Fed holds rates steady and adopts ‘wait-and-see' stance on trade war
US-UK trade deal eases auto/agricultural tariffs, signaling cautious de-escalation
KUWAIT: The US services sector expanded in April with the ISM PMI coming in at 51.6, lifted by new orders and inventories, though employment contracted, and tariff-driven price pressures hit a 27-month high. The Federal Reserve held rates steady at 4.25 percent-4.50 percent, citing trade uncertainty as aggressive tariffs risk stagflationary pressures, while unemployment claims dipped to 228,000.
A preliminary US and UK trade deal eased auto/agricultural tariffs, signaling cautious de-escalation, though existing China tariffs remain. The Bank of England cut rates to 4.25 percent to counter slow growth, while China's services sector came in at 50.7 amid weak exports and rising costs. Japan's services PMI rose to 52.4 on stronger demand, but input costs surged and optimism declined. Globally, central banks tread carefully as trade tensions inflame inflation risks while suppressing growth, leaving markets balancing fragile optimism against looming stagflation threats.
The ISM Services PMI in the US rose to 51.6 in April 2025, up from 50.8 in March and beating expectations of 50.2, signaling a stronger expansion in the services sector. Growth was driven by faster increases in new orders and inventories, while business activity remained positive despite a slight slowdown. Employment continued to shrink, though at a slower rate, and supplier delivery times lengthened. Price pressures surged to their highest level since February 2023. Concerns over tariff-related price impacts and federal budget cuts persist, but overall conditions are improving, according to ISM's Steve Miller.
Federal funds rate
In its latest policy meeting last Wednesday, the Federal Reserve opted to keep interest rates unchanged at 4.25 percent to 4.50 percent, emphasizing a cautious 'wait-and-see' approach as trade tensions cloud the economic outlook. Chair Jerome Powell highlighted that while the economy and labor market remain broadly solid, the Fed will refrain from adjusting rates until it gathers more clarity on the evolving impact of recent tariff policies. The decision comes amid a surge in imports aimed at beating new tariffs, a trend that may have distorted Q1 GDP figures.
Powell pointed to the Trump administration's aggressive trade measures as a major source of economic uncertainty, warning that rising tariffs risks pushing inflation higher while simultaneously slowing growth, an unfavorable scenario that could leave the Fed's dual mandate out of reach. Meanwhile, President Donald Trump hinted that there will be a deal with a 'big' country announced on Thursday, adding that he would not lower tariffs on China as a condition to begin negotiations. Markets reacted positively on Wednesday with the Dow Jones, S&P 500, and Nasdaq indices ending the trading day with positive gains.
Unemployment claims
US jobless claims decreased by 13,000 to a seasonally adjusted 228,000 for the week ending May 3rd, following a prior week surge partly due to a 15,089 jump in unadjusted claims in New York. This previous increase was linked to layoffs across transportation, warehousing, hospitality, public administration, and education sectors. President Trump's tariffs include a significant hike to 145 percent on some Chinese imports. Federal Reserve Chair Jerome Powell noted that these 'significantly larger than anticipated' tariff increases could lead to a rise in inflation, a slowdown in economic growth, and an increase in unemployment, with the current Fed benchmark interest rate remaining in the 4.25 percent-4.50 percent range.
Trump speaks
President Trump announced a trade agreement framework with the UK, seen as a potential model for easing US tariffs. While details are still being finalized, the deal includes reduced tariffs on UK cars and agricultural products, and a joint tariff on steel and aluminum, with pharmaceutical exemptions. However, it's more of a 'letter' of understanding than a comprehensive deal, and existing universal tariffs remain. The announcement, which surprised some UK officials, was met with positive market reactions, though analysts note the limited scope and potential for only small economic gains for the UK.
Trump emphasized that this is the first of many upcoming trade deals. Simultaneously, the US is engaging with China, with upcoming meetings aimed at de-escalating trade tensions, despite Trump's refusal to lower existing tariffs beforehand. These developments are viewed as potential signs of de-escalation in Trump's broader trade policies, which have drawn criticism from economists and global institutions concerned about their negative impact on the global economy and potential for a US recession.
The greenback was last seen trading at 100.339.
