Aurelia Butler

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.Japan’s core inflation rate climbed at its fastest rate in more than two years in April, piling pressure on the Bank of Japan as it seeks to normalise the country’s interest rates and the unpopular government of Prime Minister Shigeru Ishiba. Core inflation, which excludes fresh food but includes energy prices, rose 3.5 per cent on a year earlier last month, official data showed on Friday, exceeding the 3.2 per cent pace of growth in March and the fastest rate since January 2023. An accompanying “core-core” index, which also strips out energy, rose 3 per cent in April from a year earlier.The acceleration came as Japan began its financial year in April, a period that often prompts price rises at restaurants, private schools and entertainment services. But it underscored the challenges confronting the BoJ and Ishiba’s administration, which has seen little progress towards a deal with the US to avert President Donald Trump’s high tariffs. The yen strengthened 0.4 per cent on Friday to ¥143.47 per US dollar. The Topix equities benchmark rose 0.7 per cent and the exporter-oriented Nikkei 225 index climbed 0.5 per cent. Yields on 10-year Japanese government bonds shed 0.015 percentage points to 1.549 per cent, while those on the 40-year bonds declined 0.05 percentage points to 3.624 per cent after touching record highs earlier in the week. Bond yields move inversely to prices. JGB yields rose to record highs this week, alarming economists, before ending the week relatively calm. But traders in Tokyo warned that the inflation numbers would intensify market focus on Japan’s economic challenges.Krishna Bhimavarapu, Asia-Pacific economist at State Street Global Advisors, said the “firm” inflation reading could “augment the turbulence in JGBs [at] the long end”.“While the BoJ is rightly taking a patient approach, the upshot is a lesser than expected tax cut, which maintains high inflation that could lower consumption and slow the economy,” he added. “Suddenly the risks to the economy got quite real.”But Marcel Thieliant, Japan economist at Capital Economics said that despite dovish comments this week from senior BoJ officials, Friday’s CPI figures suggested that the central bank remained on track for further “normalisation” of monetary policy.“This has increased our confidence that a BoJ hike will come this year,” he said, adding that headline inflation, which was at 3.6 per cent for April, meant that a rate rise “will come sooner rather than later.” Thieliant predicted that a rise at the central bank’s October policy meeting appeared more realistic than at its July gathering, as many analysts had earlier forecast.The core consumer price index includes rice, a politically sensitive staple for millions of Japanese households. Despite government measures aimed at lowering prices, including dipping into the national strategic reserve earlier this year, rice prices in April were almost 99 per cent higher than in 2024.The start of the new financial year in April 1 triggered a wide range of further price increases, analysts said. In a survey of major food producers, research company Teikoku Databank found that the cost of about 4,000 food items climbed in April.Goldman Sachs economists also pointed to broad price rises in April in dining-out venues, private tuition fees and entertainment services but noted that costs were often raised by service industries in that month.April’s core CPI was also pushed higher by the end of government subsidies for gas and electricity, observers said, but many households also benefited from the gradual introduction of free high school tuition in April, which mostly affected the families of children at state schools.Additional reporting by William Sandlund in Hong Kong More

This article is an on-site version of our Unhedged newsletter. Premium subscribers can sign up here to get the newsletter delivered every weekday. Standard subscribers can upgrade to Premium here, or explore all FT newslettersGood morning. The House of Representatives narrowly passed Donald Trump’s “big, beautiful bill” yesterday, leaving the Senate as the final hurdle. As it stands, the bill will add to the already large US fiscal deficit. The bond market moved little on the news. Perhaps fiscal profligacy was priced in. Email us: [email protected] results How is the US consumer holding up? And what will be the effect of higher tariffs on consumer prices?These are two of the biggest questions facing US markets, and they are interrelated. Happily, over the past week or so, we have received some insights into both. A series of important US retailers have reported results, including “big box” players Walmart, Target, BJ Wholesale, Home Depot, and Lowe’s; as well as specialists TJX, Ross Stores, Urban Outfitters, Ralph Lauren and Williams Sonoma.On the health of the consumer, there has been an apparent contradiction between two sets of indicators. “Soft” data from sentiment surveys and the like looks terrible, but “hard” data on employment and consumer spending