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Kuwait Times
19 hours ago
- Business
- 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.
Qatar Tribune
a day ago
- Business
- Qatar Tribune
Global economy remains vulnerable to US tariffs
Agencies 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.
The Age
7 days ago
- Business
- The Age
‘Worse than Greece': Japan's bond vortex sends a global warning
(A war whose future, after Wednesday's ruling by the US Court of International Trade, is now uncertain). Loading And Japan's bond market, the third-largest in the world, is connected to the rest of the financial world's plumbing, especially with the US financial system. For decades there has been a massive 'carry trade,' where Japanese institutions and investors, and foreign hedge funds, have borrowed very cheaply in Japan to invest in higher-yielding US assets, including US bonds. The macro picture suggests that bond investors have, relatively recently, started demanding a bigger premium for the risk of holding long-dated bonds, particularly the ultra-long maturities of some of the Japanese bonds on issue. There's a definite correlation between the April 2 announcement and the spike in Japanese and US bond yields, with Trump's aggressive tariffs casting a pall over the global economic outlook and the outlook for America's major trading partners, of which Japan is one. America's assault on global trade, along with some of the Trump administration's other 'America First' policies, has ignited a 'Sell America' trade, which is being seen most obviously in the US bond market and the value of the US dollar, which has fallen 9.2 per cent against a basket of America's or trading partners so far this year, including 4 percentage points since April 2. Some of the capital fleeing Trump's America has headed to Japan, with a surge in foreign purchases of Japanese shares and bonds since April 2. Europe has experienced something similar. More threatening and potentially destabilising for the US is the potential for the Japanese carry trade to unwind. Japan is the biggest holder of US bonds, with investments of more than $US1.1 trillion ($1.7 trillion), along with significant holdings of other financial assets. Even Japanese households, faced for decades with negative short-term bond yields in their home market, have chased the higher returns available in the US. Now, with domestic yields rising and the US dollar tumbling, the risk-reward equation for Japanese investors is rebalancing and, after factoring in the cost of hedging the currency exposures, is starting to shift towards their home market. The US is in an analogous fiscal position to Japan, albeit that its government debt isn't (yet?) at Japan's stratospheric levels. Its debt to GDP ratio is around 100 per cent, with Trump's 'One, Big, Beautiful Bill Act' projected to add $US3.8 trillion or more to debt over the next decade and to raise that rate to about 118 per cent 2034. The BoJ has been reducing its purchases of government debt - it owns about 52 per cent of that debt – as it has begun normalising its monetary policies. It has been reducing its bond purchases by 400 billion yen (about $4.3 billion) each quarter. The US Federal Reserve has, similarly, been allowing its holdings of bonds to shrink by not reinvesting the proceeds as the bonds mature. In both markets, that means the former major buyer of the bonds is gradually withdrawing a key source of demand and liquidity for the bonds, even as their issuance continues to increase and, in the US, where there has been a focus on short-term debt issuance, the volume of maturing debt is surging. Loading In Japan, where life insurers and other institutions have been among the major non-government buyers, changed solvency requirements and heavy losses from existing holders – four major insurers lost more than $90 billion on their bond holdings between them in the first quarter – are also diminishing demand. Less demand, coupled with greater supply, inevitably means higher yields and rising interest costs for already stretched government finances. Japan's prime minister, Shigeru Ishiba, under pressure to cut taxes to blunt the impact of the rise in interest rates, said last week that it was important to recognise the dangers of a society and economy with (high) interest rates. 'Our country's fiscal situation is undoubtedly extremely poor, worse than Greece's,' he said, presumably a reference to the debt-inducted crisis Greece faced in 2009, when there was a serious risk that it would be forced from the European Union. The US, of course, had its last remaining AAA credit rating withdrawn by Moody's earlier this month because of its strained and deteriorating public finances. With an inflation rate above the yields on its bonds, despite their recent spikes, real interest rates in Japan remain negative, which may help with management of government debt but may also deter buyers if they doubt the BoJ's ability to bring inflation under control. Growth isn't going to help much. After Trump announced his tariffs – Japan faces the baseline 10 per cent tariff, a 24 per cent 'reciprocal' tariff and the 25 per cent levy on its auto exports the US – the BoJ downgraded its outlook for economic growth this year from 1.1 per cent to 0.5 per cent and from 1 per cent to 0.7 per cent next year. Japan's circumstances are difficult, and made more so by Trump's trade policies, which will hit Japan at a vulnerable moment.