UK official bank rate
Amidst a sluggish economy and concerns over President Trump's trade policies, the Bank of England (BoE) lowered its main interest rate from 4.5 percent to 4.25 percent on Thursday. This decision, anticipated due to easing inflation (down to 2.6 percent in March), aims to ease financial pressures for borrowers, businesses, and consumers. While five of the nine policymakers supported the 0.25 percent cut, some favored a larger reduction, and others preferred no change. The BoE highlighted the increasing uncertainty in global trade due to tariffs, noting a weakened outlook for global growth, though expecting a smaller impact on the UK. This rate cut is expected to stimulate investment, spending, and housing activity, benefiting those with loans but potentially disadvantaged savers. The GBP/USD currency pair was last seen trading at 1.3304
China services PMI
China's Caixin Services PMI fell to 50.7 in April 2025 from 51.9 in March, missing expectations and marking the weakest growth since September. New orders rose at the slowest pace in over two years, hindered by US tariffs affecting goods trade. Export growth was minimal, while employment fell for the second month amid rising cost pressures. Input costs rose sharply due to higher wages and materials, but output prices declined for the third straight month as firms tried to stay competitive. Business confidence dropped to its second-lowest level since records began in 2005, reflecting concerns over trade policy shifts. The USD/CNY currency pair was last seen trading at 7.2364
Japan services PMI
The au Jibun Bank Japan Services PMI for April 2025 was revised up to 52.4 from 52.2, indicating continued expansion for the sixth straight month and improving from March's neutral 50.0. New orders rose at the fastest rate in nearly a year, supported by ongoing, though slower, overseas demand. Hiring accelerated to its quickest pace since January, while backlogs increased modestly. Input costs surged at the fastest rate since February 2023, and output prices rose as firms passed on some costs. Despite this growth, business optimism dropped to its lowest since January 2021 due to concerns over global trade, labor shortages, and inflation. The USD/JPY currency pair was last seen trading at 145.34
Kuwait
Kuwaiti dinar
USD/KWD closed last week at 0.30645
Hashtags
Try Our AI Features
Explore what Daily8 AI can do for you:
Comments
No comments yet...
Related Articles
Kuwait Times
3 days ago
- Kuwait Times
China's factory activity hits lowest since 2022
QINGZHOU: Employees work on a tractor assembly line at a factory in Qingzhou, in eastern China's Shandong province in this photo.- AFP BEIJING: Chinese factory activity hit a more than two-year low in May, a closely watched survey showed Tuesday, as a detente in Beijing's trade war with Washington was offset by ongoing domestic problems in the world's number two economy. China and the United States agreed last month to temporarily halt most tit-for-tat tariffs on each other's goods, providing some much-needed relief to global markets. But the standoff has still piled further pressure on China's economy, which already faced a long-running real-estate crisis, sluggish consumption and high levels of local government debt. The Caixin Purchasing Managers' Index, independently calculated by S&P Global and Chinese business outlet Caixin, fell to 48.3 in May, well below the 50-point threshold separating expansion from contraction. The figure was the lowest since September 2022 and well below the 50.4 seen in April. It was also sharply off the 50.7 forecast in a Bloomberg survey of economists. 'The surprisingly sharp fall... means that the survey data now point to a loss of economic momentum last month,' said Zichun Huang, China economist at Capital Economics. 'Domestic headwinds (are) more than offsetting the boost from the US-China trade truce,' she said. Wang Zhe, senior economist at Caixin Insight Group, said the slowdown was linked to 'sluggish external demand, which fell for a second straight month'. The country should target effective measures to boost domestic demand by improving household incomes, Wang added. Official data from the National Bureau of Statistics on Saturday showed a less severe contraction in the factory sector last month. While the NBS figure focuses on large state-owned industrial groups, the Caixin index primarily surveys small and medium-sized enterprises. But in a positive sign, a business sentiment survey by S&P Global and Caixin showed a slight improvement in May after a record drop in April, thanks to expectations of stronger foreign trade through the rest of the year. — AFP
Arab Times
4 days ago
- Arab Times
S.Korea's new president vows to pursue talks with North and bolster ties with US and Japan
SEOUL, South Korea, June 4, (AP): South Korea's new President Lee Jae-myung vowed Wednesday to restart dormant talks with North Korea and bolster a trilateral partnership with the US and Japan, as he laid out key policy goals for his single, five-year term. Lee, who rose from childhood poverty to become South Korea's leading liberal politician vowing to fight inequality and corruption, formally began his term earlier Wednesday, hours after winning a snap election that was triggered in April by the removal of then-President Yoon Suk Yeol over his ill-fated imposition of martial law late last year. In his inaugural address at the National Assembly, Lee said that his government will deal with North Korean nuclear threats and its potential military aggressions with "strong deterrence' based on the South Korea-US military alliance. But he said he would "open a communication channel with North Korea and establish peace on the Korean Peninsula through talks and cooperation.' He said he'll pursue pragmatic diplomacy with neighboring countries and boost trilateral Seoul-Washington-Tokyo cooperation. "Through pragmatic diplomacy based on national interests, we will turn the crisis posed by the major shift in global economic and security landscapes into an opportunity to maximize our national interests,' Lee said. It was unclear whether Lee's election would cause any major, immediate shift in South Korea's foreign policy. Lee, previously accused by critics of tilting toward China and North Korea and away from the U.S. and Japan, has recently repeatedly stressed South Korea's alliance with the US as the foundation of its foreign policy and avoided any contentious remarks that would raise questions on his views on the U.S. and Japan. "We'll have to now see if the pressures of office will cause Lee Jae-myung to govern from the center - at least when it comes to matters of national security and the alliance with the United States,' said Ankit Panda, an expert with the Carnegie Endowment for International Peace. The toughest external challenges awaiting Lee are US President Donald Trump's tariff policy and North Korea's expanding military partnerships with Russia. But experts earlier said whoever becomes president can't do much to secure major progress in South Korea's favor on those issues. During his inauguration speech, Lee didn't directly mention trade issues with the U.S. The U.S. and Japan said they congratulated Lee's election and expressed their commitments to developing three-way cooperation.
