Aurelia Butler

Unlock the White House Watch newsletter for freeYour guide to what Trump’s second term means for Washington, business and the worldUS inflation fell to 2.3 per cent in April, the month Donald Trump imposed his global tariffs, as the US president maintains pressure on the Federal Reserve to cut interest rates.Tuesday’s annual consumer price index figure from the Bureau of Labor Statistics was below the expectations of analysts surveyed by Bloomberg that inflation would remain at March’s 2.4 per cent rate. Although Trump has cut back many of the tariffs he announced on April 2 — including this week with China — economists caution that most of the impact of the import duties has yet to be felt, with Fed officials anticipating further increases in price pressures.The Yale Budget Lab, a university research organisation, said on Monday that, because of the tariffs, the average US consumer would pay $2,800 more for products this year than in 2024.The Fed, which has kept rates in the 4.25 per cent to 4.5 per cent range for six months, next meets in June. Trump has heaped pressure on Jay Powell to cut borrowing costs, adding last week that dealing with the Fed chair was like “talking to a wall”.Following the data release, US stock futures edged higher, with contracts tracking the S&P 500 up 0.2 per cent. Yields on Treasuries were little changed after the figures.The core inflation rate, which excludes changes in the price of food and energy products, remained at 2.8 per cent in April, the BLS said.The Fed’s preferred inflation target is not CPI but the Personal Consumption Expenditures, which fell to 2.3 per cent in March but remained above the central bank’s 2 per cent goal.   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 newslettersLast Thursday, the Bank of England produced much more dovish forecasts than in February. Inflation would fall to the central bank’s 2 per cent target by the start of 2027 rather than at the end of that year. And this benign prediction was based on plugging into the model interest rate assumptions that were around half a percentage point lower than in February. In short, a big dovish change in forecast with lower interest rates and lower inflation, although the BoE’s communication sought to bury that fact. Instead, the BoE unveiled its first set of economic scenarios, designed, it said, “to provide an illustrative quantification of how alternative economic mechanisms could result in plausible different paths for the UK economy over the forecast period”.In the first scenario, households and companies were less certain and spent a little less and the BoE models were tweaked so that higher unemployment would bring down inflation faster. Let’s call it a disinflationary scenario. The second is best described as an inflationary scenario, based around a supply shock. Administrative price rises would prove more persistent than the BoE usually expects. This assumption was coupled with weaker productivity growth. As you might have already guessed, the inflationary scenario is a little inflationary and vice versa. The BoE did not, initially, say how it thought policy would react with interest rates in either scenario, except that they would be higher in the first and lower in the second. Deputy governor Clare Lombardelli filled in this gap at the Bank of England watchers’ conference on Monday. She said the inflationary scenario would require a 0.1 percentage point rise in interest rates over the coming year compared with the central forecast baseline, rising to 0.3 percentage points by 2028. The disinflationary scenario, being a demand shock, would require a slightly larger response of about a 0.45 percentage point cut relative to the baseline by 2027. These responses were smooth and indicated that the BoE also assumed it would be slow to learn the world had changed. It is useful to chart the scenario outcomes compared with the inflation forecasting errors that the BoE has made in the past, as I have done below. As is clear, the scenarios are well within the forecast band that the BoE only achieves 30 per cent of the time. Roughly speaking, Britain’s MPC can expect the real world to be more extreme than these scenarios about eight times in 10. Some content could not load. Check your internet connection or browser settings.That is an overestimate of the real difference with the central forecast, because the BoE’s response with rates would reduce the ultimate forecast differences. Governor Andrew Bailey and Lombardelli explained that there was no one on the MPC that actually believed these scenarios reflected reality. They were just a pick from a mix of possibilities.I was left wondering what is the point of all this work? Lombardelli said on Monday that the scenarios helped the committee to understand the world better. I am far from convinced. In truth, even though she claimed otherwise, the scenario outcomes were little more than a sensitivity test of a little more and a little less inflationary model assumptions without any reaction function. In England, schools used to be rated by government inspectors on a four-point scale from outstanding to inadequate. This innovation from the BoE would deserve a “requires improvement” grade, the third on the scale. Having spoken to many current and former MPC