Investment Research General Market Conditions 22 October ... · research report accurately reflect...
Transcript of Investment Research General Market Conditions 22 October ... · research report accurately reflect...
Important disclosures and certifications are contained from page 7 of this report. www.danskeresearch.com
Investment Research — General Market Conditions
Today’s release of retail sales in September was the last major data publication before
the first estimate of GDP growth in Q3 is out next week. Retail sales were strong in
September but only account for 5.7% of GDP. Based on the key economic figures for
Q3 released so far (we only have 44% of all information) we estimate GDP growth
slowed to 0.5% q/q in Q3 from 0.7% q/q in Q2. This is still at trend.
PMI services have declined fairly sharply during Q3, indicating slower growth in
services (78.4% of GDP). Still, we estimate growth in services increased to 0.7% q/q
in Q3 from 0.6% q/q in Q2 due to overhang from a large increase in June. This
corresponds to a GDP growth contribution of 0.6pp in Q3 up from 0.5pp in Q2.
Manufacturing production was weak in Q3 but this was offset by higher mining and
quarrying, implying that total production (14.6% of GDP) most likely neither
contributed positively nor negatively to GDP growth in Q3 (+0.1pp in Q2).
Construction data (6.4% of GDP) have also been weak and we estimate a negative
GDP growth contribution of 0.1pp (+0.1pp in Q2).
The UK was back in deflation in September, as the annual growth in CPI fell to -
0.1% y/y from 0.0% in August. The very low inflation is due to a combination of the
falls in oil and food prices and the strong GBP, which weighs on inflation through
lower import prices. Services inflation is the only component pulling inflation up at
the moment. Services inflation increased to 2.5% y/y in September, the highest since
October 2014, from 2.3% y/y in September. The annual growth rates in services
prices are somewhat volatile but the increase indicates that domestically-
generated prices are increasing. Although services inflation is above the BoE’s 2%
target, services inflation is still low from an historical perspective. We think CPI
inflation hit the bottom in September and that it could move slightly higher in
the coming months before picking up early next year when the base effects from the
fall in oil prices in H2 14 begin to drop out of the consumer price index.
Average weekly earnings excluding bonuses (3M avg.) slowed to 2.8% y/y in August
from 2.9% y/y in July. We think the slower wage growth is due more to the
volatility of the series than a sign of weakness in the labour market. Unemployment
rate (3M avg.) declined to 5.4% in August from 5.5% in July and is still around
NAIRU. Employment (and the employment rate) is record-high. Surveys indicate that
recruitment difficulties are very high. Thus we still see an underlying upward trend
in wage growth and think wage growth will accelerate going forward as the labour
market continues to tighten.
As the labour market continues to tighten and the underlying wage growth is
trending up, we think the case for a hike is building and thus we still expect the
BoE to hike in Q1 16, probably February. Consensus among analysts is still Q1 16,
although more analysts now expect the first hike in Q2 16. In our view, the risk is also
tilted towards a hike later in 2016, but the underlying positive trend in wage growth
will, in our view, put more pressure on the BoE to tighten than currently recognised.
Market pricing continues to be too dovish in our view.
22 October 2015
Analyst Mikael Olai Milhøj +45 45 12 76 07 [email protected]
UK research
Slower wage growth not a sign of
weakness in the labour market, 14
October
Back to deflation – we think this is
the bottom for now, 13 October
Bank of England review: Slightly
dovish as inflation outlook is
lowered, 8 October
Pre-conditions for BoE raising rates
Source: Danske Bank Markets
UK macro monitor
Growth likely slowed in Q3 but still at trend
Condition Status
Unemployment < or = NAIRU √Wages > 2 % √Solid growth outlook (above or at trend 0.5% q/q) √CPI inflation moving higher xNo financial stress ?
