UK’s economy driven higher by a boost to production, as US bank earnings await

The UK economy grew for the second month in February, suggesting that the UK has exited its mild recession from 2023. The economy is now growing on a 0.2% quarterly basis, which is higher than the 0% quarterly rate in January. This is hardly gangbusters, but it does suggest that the UK economy is gaining some momentum as we move through the year.

Car production boosts UK economy

The surprise in Friday’s GDP report was the boost to the production figures. The industrial production rate for February was 1.1%, which pushed the annual rate to 1.4%. This is the highest rate of monthly industrial production since June 2023. The gains in industrial production were broad based, including refining, textile production, transport equipment, particularly car production, and food production, which bodes well for the future. It was also driven by an increase in water and sewerage works, which may be down to the large amount of rain that we have had, which has led to urgent repair work on the country’s water pipes.

Manufacturing production was also a key contributor to growth in February, rising by 1.2%, following a 0.2% fall in January. Production output in the UK can be volatile, but this data makes it look like we may have turned a corner. Construction was a weak spot, falling 1.9% in February, as bad weather hampered output. Construction is also a drag on annual growth, declining by 2% YoY.

Are we slowing our spending on services?

The service sector eked out growth in February, rising by a mere 0.1%, which is lower than the upwardly revised 0.3% rate from January. On a quarterly basis, service sector growth is higher by 0.2%. This is the most important sector of our economy, and its growth rate is vital for the health of the overall economy. Today’s data suggests that the rate of growth is slowing, which does not bode well for the future. The biggest drag to the index of services was hotels and restaurants spending, which slowed by 0.7% on the month, the quarterly rate is now -0.7%. Bright spots in the service sector report included public transport and communications. Service sector spending was a big driver of wage growth and inflation. Wage growth is now above inflation, which means that the public have more money to spend, thus the dip in spending on hotels and restaurants could be a blip and linked to the incredibly wet start to 2024.

The UK is likely to have a modest economic recovery this year. While this will have an impact on the Bank of England’s decision on when to cut rates, international developments will also play a part. The oil price is higher once again, with Brent crude comfortably above $90 per barrel. The gold price also reached another record high earlier.

Markets feel the heat from US inflation

Risk assets have been volatile this week and the markets have once again recalibrated their expectations for interest rate cuts. There is now just over one rate cut expected from the Fed this year, with approx. two cuts expected from the Bank of England, and three rate cuts expected from the ECB. Stocks have been volatile and the Vix, Wall Street’s fear gauge, is close to its highest level since early November, although volatility did retreat on Thursday as markets were calmed by the prospect of ECB rate cuts and the start of earnings season later on Friday. The dollar is king of the FX world. USD/JPY is at its highest level for 34 years and is higher by more than 1% on a broad basis.

US banks get a boost from the Fed’s higher for longer mantra

US banks will kick off earnings season in the US on Friday. JP Morgan, Wells Fargo, State Street and Citi all release their earnings reports on Friday before the US market opens. JP Morgan’s share price was higher on Thursday and rose by nearly 2% as we lead up to earnings season. Forecasts are for another strong earnings report for the US’s largest bank. With the market now expecting higher for longer from the Fed, net interest income should continue to be a pillar of support for bank earnings in the future. This could boost the financial sector of the S&P 500, which reached a record high in recent weeks. In 2023, JPM saw net interest income rise by 33% YoY, it forecast net interest income to be $90bn in 2024, we will be watching for any upgrade to this forecast, especially since the Fed is only expected to cut rates once, or maybe twice in 2024. We expect other banks to also increase their expectations for net interest income this year. Along with a strong US economy, if they can deliver decent profits, then this could boost the outlook for banks. Investment banking income and trading will also be watched closely.

JP Morgan is higher by nearly 16% YoY, so a strong earnings report for Q1 is needed to push this stock higher. Its 12-month forward P/E ratio is 12.3 x earnings, which is higher than other US and global banks. Overall, JPM deserves its higher valuation, but it needs to keep up the good work, and today is the start of a big test for the US stock market. Ahead of the earnings report, US stocks broadly are expected to open higher on Friday.UK’s economy driven higher by a boost to production, as US bank earnings await

The UK economy grew for the second month in February, suggesting that the UK has exited its mild recession from 2023. The economy is now growing on a 0.2% quarterly basis, which is higher than the 0% quarterly rate in January. This is hardly gangbusters, but it does suggest that the UK economy is gaining some momentum as we move through the year.