have been solid. The retailers’ results, quite clearly, refute the bad soft data and confirm the good hard data. The only chains posting negative same-store sales growth were Lowe’s (which is struggling with a frozen housing market) and Target (whose business model and strategy has been wobbling for years).While the companies say — as they have for several quarters — that customers are “focused on value”, and at times hesitant about big-ticket purchases, it’s hard to find any signs of a recent slowdown in the retailers’ results. The head of Walmart’s US business said that consumers “remain . . . consistent. And we continue to see customers prioritising value and speed of delivery. We have seen growth across all income cohorts in the quarter.” And while every company nodded to higher uncertainty, almost all of them kept their annual sales and profit targets in place. The notable exception was Ross Stores, a discount clothing chain which sources more than half of its products from China. It withdrew its previous targets because of the “varying nature of tariff announcements”. Which brings us to the question of prices, where the picture is less clear. Part of this has to do with the sequencing of the reports. Walmart reported on May 15th, and said, with admirable plainness, that “given the magnitude of the tariffs, even at the reduced levels announced this week, we aren’t able to absorb all the pressure given the reality of narrow retail margins”. One analyst asked why Walmart didn’t see the tariffs as an opportunity to cut prices and take market share from weaker rivals. Chief executive Doug McMillon replied that the company would . . . watch what customers are telling us and the response that we get from them and the pressure that they’re feeling. So the bottom line is, if we need to invest more [in low prices], we can. Having said that, I really want to grow profit faster than sales. Like we’ve been working on this for a long time. I think we deserve that. You guys [investors] deserve that. And we can navigate this in a way as we balance all the interest between customers, shareholders and everyone else such that we can keep prices low enough to help people and grow profit faster than sales.To Unhedged, that’s a nice statement of how corporate capitalism is meant to work, but the US president disagrees. Donald Trump wrote on Truth Social that Walmart and their Chinese suppliers should “EAT THE TARIFFS”.Retailers who reported after Walmart seem to have taken notice of the president’s displeasure, and described their price strategies in circumspect or vague terms, often with reference to “portfolio pricing” (prices seen as a whole, with increases netted against decreases). A Home Depot executive hedged the issue like this:We intend to generally maintain pricing across our portfolio . . . we don’t see broad-based price increases for our customers at all going forward . . . It’s a great opportunity for us to take share, and it’s a great opportunity for our suppliers to take share as well.“Generally”; “Broad-based”; interpret these qualifiers however you like. Several other companies said they were committed to remaining price competitive. Most said they had “many levers” to pull to offset tariffs, of which price was only one. And so on. Reading between the lines, the industry line on price increases is: some prices are certainly going up because of tariffs; we’ll see how customers respond; and we’ll take it from there.Long bond yieldsThe long end is rising. And not just in the US: 30-year bond yields are rising across developed economies:In recent weeks the US fiscal picture has worsened as the Republican budget has come into focus, and there are concerns about foreign investors rebalancing away from the US. The price of credit default swaps on the country’s debt has risen.While none of that is true in Japan, Germany or the UK, global yields still follow those of the US. “When interest rate volatility goes up in a particular part of the US curve, that term premium moves across other countries very quickly. [Rates are] highly correlated,” says Ed Al-Hussainy of Columbia Threadneedle. Talk all you want about the end of US exceptionalism, US Treasuries are still the basis of the global rate system. If US long bonds are plunging in price, and offering more attractive yields, the rest of the world will feel the gravitational pull. That is, with the possible exception of Japan. There, moves in the long bond may be contributing to the fall in Treasury prices, not just responding to it. Japan has had its own monetary struggles over the past few weeks. James Malcolm at UBS explains:The Japanese situation is specifically Japanese. Primarily, there is a very large amount of Japanese government bonds that need to be issued and refinanced every year. [In the previous monetary regime], the BoJ was an enormous buyer of net new issuance. The market got used to absorbing very little supply . . . [With the end of BoJ’s quantitative easing], now the domestic market has come to the realisation that it has very little capacity to take over