2 | 22 October 2015 www.danskeresearch.com
UK
ma
cro m
on
itor
UK macro monitor
Business cycle indicators
PMI services suggest weaker growth in services Weak manufacturing production in Q3
Source: ONS and Markit Economics Source: ONS and Markit Economics
Growth in mining & quarrying offset falling manufacturing
production PMI construction to the weak side in Q3
Source: ONS Source: ONS
Consumer confidence at its highest level post-crisis Retail sales indicate growth in private consumption
Source: ONS Source: ONS
Economic activity
Economic upturn remains on track Growth mainly driven by services
Source: ONS Source: ONS
3 | 22 October 2015 www.danskeresearch.com
UK
ma
cro m
on
itor
UK macro monitor
UK GDP above pre-crisis level Only services GVA back above pre-crisis level
Source: ONS Source: ONS
No productivity growth Financial stress also hit UK equity market
Source: ONS, Danske Bank Source: FTSE, Stoxx, S&P
Monetary policy & inflation report
Bank rate still 0.50% - we expect first hike in Q1 16, possibly
in February
BoE’s CPI projection likely to be revised further down in next
inflation report
Source: Bank of England Source: ONS, Bank of England
Unemployment rate expected to crawl below NAIRU soon Economic upturn on track according to BoE
Source: ONS, Bank of England Source: ONS, Bank of England
4 | 22 October 2015 www.danskeresearch.com
UK
ma
cro m
on
itor
UK macro monitor
Inflation and wages
Both headline and core inflation very low Very low inflation due to fall in energy, food and import prices
Source: Office for National Statistics Source: Office for National Statistics
Low oil price weighs on inflation Also deflation in food prices
Source: Office for National Statistics Source: Office for National Statistics
Wage growth is picking up High real wage growth due to combination of very low inflation
and increasing nominal wage growth
Source: Office for National Statistics Source: Office for National Statistics
Labour market
Unemployment more or less ‘normal’ Declining slack has led to higher wage growth
Source: Office for National Statistics, Bank of England Source: Office for National Statistics, Danske Bank
5 | 22 October 2015 www.danskeresearch.com
UK
ma
cro m
on
itor
UK macro monitor
Unemployment is falling again following a small increase in
Q2 Improvement in the labour market has eased off
Source: Office for National Statistics, Bank of England Source: Office for National Statistics, Danske Bank
Housing market
House price increases have slowed RICS survey indicates pickup in prices
Source: ONS Source: ONS, Nationwide, Halifax and RICS
Record-low mortgage rates support the housing market Housing market activity has picked up slightly
Source: Bank of England Source: Bank of England and HM Revenue and Customs
Foreign trade
Continuous trade deficit Positive trade balance in services
Source: ONS Source: ONS
6 | 22 October 2015 www.danskeresearch.com
UK
ma
cro m
on
itor
UK macro monitor
GBP appreciation against EUR driven by divergent monetary
policies
Larger current account deficit in recent years due to lower
primary income, not larger trade deficit
Source: Bank of England, Danske Bank Markets Source: ONS
Public finances
Fiscal consolidation at slower pace in coming years than
previously indicated Gov. deficit most likely higher this year than anticipated
Source: ONS, OBR Note: The financial year runs from April to March. ‘1’ refers to April, ‘2’ to May
and so forth.
Source: ONS, OBR
7 | 22 October 2015 www.danskeresearch.com
UK
ma
cro m
on
itor
UK macro monitor
Disclosure This research report has been prepared by Danske Bank Markets, a division of Danske Bank A/S (‘Danske
Bank’). The author of this research report is Mikael Olai Milhøj, Analyst.
Analyst certification
Each research analyst responsible for the content of this research report certifies that the views expressed in this
research report accurately reflect the research analyst’s personal view about the financial instruments and issuers
covered by the research report. Each responsible research analyst further certifies that no part of the compensation
of the research analyst was, is or will be, directly or indirectly, related to the specific recommendations expressed
in the research report.
Regulation
Danske Bank is authorised and subject to regulation by the Danish Financial Supervisory Authority and is subject
to the rules and regulation of the relevant regulators in all other jurisdictions where it conducts business. Danske
Bank is subject to limited regulation by the Financial Conduct Authority and the Prudential Regulation Authority
(UK). Details on the extent of the regulation by the Financial Conduct Authority and the Prudential Regulation
Authority are available from Danske Bank on request.
