The UK’s manufacturing sector is enjoying one of the fastest rates of expansion in output and new orders in 25 years, according to the latest IHS Markit Purchasing Managers’ Index (PMI). Manufacturers said the sharp fall in the value of the pound had boosted export orders from the likes of China, India, the US and the European Union (EU). The index showed that activity in the sector jumped to 56.1 in December which was up from 53.6 in November and is the highest rate in two and a half years. The PMI figure was far higher than economists’ expectations of 53.3. The survey showed that output and new orders in manufacturing rose for the seventh consecutive month. The UK’s PMI exceeded the Eurozone’s balance of 54.9 and the US reading of 54.3.
Further PMI figures this week for the remaining services and construction sectors are also expected to indicate growth in December confirming that the UK economy has ended the year in good shape although economists warn that tougher times lie ahead this year. The economy’s resilience since the Brexit decision continues to surprise many experts who had predicted a sharp slowdown after the UK voted to leave the EU. Consumers have been particularly buoyant, with retail sales growing strongly in October and November.
UK inflation climbed to its highest rate in more than two years in November and is expected to rise above the Bank of England’s (BoE’s) 2.0% target in 2017. Economists warn that this, combined with sluggish wage growth, will leave consumers with less cash to spend. At the same time, the start of the formal process of leaving the EU could increase uncertainty for businesses which points to an economic slowdown later this year. On top of the challenges for consumers, most economists believe that business investment is likely to be very weak once the article 50 process gets under way.
The UK inflation outlook is consistent with the results of a survey of 20 economists, strategists and fund managers by Hargreaves Lansdown which indicates that a weaker pound will spur higher UK consumer inflation in the year ahead. Three quarters of the respondents anticipate inflation will be higher than the BoE’s 2.0% target by the end of 2017 with the prediction consensus between 2.6% and 3.0%. In the BoE’s November Inflation Report, the UK central bank lifted its 2017 consumer inflation forecast from its previous expectation of 2.0%, estimating inflation will reach 2.7% by the fourth quarter of 2017.
However the majority of respondents to the Hargreaves Lansdown survey predict that the BoE will not lift UK interest rates in response. Analysts believe that this points to the BoE facing a trade-off between supporting growth and reining in inflation. 67% of respondents believe UK interest rates will remain at 0.25% or lower during 2017, suggesting that the BoE will look through an inflation overshoot as the weaker pound pushes up domestic prices. However the remaining 33% think UK interest rates will move higher in 2017 which suggests that growth might be sufficiently resilient for the BoE not to ignore rising inflation.
Analysts expect that up to 30% of investors’ cash in Monte dei Paschi di Siena, Italy’s third-largest bank, could be wiped out as part of a taxpayer bailout plan. The Italian government is thrashing out a restructuring plan to help fill an €8.8bn (£7.5bn) capital hole. Bondholders who own €4.0bn of bank debt are expected to have to accept a big “haircut” on their investment while the Italian government has earmarked more than €6.0bn in taxpayer money for the rescue. A state rescue is needed as the bank’s long-running troubles have rattled global markets and raised fears of another eurozone banking crisis. Under European rules a state bailout requires private investors to shoulder losses as part of state bailout conditions. The European Central Bank (ECB) is believed to have raised its estimate for the bank’s capital shortfall from €5.0bn last month to €8.8bn caused by a run on the bank’s customer deposits.
Deutsche Bank has reached an agreement in principle with the U.S. Department of Justice (Justice Department) to settle a $7.2bn (£5.9bn) claim over its alleged mis-selling of toxic mortgage securities in the run-up to the 2008 financial crisis. The bank expects the agreement to be finalised in early 2017 and the proposed settlement offers some relief to the bank whose stock was hit hard in September after it acknowledged the Justice Department had been seeking nearly twice as much. The bank has announced that it does not plan a capital increase to cover the settlement but intends to record a pre-tax charge of about €1.1bn in its fourth quarter results. As part of the agreement the bank would pay a civil monetary penalty of $3.1bn and provide $4.1bn in consumer relief such as loan forgiveness. The bank cautioned that there is no assurance that the two sides will agree on the final documents.