from the BoJ.With an ageing population and new defence commitments, the Japanese government still needs to issue a lot of debt, but at the same time the BoJ wants to shrink its balance sheet. Other natural JGB buyers, particularly life insurance companies and pension funds, are facing financial pressures, too. We saw all this at work in a dismal JGB auction earlier this week. Of course, as we learned during the carry trade panic of last summer, Japan’s rates and currencies are tied to the rest of the world’s. Albert Edwards at Société Générale writes that: Japan’s bond market isn’t isolated. It’s the keystone of global yield suppression. For years, Japanese institutions propped up the global bond market through the yen-funded carry trade and massive foreign bond purchases, especially US Treasuries.The carry trade — borrowing in low-yielding Japanese assets to buy higher yielding global assets — is widely believed to have contributed to higher global asset prices, including Treasury prices. JGB yields rising fast shrinks the rate differential with the rest of the world, making the carry trade less attractive, and pulls US and global yields down. This is all a bit speculative. The size and influence of the carry trade is hard to measure. But we do find the reciprocal nature of global bond moves interesting. The US is contributing to Japan’s bond moves, and Japan might be doing the same to the US. And the pattern looks self-reinforcing.(Reiter)One good readArms procurement.FT Unhedged podcastCan’t get enough of Unhedged? 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Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.There’s a new index in town. If you read a lot of sell-side research or central bank publications, you might have seen this alarming chart recently:This was the ECB, writing about “risks to euro area financial stability from trade tensions”.  The OECD, back in March, presented it alongside a close cousin in their presentation on “Steering through uncertainty”:It is the “Trade Policy Uncertainty Index”, originally formulated by Dario Caldara, Matteo Iacoviello, Patrick Molligo, Andrea Prestipino and Andrea Raffo, and published in 2019. It’s pretty obvious what function it performs — it is just what you need when the format of the document demands a chart and some numerical evidence, while what you want to put is a guttural scream of fear. There is an etiquette to these things. If you want to criticise crazy policies of emerging market countries you can just go ahead and say that they’re crazy and damaging, but developed markets need tact. It’s not the done thing to start talking about an US “Moron Risk Premium”.Accepting that “Uncertainty” is a euphemism, though, how is the thing actually calculated? The authors explained it in a note for the Fed:“We run automated text searches of the electronic archives of seven newspapers: Boston Globe, Chicago Tribune, Guardian, Los Angeles Times, New York Times, Wall Street Journal, and Washington Post. We select articles that discuss TPU by searching for terms related to uncertainty — such as risk, threat, uncertainty, and others — that appear in the same article as a term related to trade policy — such as tariff, import duty, import barrier, and anti-dumping. Our news-based measure of TPU is the monthly share of articles discussing trade policy uncertainty, rescaled to equal 100 for an article share of 1 percent”So in the first chart above, the reading at the right hand edge indicates that for the last 30 days, an average of just under 12 per cent of the news articles referred to trade policy uncertainty. Looking at the underlying data gives even more frightening perspective — on April 10 (the day after the announcement of the “pause” on reciprocal tariffs), nearly a fifth of all news articles surveyed were about trade policy uncertainty.As you can see from the rest of the chart, this is unusual. A more typical news environment is between 1 and 2 per cent trade uncertainty. Even in the last big spike in 2018-19, covering the combined efforts of the first Trump administration and the Brexit negotiations, it only reached 4 or 5 per cent. Is this really a measure of how bad things have become?Well, is it really a measure of anything? For one thing, the index measures what the newspapers are talking about more than what they are saying. As can be seen above, they try to filter for context, but it looks like “risks of tariffs are reduced” would score the same as “threats of tariffs increase”. And for another, the ratio has a numerator and a denominator; if there is another big news event going on like a war or pandemic, TPU measured in this way is going to decline simply because it’s a lower proportion of the total output.But of course, the major glaring weakness in the construction of the index is that the Financial Times is not in it. It might be argued that this is because the authors wanted to specifically measure American trade policy uncertainty, but if so, what’s the Guardian doing in there? With the greatest of respect to all the major international banks and institutions that have made use of this analysis, no FT, no index. More

