Aurelia Butler

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Traders had previously piled into the greenback amid bets that Trump will introduce more expansionary policies, potentially underpinning inflation in the coming years.However, this trade paused on Wednesday, with the focus turning to key upcoming consumer price index data later in the day. The reading is expected to show inflation remained sticky in October.The October consumer price index reading also comes after Minneapolis Fed chief Neel Kashkari warned on Tuesday that any increases in inflation could see the Fed keep rates on hold.His comments saw traders trim bets on a 25 basis point cut in December, with traders pricing in a 64.2% chance for a cut, down from yesterday’s 66.7% probability of a cut, according to CME Fedwatch.“The strong dollar is currently pricing in a good deal of Trump’s policy mix, and data releases/dovish Fed comments might offer good opportunities to take profit in bullish dollar positions,” said analysts at ING, in a note.Meanwhile, in a note to clients on Wednesday, analysts at Bank of America Securities led by Athanasios Vamvakidis said while they expect Trump’s plans to introduce tax reductions and impose strict levies on imports coming into the US could provide support to the dollar in the short-term, they are not sure about its prospects over a longer term.”[T]he fiscal policy stance under the new Trump administration in the US remains an open question,” the analysts said.”Pre-election promises included both tax cuts and spending cuts. The market has assumed an inflationary impact, further fiscal policy loosening on the back of tax cuts, but could be surprised by fiscal policy tightening from spending cuts.” More

BERLIN (Reuters) -The leader of Germany’s conservative Christian Democrats (CDU) Friedrich Merz said he could be open to reforming the debt brake, which limits the public deficit to 0.35% of gross domestic product, in certain circumstances.Merz, who is in pole position to become Germany’s next chancellor, had previously argued the country should stick with the constitutionally enshrined debt brake, which was introduced by his party in 2009 under Angela Merkel.Within the CDU, the debate about a debt brake reform was reopened this year by Kai Wegner, the conservative mayor of Berlin. Several powerful CDU leaders from other regional governments have joined the push for reform because the states are more constrained than the federal government, having no structural leeway to incur new debt. Pressure is building within the party, with CDU state premiers pushing Merz to include reform plans in the election programme in recent party meetings.”Of course it can be reformed,” said Merz, at an event on Wednesday. “The question is, why? For what purpose? What is the result of such a reform?”Merz said he would not be open to reform to increase spending on consumption or welfare policies, but if extra borrowing were to boost investment “then the answer may be different”. He noted that the debt brake was a technical issue and he did not want to get into that discussion now.DEBT BRAKE DILEMMAThe debt brake played a part in the collapse of Germany’s coalition government that precipitated the calling of a snap election on Feb. 23.Christian Lindner, the leader of the fiscally conservative Free Democrats party who was last week sacked as finance minister by Social Democrat Chancellor Olaf Scholz, said the chancellor had attempted to force him to suspend the debt brake.Suspending the brake in an emergency, citing special circumstances, is possible with a government majority. Germany reimposed the debt brake in 2024 after four years in which it was suspended to allow extra spending due to the coronavirus pandemic and the energy crisis following Russia’s full-scale invasion of Ukraine.However, reforming the debt brake would require a two-thirds majority in the upper and lower houses of parliament.The CDU state premiers of eastern states support reform, while the head of Bavaria’s conservatives, Markus Soeder, is against it. Christian Social Union (CSU) leader Soeder said “nonsensical additional expenditure” would have to be cut first, including the citizens’ allowance and heating subsidies. Migration should also be limited, he said. “Generally speaking, before we talk about the debt brake, the financial equalization of the federal states must be changed,” Soeder said, in reference to Germany’s system of revenue redistribution. The rich state of Bavaria recently had to hand over more than nine billion euros ($9.57 billion) to other federal states. “It can’t go on like this,” Soeder said.($1 = 0.9408 euros) More

