the committee’s normally more dovish members, including Charles Evans, have made reference to the Fed’s interest rate policy becoming restrictive at some point. The Fed’s current projections suggest that its estimate of the neutral rate is around 3.00%, but given the strong economic numbers coming out of the US and the recent Fed comments, markets may be beginning to readjust their expectations that the Fed Funds Target rate range may rise above 3.00%. The US week is set to get off to a quiet start given Columbus Day, when bond markets will be shut. Economic numbers will also be in relative short supply, with the key numbers limited to CPI inflation on Thursday and Michigan consumer sentiment on Friday.
UK this week:
Monthly GDP figures for August should provide the latest update on the health of the economy. We suspect that GDP growth would have witnessed another healthy expansion this month and we forecast month on month growth of +0.2% and +0.6% 3m/3m. In addition to the GDP data, individual sector data will also be published as well as trade and the RICS housing survey. One other economic event to watch out for is the statement from the BoE’s latest Financial Policy Committee meeting due on Tuesday. On the Brexit spectrum, reports have centred on the possibility of a reworked Chequers plan (Chequers II) to find a workable solution with the EU, as well as to placate Tory rebels. Meanwhile positive news late last week has suggested that progress may be being made on the Irish backstop, with a new UK proposal reportedly being well received by the EU.
Europe this week:
Italy is set to remain a key focus for European markets in the forthcoming week as Italian budget woes continue. Over the last week or two (since 27-Sep) Italian markets have fallen heavily, the FTSE MIB down 4% and 10 year yields rising 47bp to 3.4%. Markets remain concerned over Italy’s fiscal outlook and whilst some comfort has been taken from reports that the government has revised down its 2020 and 2021 deficit targets, the full budget detail has yet to be revealed. The EU’s response once the final budget has been submitted for review could also prove a flash point later in the year. Meanwhile Euro area data that is set to feature this week includes industrial production for the Euro area and a number of member states as well as final HICP inflation data from Germany and France.
Permanent TSB: Mortgage rates cut as competition heats up
Permanent TSB on Friday announced a 20bps cut to the majority of its 3 year and 5 year fixed rate mortgage product suite for new customers, in a sign that competition within the market is continuing to increase, as the main incumbents fight for market share amid suggestions of challenger lenders beginning to enter the sector. The cut in rates by PTSB, which was hinted at by both mortgage brokers and some of the Irish media in the middle of last week, sees its 3 year mortgage rates fall to between 2.75-3.10% (depending on LTV) from 2.95-3.15%, while its 5 year offering falls to between 2.85-3.20% from 3.05-3.25% previously. When PTSB’s 2% upfront and 2% repayment cashback discounts/offers are also included, this gives effective interest rates of c.2.40% over a five year term (amortising the cash back over this period), which positions the lender at the very front of the market. The PTSB rate cuts come after recent cuts by Ulster Bank and KBC, and may increase the pressure on the other high street lenders in the sector to cut rates in response.
Irish Economy: More fiscal space for the Minister
The Department of Finance (DoF) released its White Paper setting out updated estimates for receipts and expenditure both for the current year and the next on Friday. The document is an annual release ahead of the Budget, which will be announced tomorrow afternoon. The White Paper is compiled on a technical pre-Budget basis, meaning that it does not reflect any of the changes that the Minister will unveil tomorrow. On the face of it, the document paints a positive picture, with tax revenues for FY18 now expected at €55.1bn, €0.9bn or 1.7% ahead of the previous forecast, while in FY19 the Minister is expected to have receipts of €57.4bn, which is €0.4bn or 0.7% ahead of the previous projection.
So far so good, but we note that some of this upgrade reflects one-off (IFRS 15 related) corporate tax gains in 2018, while Excise and Stamp receipts are now expected to come in €0.3bn weaker than had been modelled for in FY18. The General Government Deficit is now guided at €195m in FY18, an upgrade from the previous estimate of a €780m, although we had flagged following last week's Fiscal Monitor release that the General Government Balance for Q1-Q318 was €0.5bn better than forecast so this isn't too much of a surprise. For FY19, the Minister is now anticipating a surplus of €640m, versus the previous €350m deficit, a €1bn swing.
The Minister has signalled that he wants a balanced budget in FY19, which points to a package of measures greater than the €800m previously indicated by the DoF (as the government is widely expected to raise a number of taxes, which will increase the resources available to the Minister). The Taoiseach (Prime Minister) has downplayed suggestions that this would be an 'election budget', but we are not so sure, given reports of across the board hikes to weekly welfare recipients and other indiscriminate measures that would seem less warranted than targeting the specific areas most in need of assistance.
Our hunch has been (and remains) that the government will call an unprecedented 'hat trick' of elections (Local, European and National) on the same day next May. A 'something for everyone' type approach to tax and spending changes, if confirmed, raises the prospect of this, in our view. From an economic / stock market standpoint, the key things to watch for tomorrow are measures to boost housing output, any changes to the favourable tax regime enjoyed by the hospitality sector, and any further Brexit supports to the transport sector (these may be diluted by expected carbon tax hikes). Given the government's large economic interest in the banking sector, changes there cannot be ruled out.
Irish Economy: Construction PMI shows a moderation in growth
The latest Construction PMI release from Ulster Bank reveals that growth in activity in the sector cooled a little in September. The headline PMI moderated to an 11 month low of 56.2 in September from the previous month’s 58.3 reading. This weakening was driven by the Housing (where the 56.1 reading was the lowest since October) and Civil Engineering (where the 48.1 reading was the third sub-50 outturn in the past five months) segments.
Commercial strengthened to 58.1 from the previous month’s 57.7. Some of the other findings of the PMI survey bring reassurance, however. Growth in New Orders quickened during the month, underpinning a steady rise in hiring in the industry. The forward-looking Expectations index shows that, notwithstanding a cooling in optimism to a 10 month low (likely linked to negative headlines about the global outlook), 55% of panellists anticipate higher output levels over the year ahead. While the overall rate of input cost inflation has ticked down, it remains above the series average, while a number of firms cited rising steel costs as an issue.