Aurelia Butler

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.“Trump trade” bets on a stronger dollar and higher bond yields have backfired this year as investors take a more bearish view on the economic fallout from the new US administration’s global trade war.The US currency has slipped and Treasuries have rallied since early January, confounding widespread investor expectations that President Donald Trump’s plans for trade tariffs and tax cuts would keep inflation and interest rates high.“Despite what it feels like, if you really zoom out to the beginning of this year, a lot of the [Trump] trades haven’t worked,” said Jerry Minier, co-head of G10 forex trading at Barclays. “That is causing people to reassess.”Investors have pulled back from popular Trump trades partly because the president’s tariffs have been less aggressive than many feared. But many also worry that the uncertainty sparked by the stop-start trade war could begin to hurt confidence in the US economy, undermining the bullish market reaction to Trump’s election in November.The “average menu” of popular trades, such as betting against the euro or the Chinese renminbi, has not rewarded investors this year, Minier said. “You continue to need reasons for the dollar [rally] to continue to extend — at least for now those things have been pulled away,” he added.Bets that Trump’s inflationary policies would both give the Federal Reserve less room to cut interest rates and depress growth in US trading partners, helped drive a huge rally in the dollar. The US currency gained 8 per cent against a basket of its peers from late September until the end of the year. Asset managers flipped to a net long dollar position in December for the first time since 2017, according to an analysis by CME Group of currency futures contracts. But this year the US currency has slipped 0.4 per cent.Expectations of higher inflation also helped push 10-year Treasury yields, which move inversely to prices, to 4.8 per cent in January, their highest since late 2023. But they have now fallen back to 4.54 per cent, as the market’s focus has switched from inflation to fears that the US’s buoyant economy could falter under the new president.“There’s an underlying fear that growth might be slowing down,” said Torsten Slok, chief economist at investment firm Apollo, with a trade war “potentially having some growth implications”.The bond market is “caught between a fear that inflation might be a little bit higher because of a trade war, and a fear that US growth or global growth might be slower”, said David Kelly, chief global strategist at JPMorgan Asset Management.This month Trump backed down at the eleventh hour on threats to impose sweeping tariffs on Mexico and Canada, granting both countries a 30-day delay. But he pushed ahead with 10 per cent additional import tariffs on China, and late on Friday the president said he could also hit Japan with new levies, to tackle the trade deficit with the US’s most important ally in the Indo-Pacific. He has also announced plans for 25 per cent tariffs on steel and aluminium imports.Emerging markets, widely expected to be a particular victim of the trade war and a stronger dollar, have also defied expectations in recent weeks, after a grim 2024 in which some currencies touched multiyear lows.Since the start of Trump’s second term last month, the Chilean peso has gained more than 3 per cent, while the Colombian peso and the Brazilian real are up more than 6 per cent against the greenback. Bank of America strategists have turned positive on emerging markets in the belief that bets on a higher dollar, which is at its strongest in real effective exchange rate terms since 1985, are overstretched.“It is about very extreme positioning, and a lot of tariff noise already being priced in,” said David Hauner, the bank’s head of global emerging markets fixed-income strategy. “It’s not like it couldn’t get worse — of course, it could — but for the time being, given the back and forth of the last few weeks, we have priced in a fair amount.”Investors say emerging market central banks have scope to cut borrowing costs to support economic growth, after aggressive rate rises in recent years to tackle inflation. Mexico, the Czech Republic and India all reduced rates last week.Real interest rates — which are adjusted for inflation — are also higher in much of the developing world than in the US, making it profitable to borrow in dollars and invest in emerging markets.“No matter how you slice or dice it, local currencies have become very, very cheap — even if the dollar doesn’t weaken from here, and it just stabilises,” said one emerging markets fund manager, who had just returned from Brazil looking for cheaply priced assets. More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.Britain on Tuesday refused to join the EU in threatening a trade fight with the US over steel tariffs and followed Washington in declining to sign a global accord on artificial intelligence, in a sign of Sir Keir Starmer setting a new foreign policy in the era of President Donald Trump.Lord Peter Mandelson, Britain’s new ambassador to the US, told the Financial Times that Britain had to embrace “any opportunities opening up as a result of Brexit” and earn a living in the world by being “not Europe”.An early sign of that approach came as trade minister Douglas Alexander told MPs that the UK would not join the EU in immediately threatening tariff reprisals against the US, after Trump announced a 25 per cent tax on all