Weekly Commentary 30 May 2014

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1 Contact your treasury specialist Corporate Treasury or Business Banking Treasury Institutional Treasury Specialised Finance +353 (0) UK Sales Team (within the UK) US Sales Team Keep in touch with the markets, visit Weekly Commentary 30 May 2014 Data section contents (changes on the week) Themes from the week drift lower Headlines for the week ahead ECB and BOE meetings; US employment report ECB set to act next Thursday The ECB meets next Thursday with the market expecting a cut in the main interest rate to 0.1% (from 0.25%) and a lowering of the deposit rate to minus 0.1% (from zero percent). The market also expects the ECB to announce measures to support bank lending in the zone, either through a targeted refinancing operation or through purchases of asset-backed securities, to help counter what Mario Draghi said this week was a drag on the recovery coming from credit supply constraints. The prospect of ECB action has contributed to a fall in market interest rates recently, while the euro has weakened on the foreign exchange markets. The single currency finished marginally lower against the dollar this week at around $1.36. The Bank of England MPC also meets on Thursday and is expected to keep interest rates on hold. The minutes of its May meeting showed some members believed the decision on monetary policy was becoming more balanced. One of those members is Martin Weale, who this week said the MPC would have to start raising interest rates sooner rather than later if it wants to be able to increase rates at the gradual pace (which Weale said probably means a rate hike per quarter) indicated by its forward guidance. Notwithstanding Weale s comments, sterling lost ground against both the euro and the dollar (particularly). The US economy contracted by 0.2% in the first quarter, according to revised GDP data published this week, as a slower rate of inventory-building knocked 0.4% points off growth. Absent the latter the economy would have expanded by 0.2%, with another strong increase in consumer spending largely offset by a fall in both investment and net exports. Adverse weather conditions dampened activity in the first quarter and the economy should return to growth in Q2, with GDP expected to increase by 0.9% according to the consensus forecast. Employment in Ireland increased by 42,700 (2.3%) year-on year in Q1, according to the latest QNHS, while the unemployment rate fell to 12% from 13.7% in the corresponding quarter of Rising employment is supporting a pick up in spending in the economy. Retail sales rose in volume terms by 6.8% year-onyear in April, while sales ex cars increased by 4.6%. The latter are up 3.3% y/y in 2014 to date, after increasing by 0.8% in Meanwhile, residential property prices rose by 1.4% m/m in April resulting in acceleration in the annual rate of increase to 8.5% from 7.8% in March. Headlines for the week ahead The ECB and Bank of England MPC hold policy meetings on Thursday. The latest US employment report is published on Friday. The consensus expects an increase in payrolls of 218k in May (after 288k in April) and an uptick in the unemployment rate to 6.4% (after its sharp fall to 6.3% in April from 6.7% in March). Michael Crowley Highlights for the week ahead Commodities Prev Fcst Cons Mon GER HICP Inflation 1.1% 1.0% 1.0% US ISM Manufacturing UK PMI Manufacturing Tue EA CPI inflation 0.7% 0.7% 0.7% US Factory Orders 0.9% 0.5% 0.5% Wed IRL Industrial Production 10.2% y/y Wed US ISM Non-Manufacturing UK Services PMI IRL Live Register 11.8% Thurs ECB Meeting 0.25% 0.10% 0.10% BOE Meeting 0.50% 0.50% 0.50% Fri US Employment Report 288k 218k 218k Spot rates EUR/GBP EUR/CHF EUR/USD EUR/JPY GBP/USD EUR/CAD EUR/SEK EUR/PLN EUR/NOK EUR/ZAR EUR/HUF EUR/CZK year 3 year 5 year 7 year 10 year 15 year 20 year EUR GBP USD Official rates Current End-Q2 End-Q3 End-Q4 Fcst Cons Fcst Cons Fcst Cons EUR GBP USD Recent research View recently published reports at including: The Bulletin (monthly analysis of international and Irish markets) UK View (monthly analysis of trends in the UK economy) The Outlook (quarterly analysis of trends in the Irish economy) Irish Property Review (quarterly analysis of Irish property trends) Market Newsflash (up-to-the-minute analysis of key economic developments) All rates quoted are indicative market rates