Kuwait Times
4 days ago
- Kuwait Times
Global economy remains vulnerable to US tariffs
KUWAIT: The global economy remains vulnerable to US tariff policy with the recent US court developments injecting a new layer of uncertainty. In effect, as long as tariff cases are in front of the courts, not much progress can be expected in terms of US trade negotiations with trading partners. In the US, irrespective of court developments, the administration is sticking with its plans to impose tariffs, utilizing, if need be, other routes. In the Euro-zone, the ECB is set to cut rates again while the EU's trade negotiations with the US will likely be very difficult. In the UK, despite positive deal-making with the US/EU/India, the outlook is shaky amid limited policy support and global trade uncertainty. In Japan, soaring bond yields further complicate the BoJ's job and bring the public finances to the limelight. Finally, despite the recent heightened China-US tensions, a resumption of the de-escalatory bias between them will not be surprising. Irrespective of how the current tariff-related legal developments will unfold, the US administration will likely stick with its plans to impose tariffs, utilizing, if need be, several other routes. However, until the courts' final say on the current cases is clear, President Trump's bargaining power in his ongoing negotiations with the US's key trading partners is weakened substantially. Importantly, this means that not much can be expected from the US's trade negotiations with its main trading partners as long as the cases are in front of the courts. And while policy uncertainty has already been very high since Trump took office, another layer of court-related legal uncertainty has now been added. Court developments aside, a key date is July 9, which is the date when the pause on the 'reciprocal' tariffs would end. Earlier, the US and China had diffused their trade war, but negotiations have since stalled, and tensions re-escalated recently. While further escalation following the 90-day window is possible, we think the more plausible scenario is that a de-escalatory bias will resume as the world's two largest economies got a feel of the enormous economic damage that will ensue from a full-blown trade war. Meanwhile, the House passed the GOP's 'Big, Beautiful Bill', which is a step in the wrong direction given that it worsens an already unsustainable debt trajectory, although it is positive for economic growth in the short term. The bill is now in front of the Senate, where it is expected to undergo some amendments although it will very likely remain a debt-increasing bill. Meanwhile, GDP contracted in Q1 on tariff front-running, but the labor market remains broadly resilient with three-month average job gains at 155K/month. Hence, the Fed will likely remain in a wait-and-see mode while markets are currently pricing-in around two 25 bps rate cuts by year-end. In our view, a US recession will be avoided on condition that a major tariff escalation does not get re-ignited. The prior tariff de-escalation drove a V-shaped rebound in the S&P 500 index although the US dollar index remains 10 percent below a recent high reached in January. The Euro-zone economy started the year on a good note, growing by a higher-than-expected 0.3 percent q/q in Q1, strengthening from 0.2 percent in the previous quarter. Meanwhile, headline inflation is almost at target, standing at 2.2 percent y/y although further progress is needed in terms of core and services inflation. Nevertheless, more recent indicators are starting to reflect the tariff-related headwinds with the PMI dropping below 50 (49.5 in May) for the first time this year. The ECB has carried on with its easing policy, cutting rates seven times since June 2024, and near certain to cut again in its meeting this week. Despite the bank, back in March, dropping reference to their policy remaining 'restrictive', the futures market is still indicating additional one-to-two cuts in the second half of the year, reflecting the magnitude of the trade-related uncertainties ahead. Obviously, the EU's (US's largest trading partner) trade-related developments are a key factor shaping the outlook, especially following Trump's threat to hike the 'reciprocal' tariffs on the EU to 50 percent. Even if the courts upheld the initial ruling of blocking Trump's reciprocal tariffs, sectoral tariffs on autos and steel/aluminum (soon doubling) remain in place, while many other sectoral tariffs are in the pipeline, meaning that the Euro-zone will not be immune to further trade-related shocks. Irrespective of the court rulings, Trump's statements, on several occasions, exhibited high animosity towards the EU, which coupled with a high merchandise trade imbalance in favor of the EU, mean that US-EU negotiations will likely be very difficult. The structure of the EU, and its generally slow decision-making process, is another factor making these negotiations challenging. Having said that, EU officials have exhibited a strong preference not to escalate matters with the US. Notwithstanding an above-consensus GDP growth in Q1 (0.7 percent q/q), UK's outlook remains uninspiring as the rise came mainly on manufacturing and exports front-running US tariffs, while domestic consumption remained stagnant. The UK managed to strike a trade framework with the US, which should benefit UK auto exporters