BENGALURU (Reuters) – Donald Trump’s presidential election win has forced bond strategists to make a material change in their outlook towards higher longer-dated Treasury yields, a Reuters poll found, as the risk of a U.S. inflation resurgence escalates.Since Trump’s victory, the benchmark U.S. 10-year Treasury yield has risen nearly 15 basis points. That stems from expectations of his proposed policies of tax cuts and tariffs, which, according to estimates from the Committee for a Responsible Federal Budget, could push up U.S. fiscal debt by $7.75 trillion over the next decade.Coupled with continued resilience in U.S. economic data, that has thrown a wrench into the Federal Reserve’s easing plans. Benchmark 10-year yields, which move inversely to prices, are up over 70 basis points cumulatively since the Fed’s large September half-percentage point rate cut.Interest rate futures are now fully priced for just three more quarter-point interest rate cuts by end-2025, half of what was predicted even a few weeks ago.Nearly two-thirds of respondents, 19 of 30, said their overall view of longer-dated Treasury yields, which account for future growth and inflation expectations, had materially changed since the U.S. election in a Nov. 8-13 Reuters survey.”The situation is two-fold. Initially, we were skeptical about the U.S.’s need to cut rates as much as they were saying, or as much as the market was pricing. Central banks typically cut rates if there is a crisis or if inflation is too low, neither of which we’re currently seeing,” said Lars Mouland, chief rates strategist at Nordea.”Plus, its hard to argue against a lot of what Trump has proposed as being inflationary. Imported goods will become more expensive, and even if substituted with American goods, which are pricier from the onset, prices will rise … Perhaps we need to revisit the highs in rates and go even higher in the long end of the curve.”POLICY CLARITY SOUGHTDan Ivascyn, group chief investment officer at bond giant PIMCO, told Reuters last week the Treasury market selloff on and around the election reflected “reflationary theme” as well as higher fiscal risks.But strategists have not yet fully factored in these concerns to their official point forecasts.The 10-year Treasury yield, currently 4.43%, was seen falling about 20 bps to 4.25% in three months and to 4.20% by end-April, according to the median forecasts from nearly 40 bond strategists. Those forecasts were sizeable upgrades from October’s survey.”There are two opposing forces here for the market. One is the expectation of fiscal stimulus in 2025, which keeps an upward bias to yields. However, at the same time, there is also the fact the labor market has been weakening. The Fed is on an easing path, which acts in the opposite direction, pulling down yields,” said Jabaz Mathai, head of G10 rates and FX strategy at Citi.”Between these two forces, we find ourselves somewhat neutral at current levels – 4.2% is a reasonable target in the near term.”Several others in the survey also cited the need for greater clarity around whether Trump’s proposed policies will be implemented in full before taking a definitive call on the future path of yields.While results are still coming in for the House of Representatives, most expect the Republican Party to be in control of both Houses of Congress.”From here, yields will clearly look for more information not only from economic data, but also from fiscal policy,” said Vishal Khanduja, portfolio manager, Total (EPA:TTEF) Return Bond Fund at Morgan Stanley (NYSE:MS) Investment Management.”We need to see more details not only about who will lead certain aspects in the administration and certain departments, but also about their focus and actual numbers, whether it’s tax cuts or tariffs … This will give us more direction for Treasury yields.”Asked what was more likely for the U.S. yield curve over the coming month, 95% of survey respondents, 20 of 21, said it would steepen, 13 of whom said it would be led by longer-term yields rising faster than short-term ones, or “bear steepening”.Seven said “bull steepening” was more likely, one said “bull flattening”. More

(Reuters) – The main UK stock indexes slipped on Wednesday as traders awaited key U.S. inflation data to gauge the path of monetary policy, while defence company Smiths Group (OTC:SMGZY) rallied to record highs after upgrading its revenue outlook.The blue-chip FTSE 100 was down 0.1% at 1146 GMT, while the FTSE 250 index of midcap companies dipped 0.2%.Global stocks were sluggish ahead of the U.S. inflation data at 1330 GMT, which is expected to show that core consumer prices held steady in October. Traders are currently pricing a 59% chance of a 25 bps rate cut by the Federal Reserve in December.”The consensus is for the annual rate of inflation to move from 2.4% to 2.6%. Any higher could trouble the market, particularly given the incoming Trump administration raising the prospect of higher inflation through various policies,” said Russ Mould, investment director at AJ Bell.UK and European markets have fluctuated since Donald Trump’s re-election as U.S. president, as investors fretted over the possibility of a trade war hurting the European economy and disappointment over China’s stimulus steps.Meanwhile, still high inflation in Britain poses a risk that some drivers of price growth could be heading upwards, Bank of England interest rate-setter Catherine Mann said.The BoE last week cut borrowing costs for only the second time since 2020 and said further reductions were likely to be gradual as it assessed the persistence of inflation pressures.Smiths Group rallied 10%, having touched a record high earlier, after the British engineering firm upgraded its annual organic revenue outlook following strong demand for its next-generation scanning and explosives detectors.Babcock jumped 5.9% after the defence group said it was on track to meet forecasts for the full year as the backdrop of geopolitical instability drives demand for its defence equipment and services. More