Unlock the White House Watch newsletter for freeYour guide to what Trump’s second term means for Washington, business and the worldBig investors say they are diversifying their bond portfolios to include greater exposure to markets outside the US as Donald Trump’s trade war and the country’s growing deficit erode the appeal of the world’s biggest debt market. US debt markets have been hit in recent days by the president’s “big, beautiful” tax bill, which was passed by the House of Representatives on Thursday and threatens to sharply increase the country’s public debt. The rising concerns over the level of government borrowing follow wild swings for Treasuries during the fallout from Trump’s tariff blitz last month, when US debt failed to play its traditional role as a refuge from market stress. “The US is no longer the ultimate and only perceived safe haven,” said Vincent Mortier, chief investment officer at Amundi, Europe’s largest asset manager. “The country has become the home of extreme fiscal undiscipline.”Investment chiefs stressed that the dollar would remain the world’s reserve currency for the foreseeable future and Treasuries would maintain their role as a central component of bond portfolios. However, they added that the recent turmoil sparked by Trump’s trade war and his “liberation day” tariffs on April 2 had underscored the benefits of international allocation, particularly while many regions’ debt markets were suddenly generating strong returns.“Our client base is looking at their allocations, and they’re feeling heavily overweight dollar assets relative to where they’ve been historically,” said Bob Michele, chief investment officer and head of global fixed income at JPMorgan Asset Management.“They’re concerned now about all things in the US, the impact of tariffs, the size of the budget deficit and the federal deficit and on and on and on. Why not use that opportunity to diversify into other markets?”Long-dated US government bonds sold off sharply in the run-up to the passage of Trump’s tax bill, extending a multi-day decline after a weak Treasury auction highlighted intensifying fears over America’s fiscal trajectory. The 30-year yield climbed above 5.1 per cent on Thursday, its highest level since late 2023, reflecting a sharp drop in price.The dollar, meanwhile, has dropped 8 per cent this year against six major peers.“The dollar is the story,” said Lindsay Rosner, head of multisector investing at Goldman Sachs Asset Management. “It is hard to find an equivalently liquid, deep rule-of-law market” but “the impact on the dollar has been meaningful. There is weakness in the dollar that has some permanence. There is power in diversification outside the US.” Bond fund giant Pimco’s management team told the Financial Times earlier in May that it was “prudent” to “look for other high-quality markets to diversify into” amid heightened recession risks caused by Trump’s tariffs.Investors particularly highlighted the appeal of European bond markets, along with Japanese and Australian debt, all of which were offering strong yields together with increasingly upbeat economic narratives.“I would say there’s an acceleration in interest in looking outside of US markets at non-dollar assets, particularly now where you get a considerable amount of yield in Europe,” said Michele, who observed that a “new core is developing” in the region.“Historically, everyone had looked at Germany and France.” But “because there’s concern about fiscal expansion there, we’re now looking at what 15 years ago were considered the peripheral borrower: Italy and Spain”. Concerns over US public finances have dominated the conversation in the market in recent days, as Congress moves ahead with a bill that would extend Trump’s 2017 tax cuts. Independent analysts say the legislation would markedly increase annual deficits and the country’s debt burden. “The US will most probably maintain a budget deficit of between 6 and 7 per cent of GDP,” said Amundi’s Mortier. “That is a lot by any standard and will result in more refinancing needs . . . so more supply of Treasuries to the market.“Can demand follow? Yes, but many buyers will request higher yields.”Henry McVey, head of global macro and asset allocation at private capital firm KKR, said in a report this week that “liberation day”, when Trump launched his global trade war, had “been a catalyst for engaging in serious conversations with global investors and their boards about diversifying beyond the US capital markets.