Aurelia Butler

Unlock the White House Watch newsletter for freeYour guide to what the 2024 US election means for Washington and the worldFor Donald Trump to announce tariffs and extort trading partners weeks before entering office is true to form. His choice of victim was always going to have a random element.Canada was hit despite aligning with US trade over the years, including putting tariffs on Chinese electric vehicles. Mexico has had a more fractious relationship with the US but the trilateral US-Mexico-Canada trade deal has held together. China may be the known adversary but local stock markets shrugged off Trump’s late-night social media post; investors had expected a higher tariff rise than the 10 per cent Beijing was threatened with.But given that Trump’s tariff policy is trying to hit several entirely contradictory goals, immigration and the drugs trade were, frankly, as likely a target as any other. For the US president-elect, tariffs aren’t just trade policy as such. They are also a form of geopolitical leverage.The exact instrument he will use to raise tariffs remains unclear, though to do so on inauguration day on January 20 will probably require the International Emergency Economic Powers Act, which, as its name suggests, involves declaring a national state of emergency. Richard Nixon used IEEPA’s precursor legislation, the Trading with the Enemy Act, to impose an across-the-board 10 per cent tariff on imports in 1971 amid the collapse of the Bretton Woods fixed exchange rate system.Analysing high-frequency market reactions can be highly misleading as a guide to the medium-term direction of policy: Trump might reverse course tomorrow. Yet it is notable that traders’ instinct was to buy rather than sell the dollar. In itself, this is not a shock: theory and (often) practice show that tariffs tend to appreciate the exchange rate.However, this will work against one of Trump’s other professed goals for tariffs: to close the overall US deficit. After he announced at the weekend that hedge fund manager Scott Bessent was to be nominated as Treasury secretary, the dollar softened somewhat — perhaps in the expectation that by attacking the independence of the Federal Reserve, as Bessent has suggested, his nomination meant that interest rates would be lower than expected.As we learned from his first term, where heavy import taxes being levied on imports from China merely meant that goods were routed via countries such as Vietnam, or indeed Mexico, selective tariffs tend to rearrange production and trade networks rather than repatriate production. Although Canada and Mexico run a trade surplus with the US in contrast to the likes of China, they run overall trade deficits against all trading partners. Further reducing their overall exports, if that is the effect of tariffs, will not reduce global imbalances. In practical terms, what do the Canada and Mexico tariffs mean? If Trump means it to apply to oil and gas, it could have a rapid effect on US consumer prices — exactly the opposite of what he promised in the election campaign. Although the US has become a net oil exporter, in 2022 it still imported 8.3mn barrels a day of petroleum products out of a total consumption of 20.3mn b/d, of which about 70 per cent came from Canada and Mexico. More than a third of Canada’s total exports to the US are hydrocarbons. It is not costless to switch between domestic production and imports. Some content could not load. Check your internet connection or browser settings.Otherwise, both countries are heavily integrated into supply chains, particularly in cars, a pattern Trump’s first-term renegotiation of the trilateral Nafta trade deal into the US-Mexico-Canada agreement did not much change. As of 2022, almost a third of Mexico’s $70bn in motor vehicle exports to the US — Mexico and Canada make up more than a third of total US auto imports — were in parts and components. A tariff crunch could pose the threat of creating chokepoints in a production network as an important input suddenly jumps in price.What are Canada, Mexico and China’s options, and indeed those of other trading partners such as the EU that are bracing themselves for similar coercion? The most immediate one is vaguely promising to do something about immigration and fentanyl and hoping this allows Trump to present his gambit as a success, even before he takes over from Joe Biden.Some content could not load. Check your internet connection or browser settings.One of the most successful Trump-management episodes in his first term was European Commission president Jean-Claude Juncker promising that the EU would buy soyabeans and liquefied natural gas in return for Trump holding off on car tariffs. The pledges were meaningless — the commission president has no such powers — but Trump could call it a victory. Another strategy for trading partners would be to see if the countervailing forces within the US system manage to assert themselves. During his first administration, Trump was on the verge of pulling out of Nafta altogether before he was persuaded by his agriculture secretary, Sonny Perdue, and commerce secretary, Wilbur Ross, that it would hurt farmers and border states. Instead, he settled for the fairly modest renegotiation. Any suspicion of a sudden leap in petrol prices, or a more serious stock market sell-off, might persuade him.In the meantime, the best option for the three countries targeted by Trump might be simply to wait and see what the impact of the tariffs will actually be. Economic modelling during the first Trump administration suggested that retaliation by Canada to his tariffs might make the damage to the Canadian economy worse. Companies have done extraordinary things in recent decades managing to keep supply chains going around restrictions. It would be premature to rule out their ability to cope with these tariffs as well.Data visualisation by Amy Borrett and Ray Douglas in London More