The research reports of Danske Bank are prepared in accordance with the Danish Society of Financial Analysts’
rules of ethics and the recommendations of the Danish Securities Dealers Association.
Conflicts of interest
Danske Bank has established procedures to prevent conflicts of interest and to ensure the provision of high-
quality research based on research objectivity and independence. These procedures are documented in Danske
Bank’s research policies. Employees within Danske Bank’s Research Departments have been instructed that any
request that might impair the objectivity and independence of research shall be referred to Research Management
and the Compliance Department. Danske Bank’s Research Departments are organised independently from and do
not report to other business areas within Danske Bank.
Research analysts are remunerated in part based on the overall profitability of Danske Bank, which includes
investment banking revenues, but do not receive bonuses or other remuneration linked to specific corporate
finance or debt capital transactions.
Financial models and/or methodology used in this research report
Calculations and presentations in this research report are based on standard econometric tools and methodology
as well as publicly available statistics for each individual security, issuer and/or country. Documentation can be
obtained from the authors on request.
Risk warning
Major risks connected with recommendations or opinions in this research report, including a sensitivity analysis
of relevant assumptions, are stated throughout the text.
Date of first publication
See the front page of this research report for the date of first publication.
General disclaimer This research has been prepared by Danske Bank Markets (a division of Danske Bank A/S). It is provided for
informational purposes only. It does not constitute or form part of, and shall under no circumstances be
considered as, an offer to sell or a solicitation of an offer to purchase or sell any relevant financial instruments
(i.e. financial instruments mentioned herein or other financial instruments of any issuer mentioned herein and/or
options, warrants, rights or other interests with respect to any such financial instruments) (‘Relevant Financial
Instruments’).
The research report has been prepared independently and solely on the basis of publicly available information that
Danske Bank considers to be reliable. While reasonable care has been taken to ensure that its contents are not
untrue or misleading, no representation is made as to its accuracy or completeness and Danske Bank, its affiliates
and subsidiaries accept no liability whatsoever for any direct or consequential loss, including without limitation
any loss of profits, arising from reliance on this research report.
The opinions expressed herein are the opinions of the research analysts responsible for the research report and
reflect their judgement as of the date hereof. These opinions are subject to change, and Danske Bank does not
undertake to notify any recipient of this research report of any such change nor of any other changes related to the
information provided in this research report.
8 | 22 October 2015 www.danskeresearch.com
UK
ma
cro m
on
itor
UK macro monitor
This research report is not intended for retail customers in the United Kingdom or the United States.
This research report is protected by copyright and is intended solely for the designated addressee. It may not be
reproduced or distributed, in whole or in part, by any recipient for any purpose without Danske Bank’s prior
written consent.
Disclaimer related to distribution in the United States This research report is distributed in the United States by Danske Markets Inc., a U.S. registered broker-dealer
and subsidiary of Danske Bank, pursuant to SEC Rule 15a-6 and related interpretations issued by the U.S.
Securities and Exchange Commission. The research report is intended for distribution in the United States solely
to ‘U.S. institutional investors’ as defined in SEC Rule 15a-6. Danske Markets Inc. accepts responsibility for this
research report in connection with distribution in the United States solely to ‘U.S. institutional investors’.
Danske Bank is not subject to U.S. rules with regard to the preparation of research reports and the independence
of research analysts. In addition, the research analysts of Danske Bank who have prepared this research report are
not registered or qualified as research analysts with the NYSE or FINRA but satisfy the applicable requirements
of a non-U.S. jurisdiction.
Any U.S. investor recipient of this research report who wishes to purchase or sell any Relevant Financial
Instrument may do so only by contacting Danske Markets Inc. directly and should be aware that investing in non-
U.S. financial instruments may entail certain risks. Financial instruments of non-U.S. issuers may not be
registered with the U.S. Securities and Exchange Commission and may not be subject to the reporting and
auditing standards of the U.S. Securities and Exchange Commission.