among others, but the 10 percent baseline tariff remained in place, the status of which is in front of the courts now. Talks are continuing to finalize details with still several key sticking points. In other positive developments, the UK successfully reset its post-Brexit trade ties with the EU and signed a long-awaited trade agreement with India. Despite these favorable trade-related developments, the Bank of England (BoE) warned of US' tariff policies and their indirect impact through disruptions to global supply chains. A continued subdued growth outlook would further pressure the public finances, noting that Chancellor Reeves, in March, had reduced some welfare and other spending items to help maintain her fiscal rule. Moreover, the hike in employers' national insurance contributions could continue to adversely impact employment levels. Accordingly, the BoE, in May, trimmed its growth forecast for the coming quarters, to only 0.1 percent q/q in Q2 and around 0.3 percent in Q3/Q4 while cutting the policy rate by 25 bps to 4.25 percent, but simultaneously guiding for 'a careful and gradual approach' and anticipating 'temporary' spikes in inflation over the coming months. CPI inflation jumped to a 15-month high of 3.5 percent y/y in April from 2.6 percent in March mainly on higher utility and other government fees, which the BoE does not expect to persist next year. Amid an uninspiring economic landscape but still elevated wage growth (5.6 percent y/y) and slow progress on services inflation (5.4 percent y/y), markets are currently pricing-in one to two 25 bps rate cuts by end-2025. Soaring bond yields in Japan further complicate BoJ's job and bring the public finances to the limelight. Japan's economy contracted by 0.2 percent q/q in Q1, its first decline in a year, driven by flattening consumption, a 0.6 percent q/q decrease in exports, and a sharp 2.9 percent rise in imports. Despite a robust 5.4 percent wage hike from the 2025 Shunto negotiations that built on a similar increase last year, real wages decreased in Q1, weighing on household spending while export performance deteriorated under the strain of US tariffs. Meanwhile, inflationary pressures continued with the core CPI (excluding fresh food) rising by 3.5 percent y/y in April, the highest since January 2023 with food inflation remaining particularly acute. In response to these challenges, the government recently rolled out a relief package worth JPY2.8 trillion ($20 billion) to support households grappling with the rising cost of living and to counter the negative impact of higher US tariffs. Trade negotiations with the US are continuing with the US-imposed 25 percent sectoral tariff on autos, a key sector for Japan, one of several important sticking points. Prime Minister Ishiba and President Trump are scheduled to meet in mid-June on the sidelines of the G7 meeting in Canada, and agreeing on some sort of a trade framework by then remains a possibility although a limited one given the court developments in the US. Meanwhile, increasing fiscal vulnerabilities coupled with the Bank of Japan's (BoJ) ongoing tapering of bond purchases have contributed to pushing long-term bond yields to multi-year highs. This is putting the BoJ in an even more difficult position, which has already been grappling with major growth headwinds and inflation that has exceeded target for around three years. The steep rise in bond yields will strain public finances, dampen growth, and risk delivering large losses to institutional investors' balance sheets. Despite the headwinds, the Chinese economy grew 5.4 percent y/y in Q1, beating expectations and the 'around 5 percent' government's growth target for 2025. Exports continue to be a main growth driver, surging by 12 percent and 8 percent y/y in March and April, respectively, easily beating expectations as lower exports to the US were more than compensated by higher exports elsewhere, especially to East Asian countries. The prior de-escalation with the US, although supposedly temporary given the 90-day window, was a major relief. In our view, China has emerged having the upper hand as, even before the recent court rulings in the US, and excluding the original 20 percent fentanyl-related deemed tariffs, US tariffs on Chinese imports stood at 10 percent, equal to the Chinese tariffs on US imports. Comparatively, almost all countries globally were slapped with that 10 percent baseline US tariff, that none had retaliated against. While renewed escalation following the 90-day window is possible (especially given the current stalled negotiations), we think the more plausible scenario is that a de-escalatory bias will resume, as mentioned before. Prior to the de-escalation with the US, overall sentiment weakened with the official PMI decreasing to 50.2 in April with the manufacturing PMI falling to a 16-month low of 49.0, before both improved slightly in May. Meanwhile, domestic demand remains muted with CPI inflation in negative territory for the third straight month in April and the PPI in deflation for more than 2.5 years. Given the headwinds, the central bank eased policy in May, cutting several of its policy rates and the reserve requirement ratio, among other measures taken. Looking ahead, while a stronger fiscal and monetary policy support may be forthcoming, a sustained de-escalatory stance with the US will lower the scale of such support.