steel and aluminium imports.Alexander said the steel tariffs were not due to take effect until March 12 and that Britain would use the time to talk to the Trump administration and assess its options. “Of course, we want to avoid a significant escalation,” he said. “This is an opportunity for the UK to exercise both a cool head and clear-eyed sense of where the national interest lies.”Downing Street has not ruled out retaliatory tariffs, but ministers privately admit that such a move would have little impact on the US and risk putting Britain in line for further Trump tariffs.Alexander said British steel exports to the US were worth about £400mn and that tariffs would be a “significant blow”, but Downing Street has noted that they amounted only to about 5 per cent of UK steel exports.Although Number 10 has left retaliatory tariffs on the table, there has been none of the talk seen in Brussels of “firm and proportionate countermeasures”.Mandelson, who began work in Washington this week, said he remained convinced that Brexit “inflicted the greatest damage on the country of anything in my lifetime” but that he accepted it would not be reversed.The Labour peer said one of his “signature” objectives as ambassador would be to build closer ties between the UK and the US on AI and technology, warning that the EU had become too rules-bound.Sir Iain Duncan Smith, former Conservative leader, said: “These Brexit freedoms could not have come at a better time. We have an opportunity to set our policy for the US and Peter Mandelson’s job is to remind people in Washington that we are out with the EU.”“It’s funny that it’s a Labour government that has discovered the benefits of Brexit,” remarked one veteran diplomat.However, Britain’s attempts to “reset” relations with the EU could be harmed if Brussels perceives Starmer, the prime minister, to be getting too close to Washington and undercutting the European economic model.On Tuesday, Britain joined the US in refusing to sign a global AI agreement in Paris; the statement was signed by France, China and India among other countries.Downing Street said France remained a close partner in areas such as AI, but that the UK “hadn’t been able to agree all parts of the leaders’ declaration” and would “only ever sign up to initiatives that are in UK national interests”.The statement pledged an “open”, “inclusive” and “ethical” approach to AI development, but US vice-president JD Vance warned delegates in Paris that too much regulation could “kill a transformative industry just as it’s taking off”.One senior UK government official said Britain had opted not to sign the communique because its language was not sufficiently focused on national security and leaned more towards focusing on safety and ethics.“We have taken a slightly different approach to the EU . . . the character of the way we’re dealing with AI is quite different,” the person added, noting that the strategy had “opened the door diplomatically” in terms of Britain’s dealings with the US.The UK government has sought to position its AI Safety Institute as an organisation focused on national security, with direct links to intelligence agency GCHQ. Senior figures around Trump, including Elon Musk, had been highly critical of the focus by Joe Biden’s administration on “woke” concerns around AI safety, including bias and misinformation, but are deeply involved in efforts to ensure the novel technology furthers the west’s national security interests. 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 newslettersIn frequently declaring their monetary policy setting to be “restrictive”, European Central Bank president Christine Lagarde and Bank of England governor Andrew Bailey have raised the immediate follow-up question: what is the neutral level of interest rates, neither constraining nor stimulating economic activity? Luckily for us, both central banks published their latest assessments of natural/neutral rates late last week, allowing me to compare and contrast. One thing to note is that I am making no distinction between natural and neutral rates here. The ECB likes the word “natural”, while the BoE prefers “neutral”. They are talking about the same concept.There are many similarities in their assessments and, for additional spice, they both managed to insert a glaring contradiction for our delight. Where is the neutral rate? Both the ECB and BoE stressed that the neutral rate is highly uncertain and can only be described as a range, which might change.In nominal terms, Lagarde said in Davos that the range of neutrality lay between 1.75 per cent and 2.25 per cent. Not surprisingly, this is also the range outlined in the ECB’s formal assessment.The BoE’s assessment was more cautious, harking back to previous work from 2018, which highlighted a range of 2 to 3 per cent with a modal estimate of 2.25 per cent. It now thinks the range is a bit higher, but is very uncertain about how much. Deputy governor Claire Lombardelli said: “You know, you can add all that up and say perhaps we’re in the region of 2 to 4 [per cent]. It’s very broad.”The benefit of both these assessments is that current interest rates are above these levels, so officials can say they are restrictive without further qualification. Do officials use these estimates?Yes and no. The neutral rate number sits in the background within many macroeconomic models providing a gravitational force, gently pulling forecasts towards this equilibrium in time. They also help officials think about the degree of stimulus