members at the conference, that was a common view. Lombardelli herself said the BoE scenarios “will not be the last word, far from it”. It seems she agrees. There’s more . . . I am not going to change the grade I’ve given these scenarios, but you might think I’ve been a tad generous.The BoE presented its scenarios as something new for the MPC. I found that surprising because detailed scenario analysis is normal in other central banks and I had not thought the BoE was so far behind the curve. Philip Lane, European Central Bank chief economist, recently described the way it thinks about scenarios at a Peterson Institute event, making the point that scenarios should be about a “whole narrative” on a “particular way the world could turn” rather than “routine” sensitivity analysis looking at changing a few parameters in a model, as the BoE did.The US Federal Reserve produces deep scenarios with illustrative monetary policy responses for every meeting of the Federal Open Market Committee. We know this because it publishes them in the Tealbook with a five-year lag. In January 2019, for example, there were seven scenarios, which at times produced interest rates 4.5 percentage points different from each other. I do not think the BoE is as weak in its analytical prowess as Lombardelli suggests. Why? Thanks to Fed heir Kevin Warsh, the BoE also publishes transcripts of its MPC meeting and the material provided to the MPC with an eight-year lag. As long as you manage to ignore the painfully cringe metaphors, the analytical quality is high. In May 2016, for example, BoE staff provided the MPC with detailed scenarios of the likely economic outcomes of a leave vote in the following month’s EU referendum. They’re pretty good even with the benefit of hindsight. After the referendum, staff later followed this up with an early assessment of the consequences alongside modelled effects of different possible monetary policy responses. Scenarios are therefore not remotely new for the BoE or the MPC and what staff have provided internally in the past is much better than what was published last week. BoE still got the humpIn February, the BoE introduced a predicted “hump” in its short-term inflation forecast for 2025. The largest driver for this was higher energy bills resulting from wholesale gas prices rising from an expected £1.01 per therm in the November 2024 forecasts to £1.15 in February. MPC member Megan Greene told the conference that the hump was “way smaller” in the latest forecasts than in February because energy prices had fallen back. The latest forecast has energy prices this year below the November 2024 expectation at £0.94 a therm (current price £0.84). Greene is therefore correct about the conditioning assumption, but she was wrong about the hump being “way smaller”. It is barely flattened, as the chart below shows. I thought that looked a bit weird and there was nothing in the Monetary Policy Report that explained it, so I got in touch with the helpful staff at the BoE to find out why its forecast still has the hump. It turns out that this was caused by energy, but is now driven by a few new expected price rises in the short-term forecast and a bunch of unfortunate technical stuff that the BoE needs to do to smooth the connection between its short-term and macro inflation models, which has an unusually large effect. You do have to wonder whether the BoE was slightly lowballing the short-term inflation forecast in February, not to scare the children, and highballing it now, so it can have good news to impart later in the year. Some content could not load. Check your internet connection or browser settings.What I’ve been reading and watchingA question lots of countries must answer is whether to stand up to Donald Trump’s bullying on tariffs or just suck them up, since retaliation hurts your people most of all. There was a great good-natured dispute about what to do between Larry Summers of Harvard and former IMF chief economist Olivier Blanchard at a recent Peterson Institute event. You won’t get an answer, but you will be better informedThe ECB’s Isabel Schnabel warns again about cutting European rates too far, too fastMy colleagues at the FT’s Monetary Policy Radar and I answered your questions on central banks in a live Q&A last weekAs it held rates again, the Fed last week warned about risks of higher inflation and lower activity, exactly the combination that makes things difficult A chart that mattersWhile we are looking at the UK, its Office for National Statistics recently published an impact assessment of using retail scanner data to collect food and drink prices, comparing the results with the existing method of sending an army of people into supermarkets with clipboards. In the post-pandemic period, scanner data would have lowered measured inflation significantly, as the chart shows. It is nothing like the error in the UK’s legacy retail prices index at the base aggregation level that can add almost a percentage point to inflation, but overstating inflation 0.1 to 0.2 percentage points is not great, as the chart below shows. While the good news is that the ONS will start using scanner data from March next year, the bad news is that inflation has again been overestimated in the UK. For more on this read my colleague Louis Ashworth in FT Alphaville. 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 hereThe Lex Newsletter — Lex, our investment column, breaks down the week’s key themes, with analysis by award-winning writers. Sign up here More

