Aurelia Butler

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. A Washington Post story suggesting that Donald Trump might impose selective rather than universal tariffs sent the dollar down yesterday morning. He said the story was “fake news”, and the dollar recovered somewhat. Nobody knows anything about Trump II’s tariff policy, and nobody will for a while. Have fun trading the dollar, everyone, and if you have a moment, email us: [email protected] and [email protected] in ’25Treasury inflation protected securities — Treasuries whose value is periodically adjusted to compensate for inflation — have outperformed plain vanilla Treasuries and fixed-income benchmarks over the past six years. This is not too surprising: there has been quite a bit of inflation, which is what Tips are meant to hedge against.But Tips don’t outperform every time inflation increases. Like any bond, they are sensitive to nominal interest rates, and if the increase in rates is greater than the increase in inflation (or, more properly, break-even inflation, the market’s expectation of future inflation), Tips underperform. What was special about the years 2019-2021, when Tips performed so well, was that nominal rates were either falling faster than inflation (early 2019 to the middle of 2020) or not rising as fast as inflation (mid-2020 through 2021).We’ve used short-term Tips and Treasury indices in this chart because that is the most actively traded part of the Tips market:Some content could not load. Check your internet connection or browser settings.And what made that happen? In the earlier period, nominal interest rates (the light green line) dropped and stayed low as, first, the Federal Reserve went from raising rates to cutting them and, second, the pandemic hit, crushing growth expectations and forcing the Fed to cut to zero. All bonds did well then. In the second period, inflation took hold, but nominal rates did not rise as fast as inflation, allowing Tips to massively outperform other bonds.Some observers argue we are in store for another period in which inflation expectations rise and nominal rates do not — the ideal set-up for Tips. Break-even inflation is now at 2.4 per cent, and has not risen much since the Fed’s December meeting. This could be confidence in the central bank’s ability to keep inflation down. But it could also reflect uncertainty about the inflationary impacts of Trump’s proposed immigration and tariff policies.If the market grows to believe Trump’s policies are, indeed, inflationary, and if the Fed is then forced to hold rates steady, Tips should outperform. From Guneet Dhingra, head of US rates strategies at BNP Paribas:The Fed will have to react to [tariffs and immigration policies] somewhat, but not in a way they can fully stop inflation. We expect the Fed to keep rates unchanged . . . That is the perfect combination, where Tips will protect you against inflation risk, without the response from the Fed [that lowers nominal yields]. Both rates and the break-even side of Tips will be beneficial to investors.Importantly, tariff and immigration policies could increase inflation without substantially increasing the deficit, as opposed to government stimulus and fiscal expansion, which would likely increase nominal yields and hurt returns on Tips (and all other bonds). Elon Musk and Vivek Ramaswamy’s Doge initiative, if it is successful at trimming the budget, could also lower borrowing costs for the government, bringing down real yields and boosting Tips returns.The obvious counterpoint is that Trump’s policies appear to be fiscally expansionary, particularly his proposed tax cuts, if they are not balanced with other sources of revenue (tariff revenues probably won’t be enough of an offset). Fiscal expansion would push break-even inflation upwards, but raise yields at the same time, dragging down Tips returns. According to Brij Khurana of Wellington Management, whether or not Tips really shine will be down to fiscal policy, more than just the Fed. But either way, with inflation picking up, “[it’s good to] own protected bonds, rather than just Treasuries”, Khurana said.(Reiter and Armstrong)A question for readers: industrial productionThe goods economy in the US has been in bad shape for more than two years. Industrial production has been flat since spring of 2022. Executives in the logistics industry constantly talk about a “freight recession”. But there has been a whiff of good news in the air lately. In the widely followed ISM manufacturing survey, the new order component — considered a leading indicator — has been above 50 (indicating expansion) for two months in a row. It looks like the dreary trend may have been broken:There are several possible interpretations of the data. It could be that new orders are responding to higher fundamental demand. Or it could be buyers trying to get ahead of possible tariffs and the accompanying higher prices. Or it could be a blip.Which do you think it is?One good readMaybe the US jobs market is not all that strong, after all.FT Unhedged podcastCan’t get enough of Unhedged? 