Aurelia Butler

Unlock the White House Watch newsletter for freeYour guide to what the 2024 US election means for Washington and the worldJapan’s trade minister is heading to Washington in a last-minute attempt to seek tariff exemptions after President Donald Trump openly questioned a long-standing security pact between the US and one of its closest allies.Yoji Muto, minister of economy, trade and industry, is scheduled to meet his American counterpart Howard Lutnick on Monday, just two days before the US is set to impose a 25 per cent tariff on all steel and aluminium imports.People close to the commerce secretary have described Lutnick as favouring the use of tariffs to convince foreign governments to adopt more US-friendly policies.The trip comes after Trump on Thursday said while the US had a great relationship with Japan, “we have an interesting deal with Japan that we have to protect them, but they don’t have to protect us”.In response, Prime Minister Shigeru Ishiba told parliament on Friday that the security treaty was reciprocal. Japan hosts more than a dozen US bases and roughly 60,000 US military personnel under a mutual defence pact signed by Republican president Dwight Eisenhower in 1960.Ishiba is also overseeing a rapid expansion of military spending towards a target of 2 per cent of GDP.The trade minister is expected to discuss exemptions from the metals tariffs, as well as a reprieve from a possible 25 per cent levy on car imports, which Trump threatened in February could come as soon as April.Automobile duties would hurt Japan’s big carmakers, which directly export to the US and have complex production networks that rely on the free movement of parts between the US, Mexico and Canada. Cars were Japan’s biggest export last year, with roughly a third bound for the US.The on-off nature of Trump’s tariff threats has triggered market volatility, with Japan’s exporter-heavy Nikkei 225 stock index falling more than 2 per cent on Friday.As he departed Tokyo on Sunday, Muto told reporters that he would use his first meeting with Lutnick to “build human relations” and offer suggestions that were “win-win for both the US and Japanese economies”, but did not elaborate.His visit was announced last week amid rising consternation in Japan over whether its long-standing friendship with the US would protect it from a president who has pointed to the existence of trade deficits with other countries as evidence of unfairness. The US trade deficit in goods with Japan was the seventh largest by country, at $68.5bn, last year, according to the US Bureau of Economic Analysis. But Japan was also the largest provider of foreign direct investment to the US in terms of ultimate beneficial owner, with $783.3bn in 2023.Tokyo’s concerns also include accusations of currency manipulation. Trump last Monday cited Japan and China as countries that had been reducing the value of their currency in a way that was unfair to the US.In response, former Bank of Japan governor Haruhiko Kuroda noted that the country had undertaken huge efforts last year to prop up the falling yen and that current monetary policy, which has been focused on raising interest rates, was not aimed at cheapening the yen.“If there’s any misunderstanding on that point, it needs to be addressed,” he said on Friday in his first televised interview since stepping down as governor in April 2023. More

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The dramatic rise in Germany’s financing costs this week is far from a rejection of Friedrich Merz’s fiscal bazooka, investors say, with many believing the chancellor-in-waiting’s spending plan can boost growth without stretching Berlin’s finances beyond a sustainable level.German Bunds had their biggest one-day sell-off in decades on Wednesday as markets adjusted to a dramatic change in German fiscal policy, and a massive increase in debt issuance, following Merz’s “whatever it takes” plan to spend on defence and infrastructure.Despite settling down at the end of the week, the 10-year Bund remained elevated above 2.8 per cent on Friday, having started the week below 2.5 per cent.