This article is an on-site version of our Energy Source newsletter. Premium subscribers can sign up here to get the newsletter delivered every Tuesday and Thursday. Standard subscribers can upgrade to Premium here, or explore all FT newslettersHello and welcome to Energy Source, coming to you from New York and Brussels.Oil prices settled at a two-week high on Monday, amid hopes that a full-scale trade war between China and the US may be averted following a deal between the two nations to cut tariffs, at least temporarily.Rising optimism among investors about the potential détente between the world’s two biggest economies also pushed up the value of global stock markets and the US dollar.Staying with China, my FT colleagues published a Big Read on how President Xi Jinping has sparked an electricity revolution that is tackling a crucial vulnerability in the Asian nation: reliance on foreign energy. China is on its way to becoming the world’s first “electrostate”, with a growing share of its energy coming from electricity and an economy increasingly driven by clean technologies, they write. It offers Beijing a strategic buffer from trade decoupling and rising geopolitical tensions with the US.The country is not only rapidly advancing towards self-sufficiency in energy from secure domestic sources, but also wields vast power over the markets for the resources and materials that underpin technologies of the future.For our main item today, Alice Hancock decodes what Brussels’ new Russian gas plan could mean for US LNG exporters.Thanks for reading, Jamie What the EU’s mysterious Russian gas plan means for US exportersThe future could go one of two ways for US liquefied natural gas exporters.If an EU proposal to phase out all Russian gas imports by 2027 goes to plan, final investment decisions on 45.5mn metric tons per year of US LNG capacity could be taken this year and next, according to S&P Global figures published last Thursday.But if it does not and there was even a “modest” return of Russian pipeline gas to Europe, alongside imports from Russia’s gas facility Arctic LNG 2, which has been subject to US sanctions, S&P warns that $120bn of investment in the US industry would be at risk.The US accounts for about a fifth of EU LNG imports. Ryan Peay, a US Department of Energy official, said this week that Washington expected US LNG exports to double by the early 2030s.“The future of Russian gas supplies remains the key uncertainty for US market opening,” S&P said.The critical issue for the US LNG industry is whether the EU’s plan will actually work.The bare bones of what the European Commission is branding its “road map” to phase Russian fossil fuels out of the EU system by 2027, published last week, are: enforcing more disclosure of information about contracts with Russian suppliers; requiring all EU member states to submit plans for how they will phase out Russian gas and oil; and prohibitions on spot contracts by the end of this year and long-term contracts by 2027.The problem with the long-awaited plan is that no one outside the commission is sure that it will safely allow companies to break contracts with Russian suppliers without having to pay heavy compensation. Industry executives and ministries alike are concerned about the legal risk.“The legally most rock-solid way to ban Russia’s remaining energy imports would be sanctions, but that route is barred due to it requiring unanimous approval by all EU governments,” Elisabetta Cornago, senior research fellow at the Centre for European Reform, told Energy Source, noting that the pro-Russian governments Hungary and Slovakia would block any sanctions.The commission has suggested that it has found a workaround that would only involve a weighted majority of member states to agree and has promised to present the proposal in June.In March 2022, EU countries committed to phase out imports of Russian coal, oil and gas “as soon as possible”, following Moscow’s full-scale invasion of Ukraine in February 2022. Since then, according to one EU official, “we’ve not done much else than working on legal possibilities to limit imports on Russia . . . how we can do this in a safe manner, in a manner that is legally solid, that avoids litigation risks, that avoids economic risks for the market participants and suppliers”.