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A growing number of passengers are bypassing congested hub airports and flying directly, as airlines take advantage of new jets to redraw their networks. Since the dawn of the jet age, airlines have flown large and fuel-hungry planes on the busiest intercontinental routes. These link big airports, before passengers transfer on to smaller planes to connect across a region. But advances in aircraft technology have put this “hub and spoke” model under pressure. Airlines can now use smaller and more efficient single-aisle jets, typically associated with shorter trips, on long journeys, opening up direct routes that would have been uneconomical with larger planes. Passengers flying on United Airlines across the Atlantic next summer will be able to take direct flights from the US East Coast to destinations including Bilbao in Spain, Palermo in Italy and even Greenland. “Smaller, fuel-efficient aircraft like the Boeing 737 Max 8 have enabled new nonstop service to burgeoning niche leisure destinations within reach from the US East Coast,” said Patrick Quayle, senior vice-president of global network planning and alliances at United Airlines. “Our point-to-point portfolio taps into the growing interest in diverse European locales,” he said. Other senior airline executives said that, while the hub airport was not dead, passengers were keen to bypass big airports, in part because of the disruption which has gripped many congested hubs since the pandemic.“We do hear that some passengers are avoiding the very big hubs . . . where there have been delays,” said Bogi Nils Bogason, Icelandair’s chief executive.The changes have led to a shift in how passengers use large airports over the past decade.Among people flying through 10 of the world’s busiest international airports last year, 55 per cent were flying directly to their destination rather than connecting between flights. This was up from a near 50-50 split in 2015, according to a Financial Times analysis of data from OAG, an aviation analytics company. The trend is set to be supercharged by the arrival of an extra-long-range member of the Airbus single-aisle A320 family, which offers a leap in performance. The aircraft took its first commercial flight in November. The A321XLR can carry up to 244 passengers and has a maximum range of 4,700 nautical miles (8,700km) or 11 hours flying time, thanks to the addition of an extra fuel tank in the hold which can carry about 12,900 litres of kerosene. This compares with the older A320, whose maximum range is 3,400 nautical miles.European low-cost airline Wizz Air plans to use the XLR to link the UK to Saudi Arabia on all-economy flights, while Aer Lingus and Iberia will fly the plane across the Atlantic.Christian Scherer, head of Airbus’ commercial aircraft division, said the arrival of the XLR is the “first time in a long time that there is a new aeroplane with new capabilities coming to the market”. “So even though it’s a derivative of the 321, the fact that it opens up a whole new [range] of possibilities in that aeroplane size category, that is a big deal,” he told the Financial Times. The arrival of the XLR “will create new opportunities”, said Icelandair’s Bogason. “We can fly further into North America on a very fuel-efficient narrow-body aircraft.”The airline is considering flights to Texas, California and Dubai from its Reykjavik hub when the planes arrive. “When the cost is lower, it is less risky to start something new,” he said. Airline and airport executives agree that hub airports will still play an important role in flight networks, as the most efficient way of connecting large volumes of people and putting on high frequencies of flights on popular routes. “Our hubs will continue to play a vital role in our network,” United’s Quayle said.London’s Heathrow airport said in December it was expecting its busiest festive period, with a record number of passengers set to pass through during the month. But even hub airport bosses concede that the ground is shifting. “You could say the business model has always been under threat,” said Thomas Woldbye, chief executive of Heathrow, one of the world’s busiest hubs. “Will we see areas which will be less dependent on hubs, not least because of the XLR? Of course we will. But there is an enormous amount of people who want to travel, many come from areas without major airports. So I don’t think the hub is disappearing,” he told an industry conference in November. More

The chief executive of Nippon Steel has warned that tariffs alone would not create a stronger American steel industry, as he pursued legal action aimed at persuading Donald Trump’s incoming administration to launch another review of his proposed $15bn deal to buy US Steel.In his first public appearance since President Joe Biden blocked the takeover last week, Eiji Hashimoto told reporters in Tokyo that the combination would enhance US national security by creating a stronger company.“We don’t think there is any other route that can strengthen the US steel industry more than this deal,” he said. “We never think that industry can become stronger through tariffs alone.”The comments came after the Tokyo- and Pittsburgh-based companies filed a pair of legal cases in the US on Monday, alleging Biden’s decision to block the deal amounted to “wrongful interference”.Hashimoto’s remarks were aimed at Trump, who has argued against a sale of US Steel as he gears up to introduce protectionist measures for the sector. Trump posted on the Truth Social platform on Monday: “Why would they want to sell US Steel now when Tariffs will make it a much more profitable and valuable company?” At the heart of the debate is whether an acquisition of US Steel by a company based in Japan, a crucial Washington ally, would weaken the American steel industry and threaten production levels, or whether a capital and technology injection would enhance national security.Under Biden’s order, the two companies have 30 days to “fully and permanently abandon” the proposed transaction, unless the Committee on Foreign Investment in the US (Cfius), grants an extension. The two companies may seek injunctive relief to push back that deadline, according to lawyers.Hashimoto urged Cfius, the inter-agency body that screens overseas investment, to reopen a national security review under the Trump administration, after it had failed to reach consensus on whether the deal posed a security risk.