“German authorities have finally woken up to the fact that they needed to take drastic actions to revive their economy” and bolster their defence, said Nicolas Trindade, a senior portfolio manager at Axa’s investment arm. “This is positive for growth over the medium term, and Germany definitely has enough fiscal space to accommodate this very large extra spending.”Economists as early as Thursday morning started to revise up their growth forecasts. BNP is now forecasting that German GDP will rise by 0.7 per cent this year and 0.8 per cent in 2026, instead of a 0.2 per cent and 0.5 per cent increase. The uplift in expectations also helped drive German stocks to a record high on Thursday.The rise in Bund yields and stock prices was “an endorsement of the positive impact this policy shift will have on German growth”, said Gordon Shannon, a fund manager at TwentyFour Asset Management.Yields rose as traders moved to trim their expectations for European Central Bank rate cuts on the stronger outlook, even before Thursday’s meeting took the Eurozone benchmark rate down a quarter-point to 2.5 per cent. Traders are now fully pricing in only one further quarter-point cut, according to levels in swaps markets.The other major factor in the jump in yield, investors said, was the massive rise in Bund issuance, an asset that sets a benchmark for Eurozone debt prices but has often been in short supply due to Germany’s “debt brake” limiting government borrowing.That scarcity — also due to central banks holding a large proportion of the available stock — is one reason Bund yields have traded below zero for prolonged periods over the past decade.Traders began betting in earnest on higher Bund issuance last year as speculation rose over debt brake reform, taking 10-year Bund yields above the rate for euro interest rate swaps for the first time as investors braced for more supply. Higher yields reflect the risk that the broader Eurozone debt market might have “difficulty” in absorbing the supply of issuance “if the new fiscal headroom is indeed utilised”, said Felix Feather, economist at asset manager Aberdeen.It was not, he said, driven by a perceived increase in credit risk. “The possibility of Germany defaulting on or restructuring its debt is not a concern for us at this point,” he said.This was miles away, investors said, from the experience of the UK in 2022, when Liz Truss’s ill-fated “mini” Budget sparked a gilts crisis. A similar extreme scenario in Germany would have ramifications across the euro area.“Germany is the backbone of the Eurozone. If the German budget gets out of control, the Euro will be toast,” said Bert Flossbach, co-founder and chief investment officer of German asset manager Flossbach von Storch.The country’s light debt burden — with debt amounting to around 63 per cent of GDP, versus close to or above 100 per cent for some other big economies — means such a scenario is viewed as highly unlikely. There is more concern among investors about the potential repercussions of the shift higher in borrowing costs for other Euro area countries that are already much higher leveraged. The spread between German yields and those of other Eurozone borrowers such as France and Italy remained stable this week, a sharp contrast to historic moments of stress such as the Eurozone debt crisis. But the rise in yields in lockstep with Germany will still put pressure on countries with larger debt burdens.UK bonds were caught up in the sell-off, with the 10-year yield above 4.6 per cent on Friday, up from its low last month of below 4.4 per cent, as it comes only weeks before the government makes a statement on the public finances on March 26. The rise in yields put more pressure on chancellor Rachel Reeves to “deliver tax hikes or spending cuts to stay within her fiscal rules”, said Mark Dowding, chief investment officer for fixed income at RBC BlueBay Asset Management.A key factor in where Bunds go from here will be whether the hoped for German economic growth emerges.In one of the most optimistic outlooks, German economic think-tank IMK predicted that the German economy over the medium term may return to growth rates of up to 2 per cent — a rate of expansion slightly above the 1.8 per cent per year seen in the 15 years prior to the pandemic. Analysts also warn that a debt-funded investment spree will not be sufficient to overcome Germany’s persistent growth crisis, which many attribute to deeper issues like an ageing workforce, bureaucracy and an outdated industrial structure.The export dependent manufacturing sector is also hit hard by geopolitical tensions. “Wider deficits alone won’t solve any of [those challenges],” said Oliver Rakau, chief Germany economist at Oxford Economics.But other analysts are more positive. Bank of America called the fiscal stimulus a “game changer” for German growth that, paired with the higher bond issuance, pointed to a “meaningfully higher” forecast for the 10-year Bund yield than it had previously envisaged.“Bund yields are not going up out of fear, because Germany has plenty of fiscal space,” argued Mahmood Pradhan, head of global macro at Amundi. “The markets are treating this as a growth positive outcome.” More