“We know very much what we have in mind,” the official added, declining to give further details.Member states are mystified. “We have been looking into it ourselves for over two years now and we really haven’t found something that could work other than sanctioning or a form of sanctions,” one European official said.One way might be to argue that since the start of the war, the regulatory framework in the EU has made it harder to continue contractual obligations as per business as usual, so this would justify a “force majeure” interruption of contracts, said Cornago.But, she added: “This strategy is not without risks, as companies walking out of contracts would be involved in costly arbitration.”EU diplomats have suggested that the idea of enforcing more transparency in the market will help trace the molecules and put pressure on buyers. But it will not amount to a legal basis for a ban.Companies, such as Sefe, the German energy company that imports Russian LNG, have said they were analysing the commission’s document. Markets barely responded to its announcement having largely priced in a complete phaseout of Russian gas. Prices moved very slightly higher last Tuesday following the announcement to €36.05 per megawatt hour but have come back down to under €35/MWh. The EU plan was announced as discussions are running concurrently about how Brussels could assure the US that EU companies will buy more LNG from across the Atlantic as part of an effort to lower the bloc’s trade deficit and placate President Donald Trump.Several ideas have been suggested, including using the EU’s joint gas buying programme to collate demand and present it to the White House as an indication of how much gas the bloc could buy.Marco Alverà, chief executive and co-founder of Tree Energy Solutions, which operates one of Europe’s biggest LNG terminals, has been lobbying several EU commissioners for the bloc to have a “strategic gas reserve” that could “underwrite additional long-term LNG purchases and help trade discussions”.Chris Treanor, executive director of Page, a coalition of US LNG producers, said that the EU road map should have signalled an acceleration of “efforts to promote low-methane, long-term, flexible LNG contracts, including from the US”.Dan Jørgensen, the EU’s energy commissioner, told Energy Source that it was “too early” to speculate on how the commission would present its interest.One EU diplomat observed that the 45.5mn metric tons per year of US capacity that S&P projected could come online might become the victim of its own success: “There are a lot of questions about all the new LNG projects or liquefaction facilities in the United States, because somehow if there are too many of them the investment case is also lower because [more of them] bring the prices down.” (Alice Hancock)Power PointsDonald Trump seeks bromance and billions as he travels to the Gulf, with high expectations of securing a number of multibillion-dollar deals. Aanu Adeoye reports on the Nigerian companies leading a historic shift in oil wealth ownership, as foreign majors retreat from the African nation.Energy groups have scrapped Texas-backed gas power plant projects amid turbine delays and spiralling costs. Energy Source is written and edited by Jamie Smyth, Martha Muir, Alexandra White, Tom Wilson and Malcolm Moore, with support from the FT’s global team of reporters. Reach us at [email protected] and follow us on X at @FTEnergy. Catch up on past editions of the newsletter here.Recommended newsletters for youMoral Money — Our unmissable newsletter on socially responsible business, sustainable finance and more. Sign up hereThe Climate Graphic: Explained — Understanding the most important climate data of the week. Sign up here More

This article is an on-site version of our FirstFT newsletter. Subscribers can sign up to our Asia, Europe/Africa or Americas edition to get the newsletter delivered every weekday morning. Explore all of our newsletters hereGood morning and welcome back to FirstFT, your early morning business briefing. Here’s what we’re covering today: Republicans’ proposed tax billThe US microcap ‘boom’ Trump’s Middle East doctrineAnd New York’s best running clubsRepublicans have outlined far-reaching plans to gut government support for clean energy as part of a series of legislative proposals to fund sweeping tax cuts promised by US President Donald Trump. Here are the details.What’s in the draft legislation? Congressional lawmakers on the powerful House of Representatives’ ways and means committee, which is responsible for writing tax law, released draft legislation yesterday. It includes proposals to end renewable energy subsidies and scrap tax breaks for electric vehicle purchases, offering the first glimpse of how Republicans plan to reshape the US tax code. The bill would scrap a $7,500 tax credit for buyers of EVs after 2026 and a $4,000 credit for second-hand EVs from the end of this year. It would also wind down tax credits for most renewable energy investment and production by 2031. The bill would also raise the cap on the amount of local levies that taxpayers could deduct from their federal tax bill, from $10,000 to $30,000.  What comes next? The draft bill, the heart of the omnibus “Big Beautiful Bill” that Trump hopes to jam through Congress, will face scrutiny by the members of the ways and means committee later today before being debated by the wider House. The legislation’s assault on green energy tax credits is aimed at unpicking former president Joe Biden’s flagship climate legislation, the Inflation Reduction Act, and has drawn the ire of Democrats.Here’s what else we’re keeping tabs on today:Trump in Saudi Arabia: The US president has arrived in Riyadh on the first leg of his Middle East visit, with high expectations of securing a raft of multibillion-dollar deals. He said his travel plans could change to allow him to join Russia-Ukraine peace talks in Istanbul on Thursday “if I think things could happen”.Economic data: US inflation data is released today. The consumer price index is expected to have edged