Introduction: Pound hits 10-month high against US dollar
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The pound has climbed to a 10-month high against the US dollar, as signs build that inflationary pressures in America are easing.
Sterling hit $1.2546 this morning, the highest since last June, as the dollar dropped on the foreign exchange markets on hopes that the US Federal Reserve could stop lifting interest rates soon.
The pound has staged quite a recovery since its nadir last September, when it fell to a record low against the dollar after the mini-budget fiasco. It picked up as Jeremy Hunt tore up much of his predecessor, Kwasi Kwarteng’s, plans for unfunded tax cuts last autumn.
Chancellor Hunt has sounded upbeat about the economy’s prospects despite the UK recording no growth in February, during his trip to Washington DC for the IMF’s Spring Meeting.
He told reporters:
“The IMF have undershot on the UK economy for quite a long time.
“It has undershot in every year bar one since 2016. It is one of many forecasters.”
Hunt also said the UK government was willing to accept short-term damage to the economy from public sector strikes, rather than give in to pay demands and risk a longer-term hit from persistently higher inflation.
The pound’s rally shows the City is shrugging off the International Monetary Fund’s prediction that the UK will be the worst-performing advanced economy this year.
Instead, investors are focused on data showing that America’s inflationary surge could be fading.
Yesterday, the US producer price index for final demand unexpectedly fell by 0.5% in March, showing a slowdown in the prices being passed onto consumers. And on Wednesday, US consumer price inflation slowed to a near two-year low of 5%.
Fawad Razaqzada, market analyst at City Index and FOREX.com, says:
The US dollar continued to weaken on Thursday, mostly against currencies where the central bank still remains hawkish, or the economic backdrop is improving.
The dollar has come under renewed pressure after more signs emerged that inflation has peaked. Traders are thus betting that the Fed will stop hiking interest rates, and soon it may even start loosening its policy again.
We will have more US data in the form of retail sales and consumer confidence on Friday.
European stock markets are set for a positive start this morning:
7.45am BST: French inflation rate for March
9am BST: IEA’s monthly oil market report
1.30pm BST: US retail sales for March
2.15pm BST: US industrial production for February
3pm BST: University of Michigan’s index of US consumer sentiment for April
Global oil demand on course for record as China’s economy rebounds
Global demand for oil this year is on track to rise to a record 101.9m barrels per day as China leads an economic surge among developing nations, the world’s leading energy body has forecast.
The International Energy Agency’s predicted daily average for 2023 is 2m bpd higher than last year’s figure.
The price of a barrel of oil rose from $85.62 (£68.44) to $86.10 on Friday morning after the IEA’s report was published.
The agency warned that a recent decision by the world’s biggest oil exporters to cut their production could drive oil prices higher, in a blow to efforts to reduce inflation and reset economic growth in developed countries. “This augurs badly for the economic recovery and growth,” the IEA said.
“Consumers confronted by inflated prices for basic necessities will now have to spread their budgets even more thinly.”
More economic data: US industrial production rose 0.4% in March.
It was little changed in the first quarter, though, increasing at an annual rate of 0.2 percent.
The Federal Reserve reports that:
In March, manufacturing and mining output each fell 0.5%. The index for utilities jumped 8.4%, as the return to more seasonal weather after a mild February boosted the demand for heating.
The pound is now slipping back against the US dollar, after a Federal Reserve official has declared he was prepared to approve another interest-rate increase.
In a speech in San Antonio today, Fed governor Christopher Waller said that inflation remains “much too high”, meaning the job of tightening policy to subdue inflation is “not done”.
Waller says there are signs that economic activity moderated last month, but that lending conditions have not tightened enough despite the turmoil in the banking sector.
As such, Waller indicates that US interest rates need to be raised further, saying:
Because financial conditions have not significantly tightened, the labor market continues to be strong and quite tight, and inflation is far above target, so monetary policy needs to be tightened further.
How much further will depend on incoming data on inflation, the real economy, and the extent of tightening credit conditions.
This has knocked the pound away from this morning’s 10-month highs. It’s now down half a cent today at $1.247.
US retail sales fall 1% in March
Just in: US retail sales fell by more than expected last month.
Retail sales dropped 1% in March, twice as large a fall as expected.
Spending at motor vehicle and parts dealers was down 1.6% month-on-month, while electronics spending dropped 2.1% in the month, and were 10.3% lower than last year.
Gasoline stations took 5.5% less than in February, reflecting a fall in gas prices.
That left retail sales 2.9% higher than in March 2022, though.
While retail trade sales were 1.5% higher than a year ago, there was a 12.3% jump in spending at online shops (“nonstore retailers”), while takings at food services and drinking places were up 13.0%.
Citigroup has also beat Wall Street expectations for profits in the last quarter.
Citi earned $1.86 per share in the first quarter, beating analysts’ average estimate of $1.67, according to Refinitiv data.
Citi, like JP Morgan, earned more from borrowers paying higher interest on loans, as it benefited from a tighter monetary policy by the Federal Reserve.
However, it set aside $241m in the quarter to cover potential loan losses against the backdrop of a slowing economy.
JP Morgan has got the bank reporting season off to a solid start, says Chris Beauchamp, Chief Market Analyst at IG Group.
With stocks having rallied hard from their March lows, investors will be watching for signs of weakness in earnings, and JPMorgan appears to have avoided any real bad news.
True, mortgage activity has slowed and bad loan provisions are up, but these are the kind of numbers bank investors want to see, and get earnings season off to a solid start.
Shares in European banks are rallying on the back of JP Morgan’s results.
Standard Chartered (+3.2%), HSBC (+2.79%) and Barclays (+2.6%) are leading the FTSE 100 risers.
The blue-chip stock index has now gained 46 points, or 0.6%, today to 7890 points, its highest in five weeks.
JP Morgan also benefited from rising interest rates.
Net interest income rose by 49% in the last quarter to $20.8bn.
UK banks have also profited from higher net interest margins – the gap between the rates they pay savers and charge borrowers.
Shares in JP Morgan have jumped almost 6% in premarket trading.
JP Morgan has beaten Wall Street forecasts by reporting earnings of $4.10 per share for the last quarter.
That’s up from $2.63 per share in the first quarter of 2022, and also beats the $3.57/share reported in the final quarter of last year.
With recession fears swirling, JP Morgan also set aside $2.3bn in the last quarter to cover credit losses.
The provision for credit losses was $2.3 billion, reflecting net charge-offs of $1.1 billion and a net reserve build of $1.1 billion.
The net reserve build included $726 million in Wholesale and $416 million in Consumer, largely driven by a deterioration in the weighted-average economic outlook, including updates to the Firm’s macroeconomic scenarios and an increased probability of a moderate recession due to tightening financial conditions.
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