2 Data section contents Data section showing % changes on the week Long term fixed rates Commodity prices Europe ECB set to act on Thursday In a speech at an ECB forum on central banking in Portugal, Mario Draghi said there is no debate about the Bank s goal, which is to return inflation towards 2% in the medium term. He said the strength of the euro exchange rate has dampened inflation, while constraints in the supply of credit is dampening both economic activity and inflation, and the two could combine to generate a more persistent regime of excessively low inflation. If such a scenario were to emerge, then according to Draghi the ECB would have to respond with a broad-based asset purchase programme (QE). To ward off the threat of excessively low inflation, Draghi indicated that action would be taken, including lowering interest rates and providing term-funding of loans, either through refinancing operations or through the purchases of asset- backed securities. The term-funding of loans could help reduce the drag on the recovery coming from credit supply constraints, according to Draghi. The prospect of ECB action has contributed to a fall in market interest rates recently, while the euro has weakened on the foreign exchange markets. The single currency finished marginally lower against the dollar this week at around $1.36. Ireland Plethora of data with QNHS, Retail Sales, Earnings and Property Prices We had quite a few notable data releases this week, which for the most part, were positive. The Quarterly National Household Survey (QNHS) showed employment rose by 42,700 year-on year in Q1 14, an increase of 2.3%. This followed an annual increase of almost 61k (3.3%) in Q4 13. On a seasonally adjusted basis, employment rose for a sixth consecutive quarter in Q1, by 1,700 (0.1%), bringing the cumulative increase from the trough in employment in the third quarter of 2012 to almost 70k. Unemployment fell by almost 34k year-on-year in the first quarter, bringing the total number unemployed to 258k. The latter equates to an unemployment rate of 12%, down from 13.7% in Q1 13. The seasonally adjusted unemployment rate was also 12% in Q1 and, according to the CSO, fell to 11.8% in April. Retail sales in April were quite positive. Overall sales fell in the month, by 0.9%, but this was all driven by a decline in car sales as sales ex cars rose by 1.6%. In year-over-year terms, sales rose 6.8% in April while ex cars the gain was 4.6%. Car sales were very strong in the first 3 months of the year new car sales were up 27% year- on-year so its not unsurprising to see them ease back especially as potential purchasers may be holding off until the new registration period which starts in July. Even better is that the gain in sales last month was broad based with 7 of the 12 retail groupings (ex cars) recording increases in the month and 9 reporting annual gains. We also got April residential property price data. Nationally, prices rose by 1.4% in the month and 8.5% in the year. This, however, was driven by prices in Dublin which rose by 3.1% in the month and by 17.7% in the year, the biggest annual gain since late Outside of Dublin, prices fell for the second consecutive month, by 0.3%, with the annual increase falling to 1.3% from 2.9% in March. Lack of supply is continuing to put upward pressure on Dublin prices. However, it should be noted that even after the increases of the past year or so Dublin residential prices are still 48.5% off their peak levels, while outside of Dublin prices are 47.4% off their peak. Finally, average weekly earnings rose by 0.2% in the first quarter of this year but were down 0.4% in the year. There are signs of some wage pickups in the economy as there were annual gains in half of the 12 groupings including in industry, construction, accommodation and food services, information services, financial services and professional services. Wages in the private sector rose by 0.7% in the year to Q1 while public sector wages fell 1.8%. These are only very modest wage improvements but should support household income and consumer spending this year. 2 Bank of Ireland Global Markets