“This trial is to get them to accept my claims and to gain the right to another Cfius review under a new administration,” he said. “This differs from usual court cases.”Biden’s blocking of the deal has shaken faith in Washington’s support for “friendshoring” — working with allies and partners to build alternative supply chains to China and Russia within US borders and elsewhere.“The court case is important because it tests the outer bounds of the Executive Branch’s authority to review foreign investments,” said Anthony Rapa, co-chair of international trade at Blank Rome, a law firm.Nippon Steel and US Steel’s first legal case demanded that Biden’s order be set aside due to “unlawful political interference” in the Cfius process. The second legal case was against rival steel producer Cleveland-Cliffs, its chief executive Lourenco Goncalves and the United Steelworkers union’s president David McCall, alleging “illegal and co-ordinated actions” to prevent the deal from going ahead.David Plotinsky, partner at the Morgan Lewis law firm, said Nippon Steel and US Steel’s litigation challenge to the Cfius process would be an “uphill battle” due to the expansive scope of what can constitute national security. But “the government is faced with some genuinely bad facts in this case”, he added. More

TOKYO (Reuters) – The U.S. dollar hovered near a one-week low versus major peers on Tuesday as traders considered whether President-elect Donald Trump’s tariffs would be less aggressive than promised.On Monday, the greenback slid against the likes of the euro and sterling following a report in the Washington Post that Trump’s aides were exploring plans that would apply tariffs only on sectors seen as critical to U.S. national or economic security.However, the currency made up some of the ground after Trump denied the report in a post on his Truth Social platform.The U.S. dollar index, which gauges the currency against the euro, sterling and four other rivals, edged up to 108.38, after dropping as low as 107.74 overnight, its weakest since Dec. 30.On Jan. 2, the index pushed as high as 109.58 for the first time since November 2022, in large part due to expectations that Trump’s promised fiscal stimulus, reduced regulation and higher tariffs will boost U.S. growth.”His (Trump’s) 10-20% universal tariffs were always seen as unlikely to eventuate in such stringent form – so the reporting from the Washington Post has cemented this widely held view, even if Trump has played it down,” said Chris Weston, head of research at Pepperstone.”Clearly, the last thing Trump wants at this point is to lose his leverage and credibility going into negotiations … even if the WaPo reporting becomes the reality over time.”The euro zone has been a particular target of Trump’s tariff threats, and the euro was down slightly at $1.03795, after jumping to a one-week high of $1.0437 on Monday.Sterling was also slightly weaker at $1.125085, following its climb as high as $1.2550 in the prior session.The dollar gained 0.3% to reach 158.23 yen, the highest level since July 17, drawing support from higher U.S. Treasury yields.Against the Canadian dollar, the U.S. currency rose slightly to C$1.4345, following its slide to C$1.42805 on Monday for the first time since Dec. 17 after Canadian Prime Minister Justin Trudeau said he would step down as leader of the ruling Liberals in the coming months.”The price tells traders all they need to know: The markets believe the economy will be better off without Trudeau,” said Kyle Rodda, senior financial market analyst at Capital.com.In cryptocurrencies, bitcoin was about 0.9% stronger at $102,560, trading at its highest levels since Dec. 19. More

WASHINGTON (Reuters) – New York City drivers on Monday had to pay $9 to enter Manhattan under the first such congestion fee in the U.S., which seeks to raise billions for mass transit and reduce traffic jams.The fee went into effect on Sunday after New Jersey failed on Friday to convince a judge to halt it pending an appeal.The city rushed to implement the charge before President-elect Donald Trump’s inauguration on Jan. 20. Trump, who has a Manhattan residence, opposes the fee and said he would seek to block it. New York is imposing the $9 charge on passenger vehicles in the daytime in Manhattan south of 60th Street. Trucks and buses will pay up to $21.60. The fee is reduced by 75% at night.Charged via electronic license plate readers, private cars will pay once a day regardless of how many trips they make. Taxis will pay 75 cents per trip and ride-share vehicles reserved by apps like Uber (NYSE:UBER) and Lyft (NASDAQ:LYFT) will pay $1.50 per trip.While New York is the first U.S. city to impose such a toll, London implemented one in 2003, and the fee is now 15 pounds ($19).Sarah Kaufman, director of New York University’s Rudin Center for