Ulster Bank Weekly Economic Commentary - Simon Barry Chief Economist Republic of Ireland Ricardo Amaro Economist 10 July 2020
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Ulster Bank Weekly Economic Commentary
Simon Barry
Chief Economist Republic of Ireland
Ricardo Amaro
Economist
10 July 2020
To subscribe or unsubscribe please contact ricardo.amaro@ulsterbank.com
Ireland: PUP, card spending figures continue to offer encouragement, though
IDA warns of downside ahead for FDI
High-frequency indicators on the performance of the Irish economy
continue to point to ongoing improvement. The number of workers
on the Pandemic Unemployment Payment continues to fall steadily,
if unspectacularly. A further 26,000 fall in this week’s figures was in
line with the pace of reduction seen over the previous four weeks,
and takes the cumulative drop from the early-May peak to 189,000
or over 31%. That there are still over 410,000 former workers still in
receipt of the PUP serves to remind of the length of the recovery
journey ahead. But the sustained gradual improvement in labour
market conditions reflected in PUP claimant trends is to be
welcomed nonetheless, and it does look to be continuing to exert a
supporting influence on consumer attitudes and spending the latest
sign of which came in the weekly debit & credit card usage figures
from the Central Bank. The latest numbers show that total daily
card usage (covering sales transactions and ATM withdrawals) has
now returned to early-March levels - an important recovery
milestone that reflects the easing of restrictions and an associated
release of pent-up demand. While these short-term indicators offer a
good deal of encouragement, the mid-year update from the IDA
struck a decidedly cautious tone. 132 new investments in H1 (with
associated jobs potential of 9,600) is down a modest 6% on 2019
but still counts as a resilient performance. But with typical new
project lead times of 6 months, the agency was plainly flagging that
FDI investment and jobs trends face clear downward pressure later
this year and into next as the full effects of C-19 related disruption
come through with a lag.
Slide 2Eurozone: Further signs of short-term activity bounce as May retail sales jump
by more than expected
Building on recent positive surprises in several individual member
states (notably Germany, as we noted last week), this week’s
Euro Area Retail Sales Volumes Index, sa
aggregate retail sales figures for May covering the entire Eurozone
112.5 also came in quite a bit better than expected. Sales volumes
110.0 surged by 17.8% m/m in May, well ahead of what were already-
punchy analyst expectations for a 15% jump. While this more than
107.5 recovers the 12% drop recorded in April, it still leaves sales
volumes running 7.5% below pre-virus levels. Mounting signs that
105.0 the zone’s economy has started to turn up, and in some cases at a
faster-than-expected pace (this week’s industrial production figures
102.5
from France and Italy also beat expectations) are certainly
100.0 welcome. And swift agreement on and implementation of the
European recovery fund could provide a needed and welcome shot
97.5 in the arm to recovery prospects. But beyond any short-term
bounce in economic indicators, there are several reasons to remain
95.0
cautious: virus developments themselves remain the source of very
92.5 important downside economic risks; such is the enormity of the hit
taken in recent months, that the journey back to the pre-virus
90.0 trajectory for the Eurozone economy is still more likely to be
protracted rather than rapid; and, uncertainty about C-19’s
87.5
medium-term economic effects remains very high. One implication
85.0 for ECB policy is that if there is going to be a further change in the
near term, then any such change is going to be a further loosening
January February March April May
2020
rather than any tightening, albeit that the encouraging signs of late
Source: UB / Macrobond
on economic activity make another policy move as soon as next
week unlikely in our view.
Slide 3
UK: Wage subsidy scheme to end in October as the focus moves to getting
furloughed workers back to work
In an otherwise quiet week on the UK economic calendar,
Chancellor Sunak delivered what he described as “phase two” of
United Kingdom, Total Number of Jobs Furloughed
the fiscal response to the crisis, which marks the move from
10 blanket emergency support to the whole economy to a more
targeted approach and focussed on protecting jobs. Importantly,
9 this means that the Government’s furlough scheme, which has so
far provided income protection to over 9 million employees, will
end in October as the focus turns to supporting furloughed
8 workers back to work. To that effect, the so-called Job Retention
Bonus will offer businesses a £1,000 payment for every
furloughed employee who remains continuously employed until
7 the end of January 2021. Whether the government will succeed in
avoiding mass unemployment on a sustained basis will of course
6 also importantly depend on the wider economic recovery, with this
week’s package of measures featuring targeted supports for
hospitality, in recognition of the specific challenges facing the
5 sector. Particularly eye-catching was the eat out subsidy for the
month of August, but the industry will also enjoy a six-month VAT
cut on food, accommodation and attractions from 20% to 5%.
4 Overall, this week’s announcements delivered around 1% of GDP
of additional stimulus, bringing UK Government’s total direct
3
coronavirus spending to around 7.5%, a figure which is likely to be
increased again in the Autumn Budget and Spending Review.