“When the US [earlier this year] experienced the trifecta of a weaker dollar, falling equities and rising rates, it set off risk alarm bells that forced everyone from sovereign wealth funds to family offices to not only de-risk but also to look for ways to reduce their overweights to US assets.”McVey suggested that “the traditional role of US government bonds may diminish due to the country’s fiscal deficit and high leverage”.Video: Why governments are ‘addicted’ to debt | FT Film More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.Donald Trump’s trade negotiators are pushing the EU to make unilateral tariff reductions on US goods, saying without concessions the bloc will not progress in talks to avoid additional 20 per cent “reciprocal” duties.US trade representative Jamieson Greer is preparing to tell his EU counterpart Maroš Šefčovič today that a recent “explanatory note” shared by Brussels for the talks falls short of US expectations, according to people briefed on his thinking.The US is unhappy that the EU only offered mutual tariff reductions rather than pledging to lower duties alone, as some other trade partners have proposed to Washington. It also failed to suggest its proposed digital tax was a point for negotiation, as the US has demanded. The EU has been pushing for a jointly agreed framework text for the talks but the two sides remain too far apart, according to the people familiar with the discussions. Greer and Šefčovič are scheduled to meet in Paris next month, which is expected to be a key test of whether the two sides can avoid their trade dispute escalating. The US is determined for Brussels to adopt measures to reduce its €192bn trade deficit in 2024. The EU-US have started exchanging negotiating documents but they have made little progress on substance since Trump announced a 90-day negotiation period. A third official briefed on the interactions said they were not optimistic about reaching any deal that avoids US levies on European imports.“Exchanging letters is not real progress,” they said. “We are still not really getting anywhere.”The UK agreed a deal that kept Trump’s 10 per cent “reciprocal” tariff rate in place but secured a tariff-free quota for its steel exports and a lower levy of 10 per cent for 100,000 cars. It also had to allow more imports of US ethanol and beef.The US levied a 20 per cent “reciprocal” rate on most EU goods in April, but halved it until July 8 to allow time for talks. It has retained 25 per cent levels on steel, aluminium and car parts and is promising similar action on pharmaceuticals, semiconductors and other goods. Some EU diplomats believe that the US will maintain 10 per cent as a baseline in any deal — a prospect many EU trade ministers say would trigger retaliation. The US views the EU’s existing offer, which would remove all tariffs on industrial goods and some agricultural products if Washington does the same, as ultimately favourable to Brussels because it uses product standards to keep out imports.The US has sent the EU its standard terms for a deal, which includes making it easier for US companies to invest in the EU, reducing regulation and accepting US food and product standards. It also wants national digital taxes abolished.Sabine Weyand, the Commission’s top trade official, told ambassadors on Sunday that it wished to “counter the US’s unilateral demands with co-operative agreements”, according to a person briefed on the EU response. It has offered to discuss mutual recognition of standards, smoothing procedures for food and animal trade, and how to ensure imports complied with international labour rights and environmental protection standards, a key US demand. She said that while the Commission was considering further retaliatory measures every effort should be made to avoid them. The bloc has paused tariffs on €23bn of US goods during the talks and is consulting industry and governments on a list of €95bn more, including Boeing aircraft and Bourbon whiskey. Olof Gill, EU trade spokesman, said: “The priority for the EU is to seek a fair, balanced deal with the US, one that our massive trade and investment relationship deserves.“Both sides need to work to resolve the current tariffs situation, as well as co-ordinate strategically in key areas of mutual interest.” More

Unlock the White House Watch newsletter for freeYour guide to what Trump’s second term means for Washington, business and the worldThe gutting of the Biden-era green tech and energy tax credits programme in the US would hurt key Republican states, drive up prices for consumers, hit jobs and “hand[s] a victory” to China, a key architect of the Inflation Reduction Act has warned. The House of Representatives narrowly passed a sweeping budget bill on Thursday, which includes plans to end clean energy tax credits earlier than expected, undermining a central plank of the signature programme launched under former president Joe Biden.Former top Biden climate and clean energy adviser John Podesta, who oversaw the development of the 2022 green credits and incentives plan, told the Financial Times Climate and Impact Summit that the Trump administration had “thrown in the towel” on turning the US into a key hub for clean tech and manufacturing. “At a time where we saw record investment in the sector, record investment in manufacturing, the combination of tariffs, the high debt structure that the Senate has enacted and then the reversal of the Inflation Reduction Act is taking a very, very strong hand and essentially throwing [it away],” he said. Podesta argued that the IRA had helped