higher last month. Companies: Sportswear companies On Holding and Under Armour report results, as does Brazilian digital lender Nubank. Boeing announces orders and deliveries for April.France: The 78th Cannes film festival begins today and will run until May 24.Donald Trump’s return to the White House has triggered heightened tensions with China, raising big questions for global business, markets and the rest of the world. Join us on May 28 for insights into the most consequential geopolitical rivalry of our time. Register now and put questions to our panel.Five more top stories1. Xi Jinping has pledged support for Panama and offered greater co-operation with Latin American countries at a summit of 33 Latin American and Caribbean leaders. The Chinese president also announced measures to deepen ties with the region, including visa-free travel and a $10bn development credit line, as Beijing courts countries Washington has traditionally considered to be in its backyard.2. Nissan has more than doubled the number of job cuts it is planning to 20,000, while Honda has estimated that a $3bn blow from US tariffs will cut its annual profits by more than half, as leading Japanese carmakers struggle with restructuring and fallout from the trade war. “The impact of tariff policies is huge,” said Honda chief executive Toshihiro Mibe, adding that its modelling represented a worst-case scenario.3. The volatile market for small US initial public offerings is “booming” thanks to a surge of Chinese listings on New York’s Nasdaq as companies race to beat a rule change that blocks the smallest deals. George Steer has more on the surge of microcap IPOs.4. Brussels is preparing to use capital controls and tariffs against Russia in case Hungary blocks an extension of the EU’s economic sanctions imposed on Moscow in response to its war in Ukraine. The European Commission has told national capitals that a large portion of the sanctions could be moved on to a different legal basis.5. Companies have abandoned almost half the projects in a $5bn Texas programme to fund gas power plant construction and prevent more electricity blackouts, as they struggle with ballooning expenses and supply chain delays. Here are the groups walking away from the state-backed scheme.News in-depthDonald Trump with Medicaid and Medicare leader Mehmet Oz, left, and health secretary Robert F Kennedy Jr at the White House on Monday More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.Foreign investors bought a record amount of Japanese equities and bonds in April, as the chaotic aftermath of Donald Trump’s “liberation day” tariffs made Tokyo a global haven for the “de-dollarisation” trade.Figures released this week by the ministry of finance showed that last month, as extreme volatility gripped markets and the US dollar faltered, overseas investors were net buyers of Y8.2tn ($57bn) of Japanese securities. That marked the biggest monthly rush for Japanese assets since comparable records began in 2005 and was over three times higher than the 20-year average for April. The unprecedented buying spree by foreign investors involved $25.5bn net purchases of equities, the biggest amount since April 2023, and $31.5bn of long term bonds, the largest since July 2022. Traders said that the total had probably been boosted by purchases of Japanese government bonds (JGBs) by the reserve managers of global central banks. Yujiro Goto, chief FX strategist at Nomura, said that purchases of Japanese long-term debt “significantly exceeded” seasonal patterns and stood out for occurring in tandem with a rush into equities.Overseas investors, he said, may have been shifting US funds into Japan as part of the “de-dollarisation” trend and viewed Japan as a logical choice because of the size and relative stability of its markets.Mansoor Mohi-uddin, the chief economist of the Bank of Singapore, said that April’s huge “buy Japan” spree had taken place against a background of investor shock at US policy shifts, trade war and Trump’s criticism of US Federal Reserve chair Jay Powell. “There is probably some truth to the idea that Japan was seeing the effects of de-dollarising in April,” said Mohi-uddin. “It may be that we are seeing some movement by foreign central banks into JGBs. When they diversify they are looking for liquid markets, and for a reserve manager, Japan stands out in that regard.”With Trump this week agreeing to pause additional tariffs on China for 90 days, markets have stabilised and it is unclear if the stampede into Japanese assets will continue. In its most recent monthly survey of institutional investors, published on May 9, Bank of America noted an “almost unanimous” view among fund managers that the overall impact of the Trump administration’s economic policy changes would be stagflationary for the US. The same survey, conducted in the period following Trump’s “reciprocal” tariff announcement, found that a “short US dollar” had become the most popular trade among fund managers. BofA analysts wrote that while Trump’s policies induced uncertainty and led many to question the dollar’s “safe haven” status, its standing “remains intact in absolute terms and relative to all viable alternative currencies”. More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.Nissan plans to axe 15 per cent of