Transportation, said Monday that the experience of other world cities shows that the charge initially is very unpopular.Then residents “began to appreciate the reduction in traffic and the increased transit services. So ideally, that’s what will happen here in New York,” she said.New York’s Metropolitan Transportation Authority said the program will result in 80,000 fewer cars a day, about an 11% reduction, in what it called the most congested district in the United States.More than 700,000 vehicles enter the Manhattan central business district daily, slowing traffic to around 7 mph (11 kph) on average. That is 23% slower than in 2010.The city estimates the congestion charge will bring in $500 million in its first year. New York Governor Kathy Hochul said the money would underpin $15 billion in debt financing for investment in subways, buses and other mass transit improvements. More

“It’s so small here; it’s really inconvenient to live in,” said retired 60-year-old Xiao Bo, as she sat on her bed, eating home-made dumplings off a folding table in a tiny space adorned with pink wallpaper and a rack of colourful tote bags.Single and opting to give only her first name, she said she had nothing but “painful” memories of the partitioned, cluttered walk-up where she has lived for three years, but could not afford a better flat.(For photoessay, please click on ) More than 200,000 people in Hong Kong live in sub-divided flats like hers, often cloaked in a musty odour and plagued by bedbugs during sweltering summers.The former British colony, ranked as the world’s most unaffordable city for a 14th consecutive year by survey company Demographia, has one of the world’s highest rates of inequality.In October, Hong Kong vowed to adopt new laws setting minimum space and safety norms for sub-divided flats, where each resident lives in an area of about 65 sq ft (6 sq m) on average, or half the size of the parking space for a sedan.”We just want to regulate … so the market will be providing flats of what we think will be a reasonable and liveable standard,” its leader, John Lee, said at the time.Hong Kong aims to eliminate subdivided flats by 2049, a target set in 2021 by China’s top official overseeing the city. Beijing sees the housing woes as a serious social problem that helped fuel mass anti-government protests in 2019.Authorities plan to boost the supply of public housing to shorten waiting times from as much as 5-1/2 years now, saying they have identified more than enough land to build 308,000 public housing units in the next decade.Hong Kong’s housing problem is the top agenda item for the government, the Housing Bureau said in a written response to Reuters, and it is “determined to eradicate sub-standard sub-divided units”. Since July 2022, about 49,000 applicants have been housed in public rental housing, and around 18,400 units of transitional housing have been made available for immediate and short-term accommodation, the Bureau said.TINY HOMESStill, Hong Kong’s roughly 110,000 sub-divided flats have become notorious for high rents, with a median floor rate of HK$50 ($6.43) a square foot, a survey by non-government body the Society for Community Organization (SoCO) showed in 2022.For so-called “coffin” homes, each roughly the size of a single bed, the rate is even higher, at HK$140, exceeding a rate of about HK$35 for private homes.”All I hope for is to quickly get into public housing,” said Wong Chi-kong, 76, who pays HK$2,900 ($370) for a space smaller than 50 sq ft (5 sq m). His toilet sits right beside his bed and under the shower head.”That’s all I ask for. Amen,” added Wong, who stores all his belongings on the other side of the bed to keep them from getting splashed whenever he takes a shower.Wong, who uses a walking stick to get around while contending with deteriorating eyesight, spends most of his summer afternoons in a public library to escape the scorching heat trapped in his home.Yet some may consider Xiao Bo and Wong to be among the more fortunate, as tens of thousands of so-called “coffin” homes fall outside the scope of the new laws.These windowless spaces are still more cramped, but just big enough, at 15 sq ft (1.4 sq m) to 18 sq ft (1.7 sq m), for people to sleep in and store a few personal items.But lack of ventilation forces them to leave open the small sliding doors to their homes, denying them any vestiges of privacy.They also share washrooms with up to 20 others.”Because the beds are wooden, there are a lot of bedbugs here,” said 80-year-old Leung Kwong Kuen, adding, “Insecticide is useless,” in eradicating them.Leung used to manage a factory in mainland China before the Asian financial crisis of the 1990s, but now, estranged from his wife and two grown-up children, lives in a “coffin” home in Hong Kong, which returned to Chinese rule in 1997.”I believe in Buddhism; letting go, the past is the past,” he said. “The most important thing is I can still manage to have two meals and a place to sleep for now.”The sub-divided flats and “coffin” homes are usually located in outdated residential buildings in old business areas, allowing affordable access to workplaces and schools. “SHAME OF HONG KONG”About 1.4 million of Hong Kong’s population of about 7.5 million live in poverty, with the number of poor households rising to 619,000 in the first quarter of 2024, to account for about 22.7% of the total, says non-profit organisation Oxfam. SoCO called for the new regulations to extend