May June
2020
However, Sunak’s commitment to return the public finances to a
sustainable and healthy path also highlights that in time attention
Source: UB / HMRC
will likely re-focus on balancing the books.
Slide 4US: ISM survey signals June rebound in services but recent deterioration in
virus trends poses important risk to recovery momentum
A very encouraging outcome in the results of the latest ISM
survey of services sector activity has added to the sense that the
US, ISM Non-Manufacturing Index, sa
US economy has enjoyed a strong initial recovery. Notably, the
62.5 12.5 largest single-month gain on record left the headline Non-
Manufacturing PMI at a robust and much stronger-than-expected
60.0 10.0
reading of 57.1 in June. Other key elements within the report were
57.5 7.5 also generally upbeat, with the Business Activity and New Orders
indices both rising sharply to signal fast expansion. However, two
55.0 5.0 points of caution apply in interpreting this week’s overall positive
report. Notably, while the PMI allows us to conclude that a
52.5 2.5 majority of service-providers are now in expansion mode, the
report doesn’t inform on the magnitude of the expansion which is
50.0 0.0 particularly relevant following the activity collapse in recent
47.5 -2.5 months. It is also fair to note that the recent deterioration in
coronavirus trends and associated partial roll back of reopening
45.0 -5.0 measures in many US states pose important downside risks to the
ongoing recovery momentum. Indeed, while this week’s report
42.5 -7.5 showed slightly lower-than-expected initial and continuing claims,
recent trends remain broadly consistent with some moderation in
40.0 -10.0 the pace of improvement. And one aspect of this week’s report
which got our attention was that a measure of continuing claims
37.5 -12.5
which also includes emergency coronavirus claims (which are
2008 2010 2012 2014 2016 2018 2020 excluded from the regular claims counts) has actually increased in
ISM Non-Manufacturing Index, lhs Monthly Change, rhs the week ending June 20th, with a record reading of 32.9 million
signalling ongoing acute labour market stress even following
Source: UB / Macrobond
recent strong employment gains.
Slide 5
Financial Markets: Eur/GBP moves below 90p as investors welcome UK
summer stimulus
With major equity markets generally treading water this week,
developments in currency markets have taken centre stage. In
Eur/GBP, £ and GBP/USD, $, past 12 months
particular, investors have taken a constructive view of the latest
1.350 0.83 round of fiscal stimulus from the UK, with this week’s new package
0.84 of measures exceeding expectations. Nearly £30 billion of additional
1.325 spending measures (or around 1% of GDP) consolidate the position
0.85 of the UK’s fiscal response as one of the most aggressive so far in
1.300 0.86 the crisis, with investor sentiment also likely buoyed by promises of
more to come in October. A positive market reaction to an
1.275 0.87 announcement which also confirmed the gradual wind down of the
0.88
UK government’s furlough scheme likely leaves Chancellor Sunak
1.250 with a sense of job well done. And for the pound, Eur/GBP is
0.89 currently trading below the 90p level for the first time in 3-weeks
1.225 following a 0.7% weekly move to the downside, with the pound
0.90
enjoying even larger gains of 1.3% against the dollar. Attention now
1.200 0.91 turns to Brussels, with next Friday’s in-person summit of EU leaders
providing the first opportunity for final agreement on the EU recovery
0.92
fund. Another round of US stimulus is also needed to avoid a
1.175
0.93 “benefits cliff” as the $600 per week in Federal Pandemic
Unemployment Compensation is set to expire at the end of July,
1.150 0.94 barring another partisan agreement. July stimulus is also likely here
J A S O N D J F M A M J J in Ireland as we await a fiscal update from the new Government. In
2019 2020 the meantime, investor belief in Ireland’s credit-worthiness was once
EUR/GBP (scale-inverted), rhs GBP/USD, lhs again borne out this week, with bond sales of €1.5 bn (€1.2bn of
which was at negative yields) leaving cumulative NTMA issuance
Source: UB / Macrobond
so far this year within its €20-24 bn target for the year as a whole.