its global workforce and almost halve its number of plants after US President Donald Trump’s trade war added urgency to the carmaker’s battle for survival. In a sign of the deepening crisis at the Japanese company, Nissan said on Tuesday that it would cut 20,000 jobs, more than doubling a previous target, and would reduce the number of its factories from 17 to 10.The overhaul is one of the most radical attempted by a carmaker in years, and underlines how Trump’s tariffs are forcing Nissan to take more aggressive steps in a bid to restore its fortunes.The group, which has been hit by low-cost competition from Chinese carmakers, also reported a loss of ¥670bn ($4.5bn) in the year ending on March 30 compared with a profit of ¥426bn in the previous period.Describing the results as a “wake-up call”, Ivan Espinosa, Nissan’s chief executive, said: “We have a mountain to climb from the losses we are announcing today.”He added: “We wouldn’t be doing this if it was not necessary for our survival.”The US tariffs would add ¥450bn of costs in the current fiscal year, Nissan said, adding that it would be able to offset about 30 per cent of the costs through various measures.Like many of its rivals, Nissan also ditched its financial forecasts, citing the uncertainty over tariffs. Even before the jolt from the trade war, Nissan had begun to look beyond a previous restructuring plan set out last year.Since then, merger talks with Honda have collapsed, Nissan’s previous chief Makoto Uchida was forced out and the group took $5.9bn of charges tied to its earlier restructuring plan. Nissan is also seeking a new anchor shareholder after scaling back its more than two-decade-old alliance with French group Renault.Espinosa, who took over from Uchida in April, declined to say which of its plants were at risk, but said that a review would include its sites in Japan.The Mexican executive declined to comment directly on Nissan’s UK plant in Sunderland, but said the company was looking to produce more electric models at the site in partnership with Renault.The planned plant closures will cut Nissan’s annual production capacity to 2.5mn units by 2027. It sold 3.3mn vehicles last year.Rival carmaker Honda warned on Tuesday that it would take a ¥650bn hit from the tariffs, but said it believed it could offset about ¥200bn, including through adjusting production. As a result, annual operating profit would fall to ¥500bn in the 12 months to March 2026, down from ¥1.2tn in its previous financial year.“The impact of tariff policies is huge,” said Honda chief Toshihiro Mibe, adding that its modelling represented a worst-case scenario. “This is the bottom. I think the tariff impact will continue to change as time goes by.” The blow from tariffs and the slow pace of the shift to electric vehicles also led Honda to delay an $11bn investment in EV and battery factories in Canada. Honda and Nissan have also shifted some production to the US in an effort to mitigate the effect of tariffs. Nissan is exploring tie-ups with Mitsubishi Motors and Honda that would see its rivals use spare capacity at its US factories.“We are actively looking at market opportunities in the US. Honda is one of the candidates we are discussing to see if there’s a way forward,” said Espinosa. 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 ceasefire between India and Pakistan, which looked shaky over the weekend, appears to be holding. Equities in both countries rallied: India’s Nifty 50 index by just under 4 per cent, and Pakistan’s Karachi Stock Exchange 100 by 9 per cent, in US dollar terms. Let’s hope markets are right to be optimistic. Email us: [email protected] and [email protected]. Taco Monday: a big relief, but The pattern is now unmistakable. Trump announces extreme tariff policies but in the face of a negative political, economic or market response, he backs off. The Taco (for Trump Always Chickens Out) trade notched up its latest win yesterday, after Trump announced that he would cut tariffs on China from 145 per cent to 30 per cent for 90 days, ending what had amounted to an embargo on many Chinese goods (a significant number of products, such as electronics, had already received exemptions). China, for its part, cut its tariffs from 125 per cent to 10 per cent. Markets roared their approval.Yes, a 30 per cent tariff is still high and 90 days is not forever. But the central forecast now has to be that, should 30 per cent tariffs pinch in the US, Trump will bring those down, too. What reason has the administration given for investors to expect anything else? Trump observers love to note that the president has been rambling on about protectionism for 40 years now. But talk is cheap. Judge the man by his actions. Trump’s habit of concession is unambiguously good news. But the trade war is not over, and it is worth articulating the risks that remain.Most obviously, while we can observe Trump’s behaviour, we can’t read his mind. While it seems less likely all the time, there may be some territory he will refuse to concede, even under pressure. Andrew Bishop, head of policy research at Signum Global Advisors, agrees that Trump almost always backs off. But he points out that there is something of an escalating, two-steps-forward, one-step-back pattern in his actions. On January 20, Trump