Aurelia Butler

This article is an onsite version of our Trade Secrets newsletter. Premium subscribers can sign up here to get the newsletter delivered every Monday. Standard subscribers can upgrade to Premium here, or explore all FT newslettersHello, and welcome to Trade Secrets. It’s May Day this week, an international celebration of the labour movement (yes, yes, Americans and Canadians, I know your Labor Days are in September, I’ll do something worker-related then as well). So I’m having a look at some intriguing developments in the relationship between labour unions and trade. Today’s Charted waters is on the UK and the forthcoming shambles on checking food imports. Next week, in deference to another public day off (the UK’s pagan-inspired May Bank Holiday), the Trade Secrets newsletter will come out on Tuesday. In the meantime, this particular member of the British National Union of Journalists sends fraternal May Day greetings to all who observe.Get in touch. Email me at [email protected] Lord, won’t you sign up at Mercedes-Benz?(It’s from a song.) It’s no huge secret that US labour unions aren’t the biggest fans of international trade, which they blame for undercutting domestic wages and standards, noting that goods and capital are mobile while labour is fixed.Memories among trade folk were scarred for decades by the disastrous Seattle World Trade Organization ministerial in 1999, ringed by protesters from the fearsome (in several ways) Teamsters union. They needn’t have bothered: President Bill Clinton doomed the summit before it started by calling for labour standards in WTO agreements, infuriating lower-income countries who regarded it as protectionism.Over the next 20 years the US and EU put labour standards into their own preferential agreements, though without great effect. There’s an interesting sub-phenomenon here: labour unions have a relatively small membership in the US compared with Europe but a much bigger impact on trade policy. EU trade unionism is still overwhelmingly national while its trade policy is set bloc-wide.Recently things have been, as they say, getting real. Donald Trump’s renegotiation of Nafta into the US-Mexico-Canada trade deal (USMCA), under pressure from a Democratic Congress, wrote in some specific provisions to stiffen the spine of the Mexican labour movement, which is historically weak and co-opted by management and government.Similarly, one of the many goals President Joe Biden’s Inflation Reduction Act has simultaneously tried to hit is directing spending towards unionised plants. His trade policy, as I may have said one or two thousand times before, is disproportionately driven by the unionised parts of the steel industry, where he wants votes and organising muscle in the presidential election. So what’s the latest? There was a big victory for the United Auto Workers union recently in getting recognition at a Volkswagen plant in Tennessee. Organising plants in the generally union-hostile south is hugely symbolic — check out the fascinating history of the RJ Reynolds tobacco factory in North Carolina in the 1940s — and the VW facility was the first unionisation of an auto plant by a vote in the southern states since that decade and the first of a foreign-owned auto factory.The next UAW target is a Mercedes-Benz plant in Alabama, and the really interesting bit for our purposes is the intriguing way it has found to internationalise campaigning. The union has filed charges against Mercedes under the newish supply chain law in Germany, which makes German companies responsible for environmental, human rights or labour abuses among suppliers. The UAW says the company is victimising union members, though Mercedes denies this and says it will respect the unionisation vote.The drafters of the supply chain law probably had in mind scrutinising VW’s operations in China’s Xinjiang region rather more than supporting unionising drives in Alabama. Leftist American activists and commentators, especially those who venerate the Seattle moment in 1999, are naturally delighted. The supply chain law might not create a new civil liability for companies’ breaches of standards, but it does provide campaigners with a way of shining light on their activities.Now, you might think it odd that German car manufacturers with their famous co-operative worker council tradition in Germany chose to set up in non-union US states with lower wages and fewer labour protections, and aren’t actively welcoming unionisation there. (To be fair, VW did want to bring in a German-style works council when it built its plant in Tennessee a decade ago, but it didn’t happen.)You wouldn’t be alone. European Commission officials say they have quietly been reminding European carmakers about the social partnership model they are supposed to embody. “In addition to complying with local laws, we obviously expect EU companies to uphold European values and