Weekly Commentary 09 January 2015

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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 09 January 2015 Themes from the week Euro weakens after soft inflation data; oil prices fall further Headlines for the week ahead CPI data in UK and US The euro weakened after softer than expected Euro area inflation data falling to around $1.18 against the dollar from over $1.20 at the end of last week The annual headline inflation rate fell to -0.2% last month from 0.3% in November though the core rate (which excludes energy and food prices) nudged up to 0.8% (from 0.7%). The ECB has been warning for some time about the risk of inflation remaining too low for too long so the latest reading increases the pressure on it to take further policy action. It was reported on the newswires on Friday that a 500bn government bond buying programme might be in the offing. Data section contents (changes on the week) Commodities Highlights for the week ahead Prev Fcst Cons Tues UK CPI 1.0% 1.7% 1.7% Wed US Retail Sales 0.7% 0.1% 0.1% Fed Beige Book Thurs US Producer Prices -0.2% -0.4% -0.4% US Jobless Claims 294k 298k 298k US Philly Fed Index IRL CPI 0.1% Fri US Industrial Output 1.3.% 0.0% 0.0% US Consumer Confidence US CPI 1,.3% 0.7% 0.7% Oil prices fall further with both Brent and WTI down around 10% on the week. The continuing slide in prices will put further downward pressure on inflation in the near-term The minutes of the Fed s December meeting noted that inflation in the US is expected to rise gradually over time towards the target of 2%...as the labour market improves further, suggesting the Fed still remains on track to raise interest rates later this year. US bond yields fell on the week however - by around 10bps in the case of 10-year yields Employment in the US rose by 252k in December according to Friday s payrolls report, and the unemployment rate fell further to 5.6%, though the annual growth in hourly earnings fell to 1.7%. The Bank of England kept interest rates unchanged on Thursday and the market does not expect a first hike until late in the first quarter of Sterling was a touch firmer on the week against the euro at 78p, but fell to $1.51 against the dollar. In Ireland, the unemployment rate fell to 10.6% in December yielding an average for 2014 as a whole of 11.3%, down from 13.1% in The volume of retail sales rose by 0.2% in November and by 4.7% on an annual basis, while sales ex cars rose by 3.6% year-on-year. The NTMA raised 4bn euro through the sale of a 7-year bond at an interest rate of just under 0.87%, the first instalment of the 12-15bn it plans to raise in the markets this year. 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 Q1 15 Q2 15 Q3 15 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) The Outlook (quarterly analysis of trends in the Irish economy) 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 Euro falls after soft inflation data The euro fell against the dollar trading down to around $1.1750at one stage following weaker than expected inflation data. The annual headline inflation rate in the zone fell to -0.2% in December from 0.3% in November, due largely to declining energy costs, though the core rate nudged up to 0.8% (from 0.7%). Headline inflation is likely to fall further over the next few months given the continuing slide in oil prices, so the pressure on the ECB to take further policy action has increased. Mario Draghi did say following December s meeting that the Governing Council would reassess the outlook for inflation early in 2015, and that the preparation of further measures, to be implemented if necessary, was been stepped up. Newswire reports on Friday said a 500bn government bond buying programme could be in the offing, quoting unnamed ECB sources. Ireland New car sales up sharply in 2014 There was a modest monthly gain of 0.2% in retail sales in November, leaving the annual increase at 4.7%. New cars sales rose sharply last year the Society of the Irish Motor Industry estimates over 95k sales in 2014 (up 30% on 2013) though the pickup in retail sales broadened out over the course of the year to leave the annual rate of increase excluding cars at 3.6% in November. The impact of falling oil prices is also feeding through with the value of fuel sales down 3.1% in the month and 4.7% in the year to November. In other data, industrial production rose 4.6% in November to leave the annual increase at 36%. Both traditional and modern sector production increased significantly in the year to November. The year-end Exchequer returns show the 2014 deficit was 8.2bn, some 3.3bn lower than in Tax revenues totaled over 41bn, up 9.2% year-over- year, and more than 1bn ahead of its original target. Income, VAT, excise and corporation taxes all performed strongly reflecting the improvement in the domestic economy. Spending control remained tight, with total net voted expenditure down 2% year-overyear, but still 2% ( 841m) over target primarily due to a near 650m overspend in health. The 2014 exchequer deficit is about 250m greater than envisaged in October s Budget 2015, but the 3.7% General Government Deficit forecast is likely to be broadly met. Debt servicing costs last year were 8.2bn meaning the primary budget (i.e. excluding interest costs) was more or less in balance for the first time since United Kingdom PMI data suggest growth easing a little Sterling had a mixed week, rising a little against the euro (to around 78p) but falling against the dollar (to $1.51). The latest PMI data for December s were weaker than expected with the manufacturing index falling to 52.5 from 53.3 in November and the services index declining to the lowest reading since May from While the readings disappointed market forecasts, they still indicate that both sectors are expanding albeit at a more moderate pace than recently. In this regard, the National Institute for economic research estimate that GDP growth eased to 0.6% in Q4 from 0.7% in Q3. Meanwhile, the Bank of England kept interest rates on hold (at 0.5%) at its first policy meeting of This was no surprise as the market is not pricing in a first hike until late in the first quarter of United States Fed on track to raise interest rates this year The minutes of the Fed s December meeting noted that inflation in is expected to rise gradually towards the target of 2% as the labour market improves further, suggesting the central bank is on track to raise interest rates later this year. Friday s payrolls report showed employment rose by 252k in December and the unemployment rate fell 2 Bank of Ireland Global Markets

3 Data section contents Data section showing % changes on the week Long term fixed rates Commodity prices to 5.6%, though (surprisingly) the annual growth in hourly earnings declined to 1.7%. fell on the week - by more than 10bps to under 2% in the case of 10-year yields, while the dollar gained broadly, increasing by more than 1% on a tradeweighted basis. Stocks were largely unchanged, having been down more than 3% at one stage. Japan Falling oil prices to boost the economy Japan s economy minister, Akira Amari, said that falling oil prices would provide a stimulus to the economy. He said the decline in prices puts a brake on financial outflows and the Cabinet office estimates that this will boost the economy by up to Y7bn this year. On the negative side, he did note that falling prices would make it harder to boost inflation. Japan s imported energy-dependency has increased since the Fukushima disaster saw domestic nuclear capacity reduced. 3 Bank of Ireland Global Markets

4 Data section changes on the week EUR/GBP Spot % 1M 4 3M 12 6M 25 12M 56 EUR/USD Spot % 1M 3 3M 9 6M 22 12M 65 GBP/USD on the week Spot % 1M -4 3M -11 6M M -30 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 GBP USD 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 0.59 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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