or restrictiveness in the stance of the central banks’ policy. But both banks stressed that on a day-to-day basis, the estimates of neutrality do not loom large. The ECB said its estimates should not be taken very seriously. “These cannot be seen as a mechanical gauge of appropriate monetary policy at any point in time,” it said, and highlighted (again) that the bank takes decisions based on the inflation outlook, the dynamics of underlying inflation and its assessment of the effect of monetary policy on the economy. The BoE said its assessment of the neutral rate “plays a role” in policy setting, but this comes alongside many other considerations including financial conditions, trends in household savings, surveys of market participants and assessments of the economic cycle. Bailey said: “There is a high degree of uncertainty around this and, as we say, that’s why we don’t use it for setting interest rates.”Why is the neutral rate so darn uncertain?Because the neutral rate is a theoretical concept, it cannot be measured and can only be estimated within economic models. Different models will produce different results. Each will produce a range of plausible answers and the latest estimates, which, while most useful for policymaking, are also the least certain and most prone to revision.The ECB did a rather better job than the BoE in highlighting the uncertainties. It published estimates with confidence bounds and, unlike the BoE, did not publish guesswork about the reasons for potential recent movements in neutral rates. The chart below shows various estimates of the Eurozone’s neutral rate. To keep everything nominal, I have added 2 percentage points to each number in the chart, so it is slightly different from the original. It shows a wide range and you can see Lagarde’s 1.75 to 2.25 per cent estimates in the blue and yellow shading along with the ECB’s current interest rate at 2.75 per cent.Some content could not load. Check your internet connection or browser settings.The ECB’s concern about a wide potential range of neutral rate estimates is shown in the second chart, which focuses on the Holsten, Laubach and Williams model collated by the New York Fed. Apart from the scale of revisions, early estimates are often far from later estimates for the same period, showing the difficulty of using this data in real time. Some content could not load. Check your internet connection or browser settings.The glaring contradictionsMany of you will already have noticed the glaring contradiction in the ECB work because it is on show in the charts. Lagarde said the neutral range was 1.75 per cent to 2.25 per cent, but that is true only if you ignore the HLW measure which, the ECB itself noted, had a nominal range between 1.75 per cent and 3 per cent. Including all the measures, it is no longer clear that ECB policy is restrictive in comparison with estimates of neutral.The ECB sought to explain this inconsistency by saying the 1.75 per cent to 2.25 per cent range included all measures “for which an update to the end of 2024 is available”. You have to wonder whether this form of words was used because the president had declared the neutral range in a TV interview in January.The glaring contradiction from the BoE is that both officials and Bailey stated confidently that the neutral rate was a “global concept” not a domestic UK measure. The problem was that the 2 to 3 per cent range from the 2018 analysis was specific to the UK and much of the wider BoE analysis, such as wondering if there will be a higher neutral rate due to looser fiscal policy in future, does not match current UK fiscal plans. It is lucky that European central banks do not put a lot of policy weight on these estimates of neutral. The numbers are uncertain and the analysis does not stand up well under scrutiny. In his interview with the FT last week, the Finnish central bank governor Olli Rehn put it well when he said the following:We should not constrain our freedom of action because of a theoretical concept, which is nice to talk about when you have a pint in the pub, but it’s not suitable as a concrete benchmark for monetary policy . . .I’m actually fascinated by the discussion and always have been. But the more one studies it, the more one realises the uncertainties Bessent’s brave betFresh from the humiliation of suggesting the Donald Trump administration would move gradually with tariffs only to be blown away by the president’s announcement of huge levies on Mexico and Canada, Treasury secretary Scott Bessent has made another public bet. Speaking about Trump, Bessent said that “he and I are focused on the 10-year Treasury”, when talking to Fox Business last week. “He is not calling for the Fed to lower rates.”That’s quite a bet, since Trump has regularly called for the Fed to cut rates. Bessent doubled down later in the week when talking to Bloomberg. “We are not focused on whether the Fed is going to cut [or] not cut, we are focused on lowering rates, so we are less focused on the specific of rate cuts and [instead] how do we get the whole curve down.”His confidence is brave. And I say that using the British civil service meaning of the word — foolhardy. What I’ve been reading and watchingI wrote about why US and European monetary policy was likely to divergeAhead of Jay Powell’s testimony to Congress this week, members of the Federal Open Market Committee have been downplaying the chances of rate cuts in the near future. You can read speeches from Lorie Logan, Austan Goolsbee and Adriana Kugler