Credit Suisse AG has also reached an agreement in principle with the Justice Department to settle a $5.3bn (£4.3bn) claim and will recognise a $2.0bn billion hit to earnings. This was towards the higher end of analyst expectations. These announcements came hours after Barclays Bank Plc confirmed that it is being sued for fraud by the Justice Department in a related case after the bank balked at paying the undisclosed amount sought in negotiations. Prior to these announcements, U.S. authorities had already extracted more than $46.0bn from six U.S. financial institutions over their dealings in mortgage-backed securities.
HSBC Bank plc and the Royal Bank of Scotland plc remain under investigation by the Justice Department over the role of their mortgage-backed securities businesses. Analysts believe that Royal Bank of Scotland plc could end up paying about $2.5bn (£2.0bn) to the Justice Department and $3.5bn (£2.9bn) to settle a lawsuit from the U.S. Federal Housing Finance Agency.
|5-YEAR CDS SPREADS AND SHARE PRICES|
|Movements over the Last Fortnight|
|Date:||3rd January 2017|
|5-Year CDS Spreads (bps)||Equity Share Prices|
|ABN Amro Bank N.V.|
|ABN AMRO Groep N.V.||n/a||n/a||n/a||21.05||21.13||-0.4%|
|Parent: Aldermore Group plc|
|Aldermore Bank plc||n/a||n/a||n/a||2.37||2.23||+6.3%|
|Allied Irish Banks||65||65||0.0%||5.00||5.03||-0.6%|
|Parent: Arbuthnot Banking Group plc|
|Arbuthnot Latham & Co.||n/a||n/a||n/a||14.15||14.10||+0.4%|
|Aust and NZ Banking Group Ltd||68||70||-2.9%||30.42||29.81||+2.0%|
|Banco Bilbao Vizcaya Argentaria S.A.||124||126||-1.6%||6.41||6.55||-2.1%|
|Parent: Barclays plc|
|Barclays Bank plc||82||83||-1.2%||2.23||2.28||-2.2%|
|BNP Paribas S.A.||85||85||0.0%||60.55||60.96||-0.7%|
|Parent: Close Brothers Group plc|
|Close Brothers Limited||n/a||n/a||n/a||14.45||14.40||+0.3%|
|Credit Agricole S.A.||75||76||-1.3%||11.78||11.90||-1.0%|
|Parent: Credit Suisse Group AG|
|Credit Suisse AG||119||128||-7.0%||14.31||15.27||-6.3%|
|Deutsche Bank AG||169||197||-14.2%||17.25||18.33||-5.9%|
|Parent: HSBC Holdings plc|
|HSBC Bank plc||69||70||-1.4%||6.57||6.67||-1.5%|
|Parent: ING Groep N.V.|
|ING Bank N.V.||65||65||0.0%||13.37||13.60||-1.7%|
|Intesa Sanpaolo S.p.A.||139||140||-0.7%||2.43||2.41||+0.8%|
|Parent: Investec plc|
|Investec Bank plc||n/a||n/a||n/a||5.36||5.34||+0.4%|
|Parent: Lloyds Banking Group plc|
|Lloyds Bank plc||69||70||-1.4%||0.63||0.64||-2.3%|
|Metro Bank plc||n/a||n/a||n/a||29.25||32.64||-10.4%|
|Nationwide Building Society||85||85||0.0%||n/a||n/a||n/a|
|Nordea Bank AB||68||67||+1.5%||101||104||-2.4%|
|Parent: RBS Group plc|
|Royal Bank of Scotland plc||113||117||-3.4%||2.25||2.27||-0.9%|
|Ult. Parent: Banco Santander S.A.|
|Santander UK plc||81||82||-1.2%||4.96||5.03||-1.4%|
|Shawbrook Group plc||n/a||n/a||n/a||2.72||2.70||+0.7%|
|Parent: Standard Chartered plc|
|Standard Chartered Bank||116||117||-0.9%||6.64||6.85||-3.1%|
|Svenska Handelsbanken AB||57||58||-1.7%||127||131||-3.1%|
|FTSE 350 BANK INDEX||n/a||n/a||n/a||4138||4215||-1.8%|
|SNR FIN ITRAX CDS 5-YEARS (ESTIMATED)||95||94||+0.4%||n/a||n/a||n/a|