Unlock the White House Watch newsletter for freeYour guide to what the 2024 US election means for Washington and the worldFederal Reserve chair Jay Powell played down concerns over US growth after U-turns by Donald Trump’s administration, disappointing jobs numbers and a tumultuous week in financial markets.Powell on Friday said the world’s largest economy remained “in good shape” despite the elevated “uncertainty”, after the president launched an aggressive agenda of tariffs and spending cuts.“We are focused on separating the signal from the noise as the outlook evolves,” Powell said, adding the Fed was in no “hurry” to cut interest rates and was “well positioned to wait for greater clarity”.Powell’s comments came as the blue-chip S&P 500 ended the week down 3.1 per cent, its worst run since early September. US stocks have pulled back sharply in recent weeks after gloomy economic reports prompted worries Trump’s tariffs will slow growth. Corporate executives warned the chaotic pivots in trade policy, including a major reversal this week on the administration’s plans to tariff goods from Canada and Mexico, had made it difficult to run their businesses, and could stymie fresh investments into the US. Show video infoThe US is “at a crossroads, economically”, said Charles Lemonides, chief investment officer at ValueWorks, a New York-based hedge fund. “We don’t know where policy is going and it creates huge turmoil.”The Bureau of Labor Statistics on Friday released data showing the US created 151,000 jobs in February, falling short of the 160,000 forecast by economists polled by Reuters.The unemployment rate was 4.1 per cent last month, compared with expectations it would hold steady at 4 per cent. “Investor sentiment was euphoric after the election but there’s been a whole lot of cold water thrown on that euphoria over the past month,” said Jim Tierney, head of the concentrated US growth fund at AllianceBernstein. “Powell is saying everything is fine, but that’s not what consumer sentiment is saying and it’s not where we’ve heard business sentiment to be, either,” he added.The Fed chair had recently signalled the central bank would keep its main interest rate at its current range of between 4.25 per cent and 4.5 per cent as it assessed the impact of Trump’s policies. But markets are increasingly betting the Fed will be forced to cut rates more aggressively this year than thought, dragging Treasury yields lower and weighing on the dollar. The US dollar index, which tracks the greenback’s strength against six other currencies, has lost 4.3 per cent this year.Asked what would prompt the Fed to respond to tariffs imposed on US imports, Powell said on Friday: “What would really matter is what’s happening with longer-term inflation expectations and how persistent are the inflationary effects.”Some economists have warned Trump’s spending cuts and the slashing of the federal workforce through the so-called “Department of Government Efficiency”, led by billionaire Elon Musk, could also be a drag on the economy. Earlier in the week, Trump rolled back some of the tariffs he imposed on Canada and Mexico in an attempt to soothe markets. On Friday, he acknowledged some economic pain might come from his policies and their sometimes chaotic rollout.“There could be some disturbance, a little bit of disturbance,” the president said, repeating a line from his speech to Congress on Tuesday night. “There will always be changes and adjustments.” More

Donald Trump has threatened Russia with additional “large-scale” sanctions and tariffs, as the US president shifts to piling pressure on Moscow in an effort to broker a peace deal in Ukraine.Trump’s comments on Friday come as tensions have eased with Ukraine’s President Volodymyr Zelenskyy following a public confrontation in the White House last week, which led to the US suspending military aid and intelligence support to Kyiv. US and Ukrainian officials are due to meet next week in Saudi Arabia for talks. National security adviser Mike Waltz and secretary of state Marco Rubio will head the US delegation.“Based on the fact that Russia is absolutely ‘pounding’ Ukraine on the battlefield right now, I am strongly considering large scale Banking Sanctions, Sanctions, and Tariffs on Russia until a Cease Fire and FINAL SETTLEMENT AGREEMENT ON PEACE IS REACHED,” Trump wrote on his Truth Social platform.“To Russia and Ukraine, get to the table right now, before it is too late. Thank you!!!” he added.Trump has faced criticism from US allies as well as domestic lawmakers, including some Republicans, for his clashes with Zelenskyy. Concerns are growing that the White House is handing all the leverage to Russia even before direct talks begin between Moscow and Kyiv.In the Oval Office later on Friday, Trump returned to friendlier rhetoric towards Moscow.