to “coffin” homes. “This kind of bed homes is the shame of Hong Kong,” said its deputy director, Sze Lai-shan.The Housing Bureau said the Home Affairs Department takes strict enforcement actions against unlicensed bedspace apartments.Sum, a 72-year-old bachelor, has lived in a “coffin” home for three years, paying HK$2,500 in monthly rent. A Chinese New Year poster on the door to his home reads “Peace and safety wherever you go”. Personal items, such as a television on the platform where he sleeps, take up half of Sum’s living space. He was formerly homeless and slept under a street flyover for a year.”The most important thing is having a roof over my head, not worrying about getting sunburnt or rained on,” said Sum, who gave only his last name.Chan, 45, who pays rent of HK$2,100 a month for his 2 sq m (22 sq ft) home, said he hoped public housing would finally enable him to escape the bedbugs.”I applied in 2005,” he said, providing only one name. “I have been waiting for 19 years.”($1=7.7765 Hong Kong dollars) More

WASHINGTON (Reuters) -Michael Barr, the Federal Reserve’s top regulatory cop, said he will step down on Feb. 28, in a surprise move that will avert a potentially messy legal fight with President-elect Donald Trump who is now free to replace him with an official of his choosing.Barr said he was stepping down as the central bank’s vice chair for supervision over a year before his term was set to expire in July 2026, but planned to keep his seat on the Fed’s Board of Governors. Barr told Congress in November that he intended to serve out his term, but since then has concluded that doing so could risk a potentially harmful dispute with the incoming Trump administration, which the Washington Post reported in October has considered demoting Barr from his regulatory post. “The risk of that being a serious distraction to the Federal Reserve and its ability to serve the people was very high,” he told Reuters on Monday. “I didn’t think that risk was worth it.”Reuters had previously reported that Barr, a Democrat nominated by President Joe Biden, had sought legal advice from an outside law firm to explore his options should Trump try to remove him. Barr confirmed that Reuters report on Monday, adding that both his own lawyers and Fed general counsel agree that he could ultimately win the legal fight, but that it would be “deeply unpleasant.” His early exit now clears the way for Trump, who will be sworn in on Jan. 20, to appoint an entirely fresh slate of banking regulators and begin work on a more industry-friendly agenda, although Barr’s decision to remain as a governor limits Trump’s immediate options. Trump has not offered many details on bank regulation specifically, but has made it a top priority to trim rules as he seeks to boost economic growth.There are no open seats on the Fed’s seven-member board until 2026, meaning Trump would either need to select a new regulatory chief from the current slate of governors, or move one of those officials to a separate post elsewhere to free up a spot.The central bank said in a statement it would take up no major rulemaking until a successor to the regulatory role is confirmed. Fed Governor Michelle Bowman, a vocal critic of Barr’s efforts to impose tougher rules on the banking sector, is widely seen by lobbyists and analysts as the top candidate to replace him. Christopher Waller, another Fed governor nominated by Trump in his first term, is viewed as another potential candidate by industry officials.”Barr’s resignation is somewhat unexpected and a positive for banks,” Brian Gardner, chief Washington policy strategist for Stifel, wrote in a note, adding it would allow Fed officials to ease up immediately on supervision and M&A approvals, and could allow the central bank to shelve contentious bank capital hikes.  “While much of the Trump trade appears to be already priced into bank stocks, we think the probability of an accelerated timetable is still a positive for the sector.”Barr pushed a range of stricter rules on the nation’s biggest banks, including the so-called Basel III Endgame capital hikes. But the banking industry intensely lobbied against his efforts and threatened to sue over the draft rule, causing the measure to become mired in a disagreement among regulatory officials on how to proceed. With Barr no longer in the post, that rule could be shelved entirely.Aside from the Washington Post story, other media reports in recent months have suggested Trump’s advisers were looking for ways to increase the incoming White House’s sway over the Fed, alarming officials and investors who argue that the central bank’s independence is necessary for it to be able to properly set monetary policy.A spokesperson for Trump’s transition team did not immediately respond to a request for comment.Fed Chair Jerome Powell, who was appointed to his role as central bank chief by Trump only to be subsequently criticized for his decisions on interest rates, was seen as a target of the incoming president. But Powell said after the Nov. 5 presidential election that Trump would not have the authority to remove him. Trump subsequently said he does not intend to remove Powell.The law establishing the Fed says the president is allowed to fire Fed governors only for cause, but it is silent on whether Trump would have the power to demote Barr from his role as vice chair for supervision. Powell has previously said demoting Fed officials is not permitted under the law. More