The Central Bank of Nigeria has announced an increase in the Monetary Policy Rate (MPR) by 250 basis points, taking it from 27.25% to 27.50%. This decision was reached with a unanimous vote by the Monetary Policy Committee (MPC).In addition to adjusting the MPR, the MPC has decided to maintain the current Cash Reserve Ratio (CRR) for Deposit Money Banks at 50% and for Merchant Banks at 16%. Furthermore, the Liquidity Ratio (LR) remains unchanged at 30%.The Asymmetric Corridor, which is the range within which the MPR can fluctuate, will also continue at its current levels of +500/-100 basis points around the MPR. This corridor determines the rates at which the central bank lends to financial institutions and takes deposits from them.The adjustments to the MPR and the decision to hold other rates steady are part of the Central Bank of Nigeria’s monetary policy strategy. The MPR is a critical tool used by the central bank to control inflation and stabilize the currency. By altering this rate, the bank influences borrowing costs and consumer spending, which in turn can affect economic growth.The retention of the Cash Reserve Ratio and Liquidity Ratio at their respective percentages is indicative of the central bank’s approach to managing the liquidity in the banking system. These rates are essential for ensuring that financial institutions have enough capital on hand to meet their obligations and support economic activities.The announcement of these monetary policy decisions is significant for financial markets, investors, and the economy as a whole. It directly influences the cost of credit and the returns on savings, impacting both businesses and consumers.This article was generated with the support of AI and reviewed by an editor. For more information see our T&C. More

This article is an on-site version of our Chris Giles on Central Banks newsletter. Premium subscribers can sign up here to get the newsletter delivered every Tuesday. Standard subscribers can upgrade to Premium here, or explore all FT newslettersOn one level, the Bank of England has had a remarkably good inflation crisis. A year ago, the UK’s central bank expected inflation still to be above 3 per cent in the final quarter of this year, interest rates still to be above 5 per cent and unemployment pushing ever closer to 5 per cent.The reality shows inflation hovering around the BoE’s 2 per cent target, interest rates falling faster to 4.75 per cent in November and the official measure of unemployment at 4.3 per cent. Financial markets do not buy the good news story, however. They are demanding an inflation risk premium for the UK, which they do not for the US, France or Germany. Derived from the nominal and real returns of UK government bonds, it is relatively straightforward to calculate break-even rates of inflation, representing financial market expectations of inflation over different time periods.These are shown in the chart below for the UK, US, France and Germany. In the short term, the market expectation of UK inflation over the three years two years from now (ie between late 2026 and late 2029) is close to 4 per cent, while very long-term market expectations hover around 3 per cent. This contrasts with market expectations of French and German inflation, which are extremely close to the European Central Bank’s 2 per cent inflation target. Those in the US are a little higher, but the market rates are based on US CPI inflation, while the Fed targets PCE inflation. With CPI averaging 0.36 percentage points higher than PCE since the start of 2010, US market inflation expectations are also in line with the Fed’s target. Some content could not load. Check your internet connection or browser settings.The UK’s exceptional status here has been a long-standing phenomenon and, in the past, there has been a straightforward explanation. The UK’s market inflation estimates are based on the retail prices index, which has averaged 1.1 percentage points above the CPI inflation measure targeted by the BoE. Remove that amount from the UK’s market expectations, especially for long-term indicators and the UK’s market expectations fall back to the BoE’s 2 per cent target. But that is no longer a valid adjustment to make because from February 2030, the calculation of the RPI will change to be identical to a third inflation measure, CPIH. This measure is largely the same as CPI, but includes housing costs of owner-occupiers using the concept of owners equivalent rent. It