Slide 6Currency and interest rate market trends
Slide 7
Market Monitor
Foreign Exchange Markets Interest Rate Markets
Latest weekly ∆, % Latest (%) weekly ∆, bps
EUR/GBP, £ 0.894 -0.8 EUR 3 Month Euribor -0.438 -0.3
GBP/EUR, € 1.118 0.7 2 Year Swaps -0.39 0
EUR/USD, $ 1.131 0.6 5 Year Swaps -0.36 -2
GBP/USD, $ 1.265 1.3 10 Year Swaps -0.20 -4
EUR/JPY, JP¥ 120.8 -0.1 GBP 3 Month Libor 0.093 -1.9
GBP/JPY, JP¥ 135.0 0.6 2 Year Swaps 0.15 -5
USD/JPY, JP¥ 106.8 -0.7 5 Year Swaps 0.21 -5
EUR/CHF, CHF 1.063 0.0 10 Year Swaps 0.34 -4
USD 3 Month Libor 0.268 -0.8
2 Year Swaps 0.21 -1
Stocks & Commodities
Latest weekly ∆, % 5 Year Swaps 0.32 -2
ISEQ 6,046 0.3 10 Year Swaps 0.59 -6
STOXX Europe 600 367 0.4
FTSE 100 6,101 -0.9 Note: the data in the tables are indicative only and are sourced
from Bloomberg. Latest data are updated as at the time of
S&P 500 3,162 1.0 publication. “weekly ∆” refers to the change from the previous
Dow Jones 25,847 0.1 week’s closing levels.
Nasdaq 10,531 3.2
Ulster Bank Cost of Funds Rate (365 day count) = 0.42%
NIKKEI 22,291 -0.1 Euro rates are quoted in 360-day convention.
OIL (London Brent) 42.9 0.2 To convert to 365 day count, divide by 360, & multiply by 365
Gold 1,799 1.4
Slide 8Highlights for the week ahead: Irish Construction PMI and house prices, busy
US and UK data dockets and ECB meeting in focus
Domestic construction and house price trends will be in focus
next week, with the release of the latest Ulster Bank Construction
Ireland, CSO Residential Property Prices, y/y %
PMI and Residential Property Price Index, on Monday and
30 Wednesday respectively. The June PMI survey results will
provide a steer on activity trends at the end of H1 following
extreme, coronavirus-driven, weakness in recent months. The
20 initial impact on house prices has been relatively modest and the
May results may paint a similar picture given the various lags to
which the index is subject but overall, we would be surprised if
10 future readings don’t reveal some downside pressure on prices.
1.1
Elsewhere, following further easing last month, the July ECB
0.5
monetary policy meeting is expected to result in unchanged
0 settings and guidance. Brexit negotiations are also set to
-0.1
continue, while it remains a close call on whether EU leaders will
reach agreement on the EU recovery fund at next Friday’s
-10
European Council summit. On the data front, June retail sales
and industrial production figures from the US will be closely-
watched for further signs of ongoing rebound in US spending and
-20
activity trends. But with coronavirus trends continuing to look
concerning, investors will also eye next week’s important surveys
for July, such as the University of Michigan Consumer Sentiment
-30
index and the manufacturing surveys from the NY and Philly Fed.
2006 2008 2010 2012 2014 2016 2018 2020 In the Eurozone, we will get May figures on industrial production
Ex. Dublin Dublin National and an update on financial analyst sentiment (via the ZEW’s
report for July), while a busy UK docket includes the May
Source: UB / Macrobond
monthly GDP reading and labour market report.
Slide 9
Economic calendar for the week commencing July 13th
Ireland / Eurozone UK US
Monday
01.01 – Ulster Bank Construction PMI (Jun) 16.30 – BoE Governor Bailey speaks on Libor 19.00 – Monthly Budget Statement (Jun)
Tuesday
10.00 – EZ Industrial Production (May); GE ZEW OBR publishes Fiscal Sustainability Report 11.00 – NFIB Small Business Optimism (Jun)
Survey of Financial Analyst Confidence (Jul)
00.01 – BRC Retail Sales Monitor (Jun) 13.30 – CPI Inflation (Jun)
11.00 – Domestic Building Energy Ratings (Q2)
07.00 – Monthly GDP (May); Labour Market Data
(3-mths to May)
Wednesday
11.00 – CSO Residential Property Price Index 07.00 – CPI Inflation (Jun) 12.00 – MBA Mortgage Applications
(May); Goods Exports and Imports (May)
09.00 – BoE speech on the economy (Tenreyro) 13.30 – NY Empire Manufacturing Survey (Jul)
09.30 – ONS House Price Index (May) 14.15 – Industrial & Manuf. Production (Jun)
19.00 – Fed releases Beige Book
Thursday
12.45 – ECB July Monetary Policy Meeting 13.30 – Retail Sales (Jun); Philly Fed
Manufacturing Survey (Jul); Initial Jobless Claims
Friday
Start of 2-day Special European Council meeting 13.30 – Building Permits and Housing Starts (Jun)
on the EU recovery fund
15.00 – University of Michigan Consumer
11.00 – Weekly Update on Debit and Credit Cards Sentiment (Jul)
Payments; CSO Weekly Labour Market Update
The Calendar uses Irish local time
Slide 10Important Information
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change without notice. The information contained herein should not be construed as advice, and is not intended to be construed as such.
This publication provides only a brief review of the complex issues discussed and recipients should not rely on information contained here
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information and disclaim all liability for use the recipient or their advisors make of the information.
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