standards in their operations abroad,” a commission official told me. “The commission has strong co-operation on labour issues with the US. Our commitment includes ensuring workers are shielded from anti-union discrimination and any interference in unionisation efforts.” By commission standards that’s a measured but unmistakable shot across the bows. It won’t hurt the EU’s sometimes strained relationship with the White House either.A more perfect unionSo is this a new cross-border relationship between unions to match the multinational nature of the corporations in which they seek to organise? Ish. The German association IG Metall, Europe’s largest industrial union, which represents car (and steel) workers, is in an unusual position. It has backed the UAW’s unionising campaign in the US. But back home, although IG Metall has its own unionisation drive at Tesla’s plant in Germany, it’s much closer to management in companies such as VW and Mercedes, where it represents workers, because of the aforementioned co-operative arrangements.Bringing the more adversarial US labour tradition into companies it helps to manage might create a bit of tension. Fairly or not, the UAW has consistently been accused of inefficient work practices and making uncompetitive the companies where it represents workers.Back to trade. In Germany IG Metall generally shares the car companies’ focus on exports and is much less suspicious of international trade. One of the swing votes for trade deals in the European parliament is international trade committee chair Bernd Lange, veteran German SPD activist and IG Metall member. Lange’s role is important because he continually has to balance supporting worker rights and other good progressive causes abroad with mercantilist interests at home. In 2022, the IG Metall representative on VW’s board did raise questions about whether it was in the company’s long-term interest to be producing in Xinjiang. But that was a long way away from a clear and principled call to divest. It was German human rights campaigners who first filed complaints about Xinjiang under the supply chain law, not the union.We remain a very long way from single transatlantic unions. But it’s intriguing that the German supply chain law has managed to affect some powerful companies in ways people didn’t necessarily expect. A German think-tank associated with the SPD is wondering whether it might also be used to boost the labour movement elsewhere, such as sub-Saharan Africa. The EU last week agreed its own version of a supply chain due diligence law, admittedly watered down from its original model.Commission officials weighing in on unionisation drives in the US is particularly interesting. As I’ve said before, one traditional drollery in Brussels is that EU trade policy is set by Germany, and thus by German manufacturing, and thus by the German car industry, and thus by VW. Right now that joke looks a bit past its sell-by date.Charted watersChecks on food imported to the UK from the EU finally start this week, a mere four years after the UK left the EU. Even then a lot of the inspections will be pretty notional. The fact that so much food comes through the congested port of Dover means the inspection station will be 22 miles inland. If you’re wondering how the government makes sure that produce doesn’t simply go missing on that journey, your guess is as good as anyone’s.Trade linksKatherine Tai’s luck runs out as many in Congress join some of the US’s trading partners in finding her performance as US trade representative unimpressive.The symbolic issue of trade-distorting cotton subsidies, the subject of one of the first big wins for a middle-income country against a rich one (Brazil vs the US) in the WTO dispute settlement process, has now become a much more complex issue. The big subsidisers affecting African cotton-growers are now middle-income countries including India and China. (H/T to the great Robert Wolfe for spotting this.) That “Global South” solidarity you read about is inexplicably absent. As the strong dollar causes alarm around the world, Trade Secrets’ favourite and longtime markets guru Karthik Sankaran argues for co-ordinated intervention between the big economies to guide exchange rates.Meanwhile, Donald Trump’s advisers are supposedly discussing penalties for countries that shift away from using the dollar in reserves and so on, though how they combine that with their other apparent aim of weakening the dollar for competitiveness reasons utterly defeats me. Industrial profits at Chinese companies have fallen from a two-year high, increasing concerns that their output is running ahead of domestic and export demand. Trade Secrets is edited by Jonathan MoulesRecommended newsletters for youBritain after Brexit — Keep up to date with the latest developments as the UK economy adjusts to life outside the EU. Sign up hereFree Lunch — Your guide to the global economic policy debate. Sign up here More

