United States:
JPMorgan Gets One More Boost Off Rate Hikes Before Fed Pause
The Fed may have stopped raising borrowing costs for now, but the biggest U.S. bank is still reaping benefits from higher interest rates. JPMorgan Chase & Co. said net interest income — revenue from customers’ loan payments minus what the bank pays depositors — jumped to $14.5 billion in the first quarter, a record aided by the Federal Reserve’s four interest-rate increases in 2018. The bank’s net interest margin jumped to the highest in seven years. The bank reiterated its forecast for $58 billion of interest income this year, a $3 billion jump from 2018. Fed Chairman Jerome Powell has indicated rates are probably on hold for the foreseeable future, and analysts are predicting the first quarter was probably the last for now to get a boost from monetary policy. “Even amid some global geopolitical uncertainty, the U.S. economy continues to grow, employment and wages are going up, inflation is moderate, financial markets are healthy and consumer and business confidence remains strong,” Chief Executive Officer Jamie Dimon said in a statement Friday. NII has been a key driver for revenue in recent quarters across the industry. The first quarter’s 1 percent increase from the fourth quarter was better than the company’s forecast that the figure would be flat. Return on tangible equity increased to 19 percent, above the 17 percent full-year profitability target the bank set in February. Return on common equity hit 16 percent, the highest since the financial crisis. Trading revenue dropped 17 percent to $5.5 billion, slightly better than analysts’ estimates of an 18 percent decline. Both equity and fixed-income trading fell. Co-President Daniel Pinto tempered expectations for trading revenue in February, saying the figure would probably drop by a “high-teens” percentage in the first quarter from last year’s $6.6 billion. He blamed the drop on declines in the currencies and emerging-markets units. “Keep in mind that the year-ago quarter was really strong, especially for equities, but not so much” for fixed income, said Alison Williams, an analyst at Bloomberg Intelligence. “Beating a low bar.”
Europe:
Brexit Delay Looks Set to Keep BOE Trapped in Holding Pattern
The U.K.’s Brexit extension looks set to keep the Bank of England stuck on pause for many months to come.
The six-month addition is unlikely to give officials a large enough window to be able to consider hiking rates, according to economists and investors. The delay is seen as too short to lift the uncertainty for businesses and consumers, and will likely allow cautious BOE policy makers, who have previously said they would wait and see how Brexit evolves before acting, to continue to sit on their hands. “The bottom line is if the deal remains unapproved throughout this extension, the uncertainty holding back private-sector demand will persist,” said UBS Group AG’s head of U.K. rates strategy, John Wraith. “The extension is not long enough to allow for a window of opportunity for consumption and investment to pick up.” That view is reflected in markets, which see only a 6 percent chance of an interest-rate hike before the new Oct. 31 deadline, and an 18 percent probability of a move by the end of the year. Meanwhile, Bloomberg economist Dan Hanson says it’s now unlikely the BOE will be able to increase before Governor Mark Carney leaves in January 2020. Speaking in Washington yesterday, Carney, who has extended his tenure at the central bank twice already, said the delayed Brexit date would not affect his plans to step down this time. He also said that the extension has eased some of his concerns about a no-deal departure, even if it ends up happening. While Carney didn’t comment directly on rates, previous comments from BOE officials suggest they are unlikely to make a move before Brexit is resolved. In February, Carney himself highlighted that the economy was suffering amid the “fog of Brexit,” as the bank downgraded its view on growth for this year and next. In March, Michael Saunders, considered one of the most hawkish members of the Monetary Policy Committee, said there’s no rush to raise rates until the uncertainty lifts. His colleague Silvana Tenreyro also signaled she wouldn’t be prepared to vote for a hike until she can judge the impact of any Brexit outcome. Their caution may be increased by a slower global growth picture, which has already prompted their counterparts in Europe and the U.S. to take a more dovish turn.
Asia:
As China Trade War Cools, Japan Braces for Its Clash With Trump
Japan is finally stepping into the ring for a fight it had managed to dodge for more than two years: Bilateral trade talks with U.S. President Donald Trump. The world’s third-biggest economy has a lot at stake in the talks, which are expected to start next week in Washington just as the U.S.’s negotiations with China appear to be winding down. Prime Minister Shinzo Abe is desperate to avoid tariffs or quotas on lucrative auto exports, while Trump wants to crack open Japan’s agricultural market and reduce a $60 billion trade deficit. Abe has poured energy into courting Trump to maintain a strategic relationship that secures his country against potential threats from North Korea and China. But that doesn’t mean Japan will roll over on trade: Abe’s government is determined to avoid giving the U.S. a better two-way deal than the multilateral pacts he’s negotiated with Europe and Pacific Rim nations. “It’s the U.S. who asked for these bilateral negotiations,” said Ichiro Fujisaki, a former Japanese ambassador to the U.S., who’s now president of the Nakasone Peace Institute. “So, it’s the U.S. who should put to us what they want, rather than us offering this and that before being asked.” The talks add to worries among investors as Trump turns his gaze from China to trade grudges elsewhere. The U.S. leader, who will face questions on his success in rebalancing America’s trade relationships in next year’s presidential campaign, has signaled a willingness to continue market-disrupting tariff threats despite growing economic concerns. Abe only agreed to bilateral talks after Trump hit Japan’s steel and aluminum exports with punitive tariffs last year and later threatened to impose levies of as much as 25 percent on all imported cars, including those made in Japan. Trump faces a decision in May on how to proceed with the auto tariffs. “Japan is now negotiating,” Trump told reporters last month. “They haven’t wanted to negotiate for many years, but now they’re negotiating. It’s called ‘tariffs.’” Still, Abe’s economy minister, Toshimitsu Motegi, has been able to observe the Trump administration’s previous battles with South Korea, Canada, Mexico and China before sitting down next week with U.S. Trade Representative Robert Lighthizer. In each fight, the U.S. adopted extreme positions that threatened to upend economic ties only to drift toward more modest changes.
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