drive investment into many Republican held states, citing examples of electric vehicle and battery manufacturing from Georgia to Michigan. He cited research showing $862bn in clean energy investments had been announced in the US since the IRA had passed. But he warned this investment was now at risk, and compounded the uncertainty faced by businesses dealing with tariffs.Shares of clean energy companies plummeted on Thursday, after the new spending bill passed with much bigger hits to clean energy incentives than an initial draft that was released on May 12. The bill will head to the Senate next, where lawmakers could water down its more hardline provisions. “I think a lot of the members that voted for this bill . . . will have to go back and . . . explain to their constituents that ‘I voted to kill your jobs. I voted to raise your prices’,” as a result of the removal of the support for clean energy, Podesta said. “You know, I think they’re going to have a lot of hard explaining to do.”The Trump administration launch of tariffs and cuts to green subsidies meant the US had “handed a victory” to China, he said, which was “trying to dominate these industries”. There was “bipartisan consensus” in the US and in Europe of the need to respond to Chinese dominance of green tech, he added.“There is an economic security dimension to letting China be completely dominant in these industries. Right now, I think we’ve just thrown in the towel.”Although China still continues to roll out coal power to meet its growing energy needs, it has also transformed its energy system over the past decade by rolling out renewables and electrifying vast swaths of its economy through cars, battery storage and railways. It also wields vast power over the markets for the resources and materials that underpin technologies of the future.The role of China in the global energy shift was also highlighted by Ana Toni, chief executive of the upcoming UN COP30 climate summit in Brazil.Speaking at the FT Live conference, she said China was a “critical, critical player”, adding that many developing countries had already had “fruitful discussions and trade agreements” with Beijing.  “China has shown that they have a commitment to go faster and go forward despite the geopolitics,” she said. “China has been doing a lot in their own country, but also helping many other developing countries to transition.”Climate CapitalWhere climate change meets business, markets and politics. Explore the FT’s coverage here.Are you curious about the FT’s environmental sustainability commitments? Find out more about our science-based targets here More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.The trade war between the US and China is putting south-east Asian countries under increasing pressure to pick sides between the world’s two biggest economies, government ministers have warned.“China is looking and watching,” Malaysian trade minister Zafrul Aziz, who is leading tariff negotiations with Washington on behalf of the Association of Southeast Asian Nations, told the Financial Times.“They are saying, ‘Whatever you give to the US, we want the same because whatever you give to the US is at our expense,’” Zafrul said.Zafrul’s comments, echoed on Thursday by a warning from Singapore’s trade minister that neutrality in the region was becoming harder to maintain, highlight the rising tensions between Washington and Beijing since US President Donald Trump unveiled a package of tariffs last month.Zafrul said the economic decoupling of the US and China was putting pressure on countries in south-east Asia — many of which are important hubs in supply chains linking the two economic superpowers — to pick one side over the other.“We have to balance it by not choosing a side and by understanding each side’s concerns,” Zafrul added. “All countries [in the region] are having to navigate that. It is tough.”Malaysian trade minister Zafrul Aziz said nations in the region were having a ‘tough’ time navigating US-China trade tensions More

As the European automotive market shrank and competition increased in China, Volkswagen assured investors that the group at least still had ample room for growth in the US market.But Donald Trump’s volley of tariffs — including a 25 per cent levy on car imports — has swiftly damped the hopes of Europe’s largest carmaker and the multitude of suppliers that rely on Germany’s automotive industry.Analysts at S&P Global now expect 1.2mn fewer cars to be sold in the US next year, compared with their forecast a month before — not exactly an invitation for a company looking to expand market share. VW is, of course, far from the only company affected.“The only good thing about the tariffs is, at least, that everyone is impacted by them,” observes one VW executive. Auto executives around the world were shocked on April 2 — Trump’s so-called liberation day — when he followed through on his threat to impose tariffs not only on rivals such as China, but also on close allies such as Germany and the UK. Donald Trump announces his ’liberation day’ tariffs in April More