“I’m finding it more difficult, frankly, to deal with Ukraine [than Russia],” the president said. “I find that in terms of getting a final settlement, it may be easier dealing with Russia, which is surprising, because they have all the cards, and they’re bombing the hell out of them right now.”However, he did say that his Truth Social post was “a very strong statement” to Moscow saying it “can’t” continue its intense bombing of Ukraine.Trump said he did not think Russian President Vladimir Putin was taking advantage of the halted intelligence sharing from Washington to Kyiv and was instead “doing what anybody else would do”.“I think [Putin’s] hitting [Ukraine] harder than he’s been hitting them. And I think probably anybody in that position would be doing that right now. He wants to get it ended,” he said.Despite Moscow’s bombing campaign, Trump said he did not want to keep supplying Kyiv with air defences since “I have to know that they want to settle. I don’t know that they want to settle.” Trump added that before he thinks about US security guarantees for Ukraine, he wants the war settled. “Ukraine has to get on the ball and get a job done,” he said.US officials had previously threatened sanctions on Russia in an effort to push Putin towards the negotiating table, but Trump emphatically renewed that message on Friday.The White House has not offered any details of the threatened sanctions and tariffs on Russia. Kevin Hassett, director of the National Economic Council, told reporters on Friday that “there are a heck of a lot of things that are left, for sure” to sanction “but . . . let’s see how it goes”.Russia remains under sweeping sanctions imposed by former president Joe Biden, including on its financial services, defence and energy sectors. The US has also targeted top Russian business leaders and oligarchs with sanctions. The sanctions have cut Russia’s trade surplus by more than half, from $337bn in 2022, the first year of the war, to just $151bn last year, said Alexandra Prokopenko, a fellow at the Carnegie Russia Eurasia Center in Berlin. The most painful measures were the sanctions against oil exports, which have forced Russian companies to sell at a discount while raising their logistics and financial costs, and financial sanctions that have created cumbersome barriers for the country’s companies making international transactions, as well as sanctions on its airline sector.The sweeping approach taken by the Biden administration meant that Trump can do relatively little to ratchet up pressure, Prokopenko said. “There’s no sanctions bazooka any more and the US can’t inflict real pain,” she added.But Trump officials say the sanctions from Biden were ineffective, particularly with respect to Russia’s all-important energy sector. “A major factor that has enabled the Russian war machine’s continued financing was the Biden administration’s egregiously weak sanctions on Russian energy,” Scott Bessent, the US Treasury secretary, told the Economic Club of New York on Thursday.He suggested that the Biden administration had held back on imposing more severe sanctions due to “worries about upward pressure on US energy prices during an election season”.“What was the point of substantial US military and financial support over the past three years, without a commensurate and fulsome sanction support?” he asked. The White House has previously dangled the possibility of an easing of sanctions on Russia if it reaches a peace deal with Ukraine, and officials have even pointed to business opportunities for US investors in the country in the event an agreement is reached. Higher tariffs on Russian imports will have limited impact since the country’s trading with the US has collapsed in recent years. According to the US trade representative’s office, goods imports from Russia amounted to $3bn in 2024. More

If you’re reading this on a day that ends with -day, there’s been news that US tariffs are on, off, delayed, or exemption-riddled. This is surely the kind of strong, decisive leadership Americans voted for in November.Alphaville could spend lots of time thoroughly analysing the signs that the US is FAFOing itself into one of the dumbest economic downturns in history . . . But it’s been a disease-riddled week and it’s now Friday, so instead we’ll just sum up the current state of Trumponomics through its most appropriate medium: the meme.We’re crediting either the creator — when we think we know who it is — or the person who sent it to us first. Thanks to FTAV readers for stepping up to the plate.© @bisphamgreen.bsky.social‬© @TBPInvictus© Alexander Clarkson© Ben Carlson© Sean Tuffy© @SkylerforNY © Sean Tuffy More