Car production boosts UK economy

The surprise in Friday’s GDP report was the boost to the production figures. The industrial production rate for February was 1.1%, which pushed the annual rate to 1.4%. This is the highest rate of monthly industrial production since June 2023. The gains in industrial production were broad based, including refining, textile production, transport equipment, particularly car production, and food production, which bodes well for the future. It was also driven by an increase in water and sewerage works, which may be down to the large amount of rain that we have had, which has led to urgent repair work on the country’s water pipes.

Manufacturing production was also a key contributor to growth in February, rising by 1.2%, following a 0.2% fall in January. Production output in the UK can be volatile, but this data makes it look like we may have turned a corner. Construction was a weak spot, falling 1.9% in February, as bad weather hampered output. Construction is also a drag on annual growth, declining by 2% YoY.

Are we slowing our spending on services?

The service sector eked out growth in February, rising by a mere 0.1%, which is lower than the upwardly revised 0.3% rate from January. On a quarterly basis, service sector growth is higher by 0.2%. This is the most important sector of our economy, and its growth rate is vital for the health of the overall economy. Today’s data suggests that the rate of growth is slowing, which does not bode well for the future. The biggest drag to the index of services was hotels and restaurants spending, which slowed by 0.7% on the month, the quarterly rate is now -0.7%. Bright spots in the service sector report included public transport and communications. Service sector spending was a big driver of wage growth and inflation. Wage growth is now above inflation, which means that the public have more money to spend, thus the dip in spending on hotels and restaurants could be a blip and linked to the incredibly wet start to 2024.

The UK is likely to have a modest economic recovery this year. While this will have an impact on the Bank of England’s decision on when to cut rates, international developments will also play a part. The oil price is higher once again, with Brent crude comfortably above $90 per barrel. The gold price also reached another record high earlier.

Markets feel the heat from US inflation

Risk assets have been volatile this week and the markets have once again recalibrated their expectations for interest rate cuts. There is now just over one rate cut expected from the Fed this year, with approx. two cuts expected from the Bank of England, and three rate cuts expected from the ECB. Stocks have been volatile and the Vix, Wall Street’s fear gauge, is close to its highest level since early November, although volatility did retreat on Thursday as markets were calmed by the prospect of ECB rate cuts and the start of earnings season later on Friday. The dollar is king of the FX world. USD/JPY is at its highest level for 34 years and is higher by more than 1% on a broad basis.

US banks get a boost from the Fed’s higher for longer mantra

US banks will kick off earnings season in the US on Friday. JP Morgan, Wells Fargo, State Street and Citi all release their earnings reports on Friday before the US market opens. JP Morgan’s share price was higher on Thursday and rose by nearly 2% as we lead up to earnings season. Forecasts are for another strong earnings report for the US’s largest bank. With the market now expecting higher for longer from the Fed, net interest income should continue to be a pillar of support for bank earnings in the future. This could boost the financial sector of the S&P 500, which reached a record high in recent weeks. In 2023, JPM saw net interest income rise by 33% YoY, it forecast net interest income to be $90bn in 2024, we will be watching for any upgrade to this forecast, especially since the Fed is only expected to cut rates once, or maybe twice in 2024. We expect other banks to also increase their expectations for net interest income this year. Along with a strong US economy, if they can deliver decent profits, then this could boost the outlook for banks. Investment banking income and trading will also be watched closely.

JP Morgan is higher by nearly 16% YoY, so a strong earnings report for Q1 is needed to push this stock higher. Its 12-month forward P/E ratio is 12.3 x earnings, which is higher than other US and global banks. Overall, JPM deserves its higher valuation, but it needs to keep up the good work, and today is the start of a big test for the US stock market. Ahead of the earnings report, US stocks broadly are expected to open higher on Friday.