is methodologically close to the US CPI in that respect. After a long struggle to remove well known problems with the RPI and with all legal challenges exhausted, there is no doubt that the RPI will change to be CPIH from February 2030 and that “inflation protection” in UK index-linked government bonds will fall considerably. (I put inflation protection in inverted commas because the protection was previously too high to compensate for inflation). I will not go into the reasons why this is not remotely an expropriation or a disguised default, but you can read some of the gory details here.Although CPIH is currently elevated due to rental inflation being high, we would expect the inflation protection in UK index-linked bonds to fall by about 1 percentage point in the 2030s as you can see from the chart. Some content could not load. Check your internet connection or browser settings.There is therefore an important question about financial market expectations of UK inflation. In the year before and after the new methodology, inflation swaps market pricing shows that expected RPI inflation falls just over 0.4 percentage points. The change in inflation calculation methodology is being priced in, but not fully. As the chart below shows, well after the change in 2030, financial markets expect UK CPIH inflation to be a little over 3 per cent while the BoE’s inflation target is 2 per cent.The pink line represents the BoE’s own estimate of inflation expectations at all points in the future, derived from the same nominal and index-linked government bond markets. It is heavily smoothed so cannot accurately pick up the change in the RPI calculation methodology. Some content could not load. Check your internet connection or browser settings.There are only so many explanations for this market pricing that can exist. They are not mutually exclusive. Financial markets believe the RPI methodology change will not happen. I think this is incorrect given the public position of the UK Statistics AuthorityThe real yield on UK index-linked gilts is artificially depressed by high demand for these bonds from pension funds, thereby raising the implied expected inflation component. If this is the case, Sushil Wadhwani made a strong case for the government to issue more index-linked government bonds. If financial markets expect 3 per cent inflation and the BoE will deliver 2 per cent inflation, these will make government borrowing much cheaper than nominal bonds. The UK government’s policy is to do the opposite of this. It is potentially costlyFinancial markets do not find the BoE’s 2 per cent inflation target credible and believe the BoE will achieve a figure closer to 3 per cent for CPIH. As the table above shows, the past suggests this would not be an entirely unreasonable assumption. Even after the recent inflation, long-term average inflation for the US and Eurozone are only a touch over 2 per centFinancial market pricing is wrong. Hey, markets are not always efficientBoE credibilityClare Lombardelli, the BoE’s deputy governor for monetary policy, sought to address any issues about the central bank’s credibility, forecasting and policy with a speech yesterday at the annual BoE watchers’ conference. Although it was very much a work in progress, Lombardelli said the bank was working on its models, that the changes in forecasting practices would be large and that they were only just starting. She was notably hawkish, saying that in her view although the upside and downside risks were similarly sized, she thought outcomes would be worse if inflation remained too high for longer so gave that risk greater weight. Her colleague on the MPC, Swati Dhingra, shared much of the analysis but weighted risks differently. But all noises from the BoE suggest it is minded to withdraw restrictiveness gradually (which means at a roughly quarterly pace) until there is more evidence on the persistence of inflation one way or the other. That financial markets (unlike households) do not trust policymakers is not raised in most polite conversations. What I’ve been reading and watchingIan Harnett, chief investment strategist at Absolute Strategy Research, argues that central banks should seek to rectify inflation overshoots with a period of below target price risesFormer UK Monetary Policy Committee member DeAnne Julius thinks everything above here is too rosy and the UK is heading for stagflationUS finance and business breathes a sign of relief with the pick of Scott Bessent as Trump’s Treasury secretaryEurope needs to save less, says Martin Sandbu, and he comes up with a raft of policy ideas to achieve it, many of which are hated by the European economic establishmentA chart that mattersOver the past month and since Donald Trump became president-elect, expectations of US interest rate cuts have weakened significantly and the market-implied path of interest rates is now much higher than the start of the year. This reflects a combination of expectations of looser fiscal policy, a view that neutral rates are higher and that policy is not as restrictive as thought and a couple of slightly disappointing months of inflation data.UK expectations have followed the Fed, despite BoE forecasts suggesting inflation would be broadly on target with interest rates falling well into numbers beginning with a three. The UK Budget’s fiscal loosening and some inability of UK markets to divorce themselves from the Fed are thought to be to blame. In contrast, European market interest rate expectations have not budged over the past month. Some content could not load. Check your internet connection or browser settings.Recommended newsletters for you Free lunch — Your guide to the global economic policy debate. Sign up hereTrade Secrets — A must-read on the changing face of international trade and globalisation. Sign up here More