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NEW YORK (Reuters) – Options on Secured Overnight Financing Rate (SOFR) futures are showing a higher probability that the Federal Reserve could hike interest rates a quarter percentage point this year and next as U.S. inflation and the labor market remain resilient.Bond investors look to SOFR futures, among other indicators, to gauge expectations on Fed policy rates. Options, on the other hand, are widely used to hedge against expected moves, with “vol” or volatility a key input in the price. SOFR, currently at 5.31%, measures the cost of borrowing cash overnight in money markets collateralized by U.S. Treasuries. It is the benchmark rate used to price dollar-denominated derivatives and loans.Odds for a rise in SOFR are low, though not insignificant. Few market participants actually expect the Fed to hike again. It could well be that the Fed cuts rates just once this year or not at all, and hold them higher for longer.Analysts said it would take a full-blown re-acceleration in inflation for the Fed to tighten again. That is not the baseline scenario for most economists.Inflation remains stubborn despite slowing late last year after 15 months of aggressive rate hikes that the Fed halted in July. Data on Thursday showed that core U.S. personal consumption expenditures inflation rose 3.7% in the first quarter, after growing 2% in the fourth.Friday’s monthly report on PCE inflation for March showed 0.3% growth, the same as February, while over 12 months inflation rose 2.7%, worse than February’s 2.5% and further from the Fed’s 2% target.”If you look purely at the data and you did not have the rhetoric coming from central banks, we would be pricing in hikes, not cuts,” said Akshay Singal, head of short-term interest rate trading at Citi.”And the fact that central bankers have been of the view that they’ve done enough is being challenged quite aggressively now.”The option-implied probability for SOFR to rise 25 basis points to 5.56% by December has risen to 29%, Barclays estimates showed, from about 26% in early April.The prospect of a no-cut scenario for 2024 is 31%, up from 20% a month ago, BNP Paribas (OTC:BNPQY) data showed. Chances of the first 25-bp hike in 2025 are at 22%. Volume though is typically thin the further out the curve so that number can change.Gennadiy Goldberg, head of U.S. rates strategy at TD Securities, said the increase in pricing reflects the uncertainty investors face in an environment of strong growth and persistent inflation.”The longer we stay at higher rates and the economy stays strong and inflation sticky, the more investors will question whether the Fed is doing enough,” he added.MARKET BIASED TOWARD CUTSEven so, SOFR futures have priced in about 30 basis points in easing for 2024.”There’s a very high threshold to price a shift in Fed policy,” said Bruno Braizinha, rates strategist at BofA Securities. “U.S. data needs to improve by a lot for the market to abandon rate cuts and transition to pricing hikes.”The rise in implied volatility in interest rate swaps, a corner in the fixed income space investors use to hedge interest rate risk, has accompanied the increase in rate-hike odds with rising uncertainty over Fed outcomes.Rate swaps measure the cost of exchanging fixed-rate cash flows for floating-rate ones, or vice versa. Implied vol is a gauge of how much the option market believes rate swaps will move in either direction over a given time frame. The higher the vol, the greater the perceived instability over a given period.Volatility on shorter-dated swaptions such as one-year at-the-money options on one-year swap rates, that part of the curve in which Fed policy is being priced, rose to a price of 28.62 bps on Thursday, the highest since April 17.So-called receiver swaptions, a type of option that pays off when interest rates fall, are still in demand. In a receiver swaption, the holder of the option chooses to pay a fixed interest rate in exchange for receiving a floating rate.But the price for those receivers have cheapened a bit on shorter maturities, suggesting that demand may be easing as rate cuts are factored out.”The baseline case for now is no-landing,” BofA’s Braizinha said, referring to a scenario where the U.S. economy avoids recession. And that, he said, does not necessarily warrant a rate hike. More

