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JP Morgan’s Opinion in Focus

JP Morgan have made some interesting points in the last couple of days: speaking about the Fed meeting next week, they’re concerned that if the FOMC do press the pause button, but were then forced to resume rate hikes either in July, or after the summer, in the face of stubborn inflation, what would this do to risk appetite in the market, because it might be a bit unnerving to see that the central bank hasn’t got a firm grasp on the problem.

One thing they do see with central banks is the Europeans having to play catch up with the Bank of England and Federal Reserve. Rates in the Eurozone are 3.75%, which is 1.5% lower than those in the US and 75bps lower than the UK, with forecasts that their ‘terminal rate’ might end up being 4%. JP Morgan disagrees and sees them having enough momentum amongst policy setters to see them go through this number. Another point they make is that the pound seems to have hit a bit of a ceiling and investors are more concerned about the economic outlook in the second half of the year undermining the value of the pound than optimistic that continuing inflation pushes the Bank of England to keep hiking. The concern stems from the turn in fortunes in the housing market, which is seeing prices fall and the number of mortgage approvals decline – with any further hiking in rates piling more pressure onto households and therefore lower discretionary expenditure.

Markets Weigh on Eurozone Growth

Today will see the release of the latest Eurozone growth figures for Q1 where the general market consensus is expecting a 0% growth on a quarter-on-quarter basis and 1.2% on an annualised basis. Despite market optimism early in the year being buoyed on the notion of a ‘softer-than-expected landing’ across the currency union, markets have recently been weighing on poor growth from Germany. For example, in the first quarter 2023, the German economy contracted 0.3%, marking the second consecutive quarter of contraction and putting the German economy in a technical recession. This came as household consumption fell 1.3% as the rising cost of living hit discretionary spending and government spending shrank 4.9% as financial support packages for energy bills subsided.

 

Looking Ahead at Eurozone Growth

In May, the European Commission upwardly revised their growth forecasts for the EU over the course of 2023. Brussels is now expecting the 27-state bloc to register 1% growth this year, marking an increase of 0.2 percentage points for earlier predictions. With recessionary fears easing and energy insecurity concerns subsiding, they also raised 2024’s estimate 0.1 percentage points to 1.7%. When looking at the Eurozone specifically, Brussel’s expect the currency union’s economy to expand 1.1% this year and 1.6% next year. Here, the commission predicts that the German economy will expand 1.4% in 2024 – with marginal growth of just 0.2% this year.

Japanese Growth

In Asian markets, investor sentiment was buoyed this morning after Japanese growth came in higher-than-expected for Q1 2023. Against forecasts of 1.9% growth, the Japanese economy expanded 2.7% marking the second consecutive quarter of growth. This came as capital spending surged with business spending rising at its fastest rate since 2015. Nevertheless, net trade contributed negatively with exports falling 4.2% as imports only fell 2.3%. Japan has been struggling with a growing trade deficit with their current account surplus being cut in half last year as it hit an eight-year low. This came as the yen plummeted against the dollar
and the value of energy imports soared. Over 2022, as the yen sank to above 150 against the US dollar (a fall of close to 20%), Japan logged a record year for primary income (which is made up of foreign investment revenues from Japanese companies subsequently repatriated). More recently, the Japanese current account surplus jumped in April to JPY 1,895 bn compared to JPY 1,075 bn in 2022.

 

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