The uncertainty caused by the EU referendum is underlined by the wide disparity between the forecasts of economists (including the Bank of England) and those of the financial markets as to future UK interest rate movements. Despite market pricing suggesting there is a 30% chance that interest rates will fall this year, a cut does not appear to be likely. While many economists believe that the possibility of rising inflation will require a hike in interest rates later this year, increases are expected to be more gradual than past tightening cycles as there appears to be plenty of spare capacity in the economy allowing for a pick-up in growth without stoking significant inflationary pressures. The consensus view of economists is for a first interest rate rise in November of this year, reaching 1.25% by the end of 2017. However the money markets continue to paint a significantly different picture with the futures markets implying that the date of the next UK interest rate hike will be December 2019!
With the Brexit debate now entering its final month before the referendum vote on the 23rd June, the focus of the debate appears to be returning to the economic versus immigration argument. It would appear that both the ‘Remain’ and ‘Leave’ camps are concentrating their efforts on promoting the fear factor rather than articulating the positives from their respective positions. It looks like it may become a ‘heart’ decision for many as there appear to be a dearth of facts that are trusted by the electorate on which to make an informed decision.
The UK Consumer Prices Index (CPI) inflation figure rose by 0.3% in the year to April 2016, down from 0.5% in the year to March. Falls in air fares and prices for clothing and vehicles were the main contributors to the decrease in the index. These downward pressures were partly offset by rising prices for motor fuels and recreational goods. After last month’s bigger than expected rise in the inflation rate, economists caution that the fall this month reinforces the recent subdued outlook for inflation and highlights the need for government action to boost business confidence and support growth at a time when the economy faces so many headwinds.
On the positive side, the strong recovery in the official UK retail sales figures for April, after the disappointing decline in March, appears to indicate that in spite of major headwinds the UK economy continues to grow – albeit at a slowing pace. UK retail sales volumes in April were up by 1.3% on the month, and up by 4.3% on the year. However economists point to the contrast between buoyant retail sales and the problems facing other sectors such as manufacturing which highlights the unbalanced nature of the UK recovery. To secure sustained growth economists believe that a more balanced economic structure with a stronger focus on exports, investment and manufacturing is required.
Despite significant global economic challenges, U.S. Federal Reserve minutes from its April rate-setting meeting appear to indicate that Fed policymakers are on the verge of meeting most of the economic conditions that they had set in order to increase interest rates in June or September. Until last week markets were putting extremely low odds on a summer rate increase, in part because of the dovish tone of Fed chair Janet Yellen’s last speech two months ago. To justify a move at its next policy meeting in June, the Fed set itself three tests: to see additional signs of a rebound in the economy in the second quarter; further strengthening in the jobs market; and for inflation to carry on towards the Fed’s 2.0% target. However, policymakers remain divided over whether these conditions will all be met by next month but if not economists believe that a September increase is likely.
The eurozone will be relieved that the Greek parliament has approved tax increases and a new privatisation fund in exchange for much-needed bailout loans and debt relief. It is hoped that the measures will help unlock the funds that Greece needs to repay IMF loans and ECB bonds maturing in July. Talks over the reforms have dragged on for months, mainly due to a rift between the EU and the IMF over Greece’s fiscal progress with the latter sceptical that Greece can achieve a 3.5% surplus target in 2018 unless it gets substantial debt relief and takes upfront measures. It has set both as conditions for its participation in the bailout. To help break the deadlock, Athens has included a contingency mechanism of spending cuts, which will be activated if it is set to miss its bailout targets. These measures are due to be discussed this week at a Euro-group meeting.
|5-YEAR CDS SPREADS AND SHARE PRICES|
|Date:||23rd May 2016|
|5-Year CDS Spreads (bps)||Equity Share Prices (LCL)|
|Parent: Aldermore Group plc|
|Aldermore Bank plc||n/a||n/a||n/a||1.97||1.87||+5.3%|
|Allied Irish Banks||66||65||+1.5%||6.80||7.60||-10.5%|
|Parent: Arbuthnot Banking Group plc|
|Arbuthnot Latham & Co.||n/a||n/a||n/a||14.60||14.61||-0.1%|
|Aust and NZ Banking Group Ltd||100||107||-6.5%||25.09||24.11||+4.1%|
|Banco Bilbao Vizcaya Argentaria S.A.||137||127||+7.9%||5.63||5.51||+2.2%|
|Parent: Barclays plc|
|Barclays Bank plc||114||125||-8.8%||1.76||1.65||+6.7%|
|BNP Paribas S.A.||86||80||+7.5%||45.71||44.02||+3.8%|
|Parent: Close Brothers Group plc|
|Close Brothers Limited||n/a||n/a||n/a||12.81||11.76||+8.9%|
|Credit Agricole S.A.||84||80||+5.0%||8.84||8.65||+2.2%|
|Parent: Credit Suisse Group AG|
|Credit Suisse AG||136||133||+2.3%||20.90||19.90||+5.0%|
|Deutsche Bank AG||181||176||+2.8%||15.14||14.68||+3.1%|
|Parent: HSBC Holdings plc|
|HSBC Bank plc||97||101||-4.0%||4.29||4.30||-0.2%|
|Parent: ING Groep N.V.|
|ING Bank N.V.||72||72||0.0%||10.49||10.43||+0.6%|
|Intesa Sanpaolo S.p.A.||133||127||+4.7%||2.31||2.22||+4.1%|
|Parent: Investec plc|
|Investec Bank plc||n/a||n/a||n/a||4.81||4.82||-0.2%|
|Parent: Lloyds Banking Group plc|
|Lloyds Bank plc||95||103||-7.8%||0.70||0.66||+6.1%|
|Metro Bank plc||n/a||n/a||n/a||22.12||21.00||+5.3%|
|Nationwide Building Society||76||76||0.0%||n/a||n/a||n/a|
|Nordea Bank AB||65||65||0.0%||78||76||+2.6%|
|Parent: RBS Group plc|
|Royal Bank of Scotland plc||126||134||-6.0%||2.31||2.11||+9.5%|
|Ult. Parent: Banco Santander S.A.|
|Santander UK plc||76||76||0.0%||4.15||4.06||+2.2%|
|Shawbrook Group plc||n/a||n/a||n/a||2.80||2.56||+9.4%|
|Parent: Standard Chartered plc|
|Standard Chartered Bank||154||144||+6.9%||5.26||5.07||+3.7%|
|Svenska Handelsbanken AB||65||63||+3.2%||104||101||+3.0%|
|FTSE 350 BANK INDEX||n/a||n/a||n/a||3236||3140||+3.1%|
|SNR FIN ITRAX CDS 5-YEARS||100||97||+3.1%||n/a||n/a||n/a|