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AMSTERDAM (Reuters) -Philips shares surged 35% early on Monday as the medical devices maker announced a smaller-than-expected settlement to resolve claims over recalled breathing devices in the United States.Philips said it had agreed to pay $1.1 billion to settle all personal injury claims filed in the U.S., ending uncertainty that had slashed its market value over the past three years.”This settlement is significantly lower than expectations of $2-4 billion and worst case of $10 billion,” Barclays analysts said.”It comes a lot earlier than anticipated and removes an overhang many have worried would linger for years.”Amsterdam-based Philips has grappled with the fallout of its recall of millions of breathing devices and ventilators for three years, as fears of large litigation bills lopped off about two-thirds of its market value.Its shares were up 35% at 26.60 euros at 0810 GMT, hitting their highest level since April 2022 though still only worth half as much as before the recall started in June 2021.The devices were recalled because of concerns that foam used in them could degrade and become toxic, carrying potential cancer risks.CEO Roy Jakobs declined to say whether the bill was smaller than he had feared.”$1.1 billion is a significant amount, however you put it. This is important to end uncertainty and to provide clarity on our way forward,” he told reporters.Philips is still facing lawsuits in Europe over the devices, but Jakobs said this settlement would end most of the uncertainty for investors.”Totalling the total U.S. cases that we have now finalised, so economic loss, medical monitoring and personal injury, then the vast majority of claims is actually put to bed.”The company said it did not admit any fault or liability, or that any injuries were caused by its devices.Philips this month announced the final details of a consent decree reached with U.S. authorities in January, spelling out the improvements it needs to make at its Respironics plants in the United States.It said it had now also reached agreement with insurers over compensation of 540 million euros ($580 million) for product liability costs, to be received in the second quarter of 2024.It booked a provision of 982 million euros in its first-quarter results for the settlement payments, which it expects to fund from cash flow next year.ORDERS AND RESULTSPhilips on Monday also reported its first-quarter earnings, which beat analyst expectations with an 8% jump in adjusted earnings before interest, taxes and amortisation (EBITA) to 388 million euros.That beat the 361 million euros, roughly stable from a year before, expected by analysts in a company-compiled poll.Comparable sales growth of 2.4% was in line with expectations, leading to a higher-than-expected 9.4% profit margin.Order intake, however, continued to fall due to slower sales in China and was 3.8% lower than in the first three months of 2023.”We started the year in line with our plan,” Jakobs said. “With order intake growth outside China turning positive and strong margin improvement.” More

Regional banks have been struggling to retain deposits as customers seek the safety of larger ‘too-big-to-fail’ rivals, while higher interest rates have also diminished the value of their loan books due to increased unrealized losses.Republic Bank’s troubles included low liquidity, not filing annual reports detailing year-end financials with the U.S. SEC and being targeted by multiple activist investors since 2021.The beleaguered lender, which had about $6 billion and $4 billion in total assets and deposits, respectively, was closed on Friday by the Pennsylvania Department of Banking and Securities. The FDIC was appointed its receiver. The FDIC estimated the cost to the Deposit Insurance Fund related to the failure of Republic Bank would be $667 million.Investors have been worried about a possible contagion in the sector since three prominent lenders – Silicon Valley Bank, First Republic and Signature Bank (OTC:SBNY) – collapsed in early 2023. The failures reverberated across the global financial system, triggered a broad sell-off in banking stocks and invited tough regulatory scrutiny. In February, Republic First disclosed that an investor group consisting of veteran businessman George Norcross, high-profile attorney Philip Norcross and former TD Bank executive Gregory Braca had terminated its planned $35 million funding in the troubled lender. Regulators had reportedly been discussing a sale of the bank before the capital infusion deal was signed. The Philadelphia-based bank cut jobs last year to reduce costs and exited its mortgage origination business. Its shares were delisted from the Nasdaq in August and now trade over the counter. Fulton expects the deal will double its presence in the Philadelphia market. The lender’s management is scheduled to hold an investor conference later in the day to discuss the deal. Analysts at Jefferies said they expect the integration to be smooth and boost the bank’s liquidity, even though this is the largest deal Fulton has undertaken post the global financial crisis. Fulton’s stock was last trading 11% higher at $17.31 before the bell in light volume. Through previous close, it had a market capitalization of $2.53 billion. The KBW Regional Banking Index, a gauge of investor sentiment towards the broader industry, is down 10.5% so far this year. More