Retailers in the United Kingdom (TADAWUL:4280) are facing a challenging outlook as sentiment about their business situation over the next three months has sharply declined, according to the latest findings from the Confederation of British Industry (CBI). The CBI’s quarterly Distributive Trades Survey, released this November, indicates that retailer sentiment fell at the fastest rate in two years.In the year to November, retail sales volumes saw a moderate decline, with a weighted balance of -18%, a dip from -6% in October. Retailers have reported sales as “poor” for the time of year, a sentiment consistent with the previous month. There is an expectation that annual sales growth will further deteriorate in December, with sales volumes set to remain below seasonal norms, though the anticipated shortfall is less severe than in November.Retailers are also bracing for a decline in capital expenditure over the next twelve months compared to the past year, reflecting weakened consumer demand and falling confidence. Employment in the sector has fallen over the past year to November at the slowest rate since November 2023, and retailers predict that headcount will remain broadly the same in December.Notably, selling price inflation has eased in the year to November, with a balance of +24% compared to +30% in August, staying below the long-run average for the third consecutive quarter. However, an acceleration is expected in December, with retailers predicting a balance of +33%.The wider distribution sector, which includes retail, wholesale, and motor trades, also experienced a contraction in sales volumes at a moderate pace in the year to November, with firms anticipating sales to fall at the same rate in December.Ben Jones, Lead Economist at the CBI, highlighted the severity of the situation, stating that the level of gloom among retailers has not been seen since the peak of the inflation shock in November 2022. Jones emphasized the impact of upcoming fiscal changes, such as the rise in Employers’ National Insurance and increased business rates for higher-value properties, which are expected to hit retailers hard by adding significant operational costs. He urged the government to urgently collaborate with the business community to mitigate the cumulative cost burden that threatens to impair investment and hiring, while also leading to higher prices for consumers.This article was generated with the support of AI and reviewed by an editor. For more information see our T&C. More

LONDON (Reuters) -A global resurgence in industrial policies that aim to boost or protect domestic interests threatens international cooperation and could hurt poorer countries in particular, the European Bank for Reconstruction and Development said in an annual report.The annual transitions report, which this year examined data impacting trade for 140 countries, found a “remarkable global resurgence” in strategic interventions designed to shape countries’ economies. “Industrial policy is back with a vengeance,” Beata Javorcik, EBRD Chief Economist said in an interview. “It is back in rich countries as well as in emerging markets.”Such policies often include state-backed grants or loans or subsidies for local industry; 90% of those in advanced economies and EBRD regions discriminate against foreign interests in favour of domestic ones. The report found that such policies have increased rapidly since 2019 due to factors including boosting the green transition, following the lead of major economies such as China or the United States, and because citizens increasingly back a greater state role in the economy. The report found that while such policies can be effective, when they are not carefully managed they risk undermining the level playing field. “This means that industrial policy can become a force that will push the world towards fragmentation,” Javorcik said. The report, from the EBRD’s office of the chief economist, was the first compiled by it with the use of artificial intelligence, which researchers used to crunch data from the Global Trade Alert database. Javorcik said the economic upheaval in recent years – due to globalisation, automation, the green transition and now AI – had amplified support for greater state involvement – particularly among those born before 1975. The increasing use of such policies in lower-income countries that have limited administrative capabilities is particularly concerning, Javorcik said, as they tend to opt for the “most distortive”, such as import or export bans or export licensing, which bring risk of corruption. More