here, or see an updated summary of central bank views on the FT’s Monetary Policy RadarCatherine Mann became the most interesting member of the BoE’s Monetary Policy Committee by shifting from being the most hawkish to seeking an immediate half-point cut last week. The FT interviewed her after the decision and asked why she changed her mind. Full transcript on Monetary Policy Radar A chart that mattersThe BoE generated huge amounts of alarmist media coverage last week about it “halving” its growth forecast for 2025. Actually, as the chart below shows, the forecast for 2025 was barely changed from November and subsequent growth was revised higher. What had changed was that the BoE had recognised there had been no growth in the final two quarters of 2024. I was surprised by how difficult it was to gather the data in the chart below. (You have to download two different spreadsheets from separate obscure zip files, ask the BoE to remove password protection on one of them and then merge the data). Given the horrible headlines the next day, perhaps it is time to retire headline forecasts based on annual average GDP levels. In these figures, the previous year is just as important as the year of the “forecast”, so people always misunderstand the results. The BoE (and the ECB) could learn from the Fed, which publishes Q4 2025 over Q4 2024 forecasts and will always avoid this type of misunderstanding. 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

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Unlock the White House Watch newsletter for freeYour guide to what the 2024 US election means for Washington and the worldTraders in the US are paying much higher prices for copper, aluminium and steel than their European counterparts as they rush to buy the metals ahead of President Donald Trump’s tariffs. Trump on Sunday said he would impose 25 per cent tariffs on all steel and aluminium imports. He has also threatened to apply levies on imported copper.The looming tariffs have created an unusually wide transatlantic price gap, with the premium for benchmark New York Comex copper futures widening to more than $800 a tonne over the London price, the highest level since at least early 2020. Comex copper on Monday was up 2 per cent at just over $10,000 a tonne.The high US premiums reflect a “distorted” market, said Tom Price, an analyst at Panmure Liberum, reflecting fears about a “starvation of supply” rather than the more usual reason of increased demand.“The US can’t switch to any other source in the short term,” he said, noting this was particularly the case for aluminium. Buyers there are “competing with each other to get hold of the metal”. Higher US premiums were a reflection of “the expectation that prices will be higher in future as a result of tariffs”, said Daria Efanova, head of research at Sucden Financial. “Markets are pricing that before it actually hits.”Concerns over tariffs are rippling through the American aluminium market, sending a closely-tracked measure of the difference in US and London prices for the metal, called the Midwest premium, rising sharply. The premium, which tracks prices of the metal delivered to plants in the US Midwest including taxes, transportation and other costs, is an important metric because the country relies on imports for about 80 per cent of its aluminium needs, according to JPMorgan. Canada is by far the US’s biggest source of refined aluminium, which is used widely in industry, from everything to cars and packaging.Futures following the Midwest premium for settlement next month jumped nearly 10 per cent on Monday to 30 cents a pound, according to CME Group data.US stocks of aluminium could provide a short-term “buffer” against a temporary supply crunch, JPMorgan noted. However, the Wall Street bank said if tariffs on all countries are implemented, the premium could jump more than a third to 40 cents as inventories will be “exhausted relatively quickly”.Trump was expected to give more details about the prospective tariffs later on Monday, potentially including whether there might be any exemptions, as were granted when he levied tariffs on metals in his first term as president.After his previous U-turns on tariffs against Canada and Mexico, analysts say many traders are waiting for more clarity, with some avoiding taking positions until the policies become clearer.“The uncertainty creates a skittishness,” said Al Munro, an analyst at Marex. “It creates a lack of investment. You just sit there and you don’t do anything.” Copper is widely used in electrical equipment such as wiring and motors, while aluminium is a lightweight material used in an array of industries including the automotive and aerospace sectors.Copper is taken into Comex warehouses on a so-called “duty paid” basis, meaning all taxes must be paid before the metal enters the facilities. That means supplies taken in before tariffs come into effect would not be affected by the levies.Comex’s stocks of copper jumped last year and have edged up further this year. “People are looking to protect against having to pay copper price plus tariff,” said William Adams, head of base metals research at Fastmarkets.Traders rushing to secure access to physical metals ahead of any potential tariffs have pushed up premiums in the US for steel and precious metals such as silver and gold.The potential tariffs on steel and aluminium are likely to have a particularly big impact on Canadian aluminium smelters, which supply about 44 per cent of US aluminium needs. More