proposed tariffs on Canada, Mexico and China, and then did nothing whatsoever about it. In February he threatened those countries again, and actually signed an order, but didn’t implement it. In March, he announced, signed and implemented tariffs on Canada and Mexico — then backed down immediately. On “liberation day”, he announced, signed and implemented high tariffs on the world — and then took a month to back off. So there is a sort of advancing pattern amid all the retreats. The Taco view of this pattern is that Trump is feeling around for a position that changes other countries’ behaviour significantly without causing significant consumer or market pain in the US. Because there is no such position, the final equilibrium state will be a quite moderate tariff regime. But even hardcore Taco believers like Unhedged have to concede that other outcomes, while unlikely, are possible. Trump is not especially easy to predict. For the time being, tariffs at their current levels are high enough to have a significant impact on corporate profits, and the stock market is still not pricing that in. Joseph Wang, an independent analyst, wrote yesterday thatIn theory, the impact on tariffs can be blunted by a strengthening currency and substitution towards non-tariffed countries. However, the dollar has been weakening and a global minimum tariff makes substitution less likely as it impacts all imports regardless of origin . . . A very rough estimate based on recent goods import volumes of $3tn suggests that the incremental increase in tariff revenue would easily be over $200bn  A $200bn tax increase could carve 4 per cent or 5 per cent out of US corporate profits, and yet earnings estimates and valuations remain elevated. Foreign investors, meanwhile, may look at the volatility in US policy and asset prices and change their behaviour in significant ways, even after the latest climbdown. Regulated global investors like pension funds and insurance companies will be forced by their risk rules — grounded in backward-facing volatility measures — to reduce their dollar exposure or hedge it more (this helps explain the continued weakness of the dollar index). And many investors may think about diversifying outside of the US, especially given that American assets are so expensive to begin with. For example, Jim Caron, chief investment officer for the Portfolio Solutions Group at Morgan Stanley Investment Management, is looking to regional diversification, and his team’s highest conviction overweight is European equities. Also, the China reprieve might not do very much to the fact that inflation risks remain, which means that hedging volatile US equities with long Treasuries might not work. Here’s Caron: From a portfolio perspective [higher inflation] means that longer duration fixed income may not be as good of a hedge as in prior cycles. So, I prefer to be underweight duration, holding higher quality shorter duration bonds, because in the event something bad happens, the mechanism for the Fed to cut rates will be deployed. Conversely, if we get positive news, well, that’s inflationary too, [so the] back end underperforms. Effectively, we have to understand that longer duration bonds are not the hedge they used to be. The economic scars from back-and-forth US policymaking may be significant and lasting, too. As Bishop points out, policymakers and corporate managers may not take much comfort from the fact that Trump chickens out almost every time. “You are playing Russian roulette,” he says. “Yes, [Trump] backs down nine times out of 10, but if you hit the wrong chamber, you blow up your economy” or your company. Investors, politicians and companies still have to take defensive measures when dealing with the US, and defensive measures create economic friction. For example, supply chains will not function as smoothly, as Grace Zwemmer, economist at Oxford Economics, explains:The 90-day pause will probably spur another round of frontloading by importers trying to avoid heavy tariffs [later] . . . A rebound in imports from China would reduce the risks of a supply chain disruption . . . However, it is likely to keep uncertainty around tariff rates high. Future tariff announcements could lead to sharper declines in imports and a bigger risk of supply chain disruptions in anticipation that relief will be forthcoming.Finally, the China de-escalation may not be enough to free the Fed to cut rates. The Fed is looking at firm employment data, inflation a bit above target, and significant tariff uncertainty. Trump has taken the worst-case scenario off the table for three months, but the Fed needs more clarity than that, given the data it has. Several Wall Street economists came out yesterday and reaffirmed their view that the Fed is unlikely to cut this year. Unhedged tends to agree with them.  One good readWhipping Post.FT Unhedged podcastCan’t get enough of Unhedged? Listen to our new podcast, for a 15-minute dive into the latest markets news and financial headlines, twice a week. Catch up on past editions of the newsletter here.Recommended newsletters for youDue Diligence — Top stories from the world of corporate finance. Sign up hereFree Lunch — Your guide to the global economic policy debate. Sign up here More

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