LONDON (Reuters) -The collapse of Germany’s government could have a silver lining for the euro zone’s ailing economy with potentially higher spending likely to support its currency and stock markets, even if the path remains uncertain.Markets are already moving in anticipation of more government borrowing that would help stimulate the economy, pushing a closely-watched bond market gauge of debt issuance to a record. One reason for the collapse of the ruling coalition was disagreement on whether to suspend Germany’s debt brake, which limits borrowing, and the early read out from markets is that fresh elections in February could bring more certainty for an economy that just dodged recession.German stocks outperformed European peers on news that the government collapsed last Wednesday, another sign of a more positive mood taking hold – just hours after Donald Trump’s U.S. election win raised the threat of tariffs in a fresh blow to Europe’s biggest economy.”The German growth dynamic has been anaemic and a large part of that has been self-inflicted as Germany has stuck with the debt brake at a time when the economy needs support,” said Zurich Insurance Group (OTC:ZFSVF)’s chief markets strategist Guy Miller.”The collapse of the coalition is constructive and we hope there could be more fiscal leeway in the 2025 budget.”Friedrich Merz, leader of the conservative opposition Christian Democrats leading the polls, said on Wednesday that the debt brake could “of course” be reformed, having previously said Germany should stick to it. DEBT BRAKE DILEMMAEconomists have long blamed the debt brake, adopted in 2009, for holding back Germany’s economy, which is expected to shrink this year. A rise in government spending by 1% to 2% of output for 10 years could boost potential growth to at least 1% from around 0.5% currently, ING’s head of global macro Carsten Brzeski estimates. “Germany is not in any public finance problem,” Brzeski said, as given debt at just 63% of output, it has more room to spend than peers like France and Italy.”If you can combine reforms with looser fiscal policies, please do it,” he added. The International Monetary Fund has also said Germany should consider easing its debt brake and any signs that higher spending is coming could bolster European shares.The pan-European STOXX 600 is up just 5% this year, less than a quarter of the U.S. S&P 500’s 25% gain.Hopes of a pro-growth policy turn “would be much needed for German equity valuations to re-rate,” Barclays (LON:BARC) reckons.Citi expects tax cuts the conservatives have proposed would support equities.The euro, which fell to its lowest in a year just below $1.06 on Wednesday , with talk of a drop to parity resurfacing as tariff worries weigh, could also benefit. Societe Generale (OTC:SCGLY)’s chief FX strategist Kit Juckes notes that Germany overtook Japan this year as the country owning the most foreign assets, meaning it has plenty of capital that could be used to invest in its own economy. Such money “could be used to buy high-yielding German government bonds to get the economy moving,” Juckes said, adding that could eventually have a “big impact” on the euro if the government signals a material change to its policy approach. The hope is a German policy turn could also open the door to more joint European spending. Trump’s election may require the bloc, which already faces calls for massive investments to boost competitiveness, to increase defence spending.”A change in tone at the top in Germany is essential to move toward greater European integration,” said Gilles Guibout, head of European equity strategies at AXA Investment Managers.He called the sacking of finance minister Christian Lindner, a fiscal hawk, “great news” for Europe, but added whether it will prove enough remains to be seen. HOLD ON!For sure, political uncertainty means more near-term pain for industry and could hurt sentiment.And it’s not clear to what extent Merz’s conservatives would be open to raising spending. On Wednesday Merz said he would not be open to reform if more money was spent on consumption and welfare policies, but “the answer may be different” if it were to boost investment. Previously, Merz said he wanted to see the right conditions to invest in pro-growth programmes. He has also opposed further common European Union debt. Economists are debating whether the debt brake itself could see reform or whether Germany could launch fresh off-budget spending, tough asks requiring a large majority in parliament.Goldman Sachs said last week it expected the conservatives would only support amending the debt brake for modest additional spending, around 0.5% of output, expecting fiscal policy to remain a “drag” on growth.Macquarie strategist Thierry Wizman recommended betting against the euro with no guarantee of a reformist government. For others, change is a matter of time.Davide Oneglia at consultancy TS Lombard expects snap elections to bring debates on Germany’s growth model and EU security risks “to the fore in all their urgency”. “The main risk to our view is that they fail to grasp the need of a paradigm shift and fall back on old, now unviable, economic recipes,” he said. “A still harsher reckoning would then come for the German and EU economy.” More