3 Data section contents Data section showing % changes on the week Long term fixed rates Commodity prices United Kingdom Weale says interest rates have to rise sooner rather than later While the MPC voted 9-0 to keep policy on hold in May it may not be long before we see a split decision as MPC member Martin Weale said this week that interest rates would have to rise sooner rather than later if the Committee plans to tighten policy only gradually. Weale said the MPC could wait a bit longer before raising rates but how long that bit longer will be, I m not sure but it is not so urgent it needs doing now. He confirmed that he was amongst the members at the May meeting who saw the decision to keep rates unchanged as becoming more balanced, and said that a number of factors could tip his decision towards voting for a rate increase including a faster fall in unemployment or a bigger increase in wage growth than currently forecast. He believes that rates should only rise gradually, which would mean, by his definition, an increase of no more than 25bps per quarter. On the basis of this interview, we would not be surprised to see Weale voting for a rate increase in August when the next inflation report, and related forecast revisions, is published. United States US economy stalls in Q1 likely to bounce back in Q2 The US economy contracted by 0.2% in the first quarter according to revised GDP data published this week, as a slower rate of inventory-building knocked 0.4% points off growth. Absent the latter the economy would have expanded by 0.2%, with another strong increase in consumer spending of 0.8% quarter-on-quarter largely offset by a fall in both investment and net exports. Despite slipping back in April (following two sizeable gains in February and March), consumer spending was still almost 0.5% ahead of Q1 and so should increase again in the second quarter. This together with a likely rebound in investment, which is indicated by the capital goods orders data, suggests the economy will return to growth in Q2 with GDP expected to increase by 0.9% according to the latest consensus forecast. In comments on Thursday, Fed member Lacker said he was not concerned by the fall in GDP, which was largely due to poor weather, and expects the economy to bounce back in Q2. He also said inflation has bottomed and is likely to pick up. Indeed, the annual rate of inflation on the Fed s preferred measure the personal consumption deflator rose to 1.6% in April from 1.1% in March according to data published on Friday while the core inflation rate rose to 1.4% from 1.2%. Meanwhile, US bond yields continued to fall this week with the benchmark 10-year yield trading down to 2.40% before snapping back to end the week at around 2.45%, a decline of around 8bps from last Friday. 10-year yields have fallen by almost 35bps over the past two months or so as the market has scaled back the extent to which it expects the fed funds rate to rise over the next 2-3 years. Japan Tax increase impacts on activity in April Retail sales fell precipitously in April, down 13.7% in the month with the annual rate at - 4.4% from 11% in March. A fall in sales was expected due to the implementation of the sales tax hike at the start of last month. Sales had risen in each of the first three months of the year, with a 6.4% month-on-month gain in March alone, as consumers brought forward purchases ahead of the 3 percentage point increase in the sales tax. The magnitude of the fall in April is in line with forecasts and doesn t alter the consensus view that GDP will contract in Q2 but rebound over the second half of the year. Industrial production also fell in April, by 2.5%, but, again, this was in line with expectations and, once again, related to a fall in demand due to the tax hike. Inflation, however, surged on the tax rise with the annual rate of core inflation picking up to 2.3% in April from 0.7% in March and is the highest rate reported since Bank of Ireland Global Markets

4 Data section changes on the week EUR/GBP Spot % 1M 1 3M 6 6M 14 12M 40 EUR/USD Spot % 1M -1 3M 0 6M 2 12M 12 GBP/USD on the week Spot % 1M -4 3M -12 6M M -67 EUR currency pairs EUR/CAD % EUR/AUD % EUR/NZD % EUR/CHF % EUR/JPY % EUR/SEK % EUR/NOK % EUR/HUF % EUR/PLN % EUR/ZAR % EUR/CZK % USD currency pairs USD/CAD % USD/AUD % USD/NZD % USD/CHF % USD/JPY % USD/CNY % USD/MXN % USD/SGD % USD/BRL % USD/THB % USD/ZAR % GBP currency pairs on the week GBP/CAD % GBP/AUD % GBP/NZD % GBP/CHF % GBP/JPY % GBP/SGD % GBP/MYR % GBP/NOK % GBP/HKD % GBP/SEK % GBP/DKK % GBP/ZAR % on the Week Base O'night 1 week 2 week 1 M 2 M 3 M 6 M 9 M 12 M EUR n/a n/a GBP n/a n/a USD n/a n/a on the Week 2 year Chng 5 year Chng 7 year Chng 10 year Chng EUR GBP USD Government bond yields (YTM) on the Week 2 year Chng 5 year Chng 10 year Chng 30 year Chng Ireland Germany US UK Prime Rate Bank of Ireland prime rate 0.72 on the Week ISEQ % DOW Jones % S&P % SMI % Nasdaq % FTSE % Eurostoxx % Nikkei % Commodities on the Week Brent % WTI Cushing % Gold % Wheat % Emissions Allowance % 4 Bank of Ireland Global Markets

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