Sydney Morning Herald
7 days ago
- Business
- Sydney Morning Herald
‘Worse than Greece': Japan's bond vortex sends a global warning
(A war whose future, after Wednesday's ruling by the US Court of International Trade, is now uncertain). Loading And Japan's bond market, the third-largest in the world, is connected to the rest of the financial world's plumbing, especially with the US financial system. For decades there has been a massive 'carry trade,' where Japanese institutions and investors, and foreign hedge funds, have borrowed very cheaply in Japan to invest in higher-yielding US assets, including US bonds. The macro picture suggests that bond investors have, relatively recently, started demanding a bigger premium for the risk of holding long-dated bonds, particularly the ultra-long maturities of some of the Japanese bonds on issue. There's a definite correlation between the April 2 announcement and the spike in Japanese and US bond yields, with Trump's aggressive tariffs casting a pall over the global economic outlook and the outlook for America's major trading partners, of which Japan is one. America's assault on global trade, along with some of the Trump administration's other 'America First' policies, has ignited a 'Sell America' trade, which is being seen most obviously in the US bond market and the value of the US dollar, which has fallen 9.2 per cent against a basket of America's or trading partners so far this year, including 4 percentage points since April 2. Some of the capital fleeing Trump's America has headed to Japan, with a surge in foreign purchases of Japanese shares and bonds since April 2. Europe has experienced something similar. More threatening and potentially destabilising for the US is the potential for the Japanese carry trade to unwind. Japan is the biggest holder of US bonds, with investments of more than $US1.1 trillion ($1.7 trillion), along with significant holdings of other financial assets. Even Japanese households, faced for decades with negative short-term bond yields in their home market, have chased the higher returns available in the US. Now, with domestic yields rising and the US dollar tumbling, the risk-reward equation for Japanese investors is rebalancing and, after factoring in the cost of hedging the currency exposures, is starting to shift towards their home market. The US is in an analogous fiscal position to Japan, albeit that its government debt isn't (yet?) at Japan's stratospheric levels. Its debt to GDP ratio is around 100 per cent, with Trump's 'One, Big, Beautiful Bill Act' projected to add $US3.8 trillion or more to debt over the next decade and to raise that rate to about 118 per cent 2034. The BoJ has been reducing its purchases of government debt - it owns about 52 per cent of that debt – as it has begun normalising its monetary policies. It has been reducing its bond purchases by 400 billion yen (about $4.3 billion) each quarter. The US Federal Reserve has, similarly, been allowing its holdings of bonds to shrink by not reinvesting the proceeds as the bonds mature. In both markets, that means the former major buyer of the bonds is gradually withdrawing a key source of demand and liquidity for the bonds, even as their issuance continues to increase and, in the US, where there has been a focus on short-term debt issuance, the volume of maturing debt is surging. Loading In Japan, where life insurers and other institutions have been among the major non-government buyers, changed solvency requirements and heavy losses from existing holders – four major insurers lost more than $90 billion on their bond holdings between them in the first quarter – are also diminishing demand. Less demand, coupled with greater supply, inevitably means higher yields and rising interest costs for already stretched government finances. Japan's prime minister, Shigeru Ishiba, under pressure to cut taxes to blunt the impact of the rise in interest rates, said last week that it was important to recognise the dangers of a society and economy with (high) interest rates. 'Our country's fiscal situation is undoubtedly extremely poor, worse than Greece's,' he said, presumably a reference to the debt-inducted crisis Greece faced in 2009, when there was a serious risk that it would be forced from the European Union. The US, of course, had its last remaining AAA credit rating withdrawn by Moody's earlier this month because of its strained and deteriorating public finances. With an inflation rate above the yields on its bonds, despite their recent spikes, real interest rates in Japan remain negative, which may help with management of government debt but may also deter buyers if they doubt the BoJ's ability to bring inflation under control. Growth isn't going to help much. After Trump announced his tariffs – Japan faces the baseline 10 per cent tariff, a 24 per cent 'reciprocal' tariff and the 25 per cent levy on its auto exports the US – the BoJ downgraded its outlook for economic growth this year from 1.1 per cent to 0.5 per cent and from 1 per cent to 0.7 per cent next year. Japan's circumstances are difficult, and made more so by Trump's trade policies, which will hit Japan at a vulnerable moment.
Yahoo
27-05-2025
- Business
- Yahoo
Stocks fluctuate as traders await next moves in Trump trade war
Equities meandered Tuesday as investors awaited the latest developments on Donald Trump's trade war, while the yen rallied after the head of Japan's central bank flagged more interest rate hikes if the economy improved. With Wall Street closed for a holiday, there were few major catalysts to drive business, though investors remain on their toes after the US president's threat of 50 percent tariffs on European Union goods and subsequent delay reviving volatility. But analysts said the uncertainty caused by Trump's capricious policy announcements, along with his plans to extend tax cuts, was hurting confidence in the US economy and pushing Treasury yields higher. "Markets are once again dancing on hot coals, front-running White House mood swings while dodging macro landmines," said Stephen Innes at SPI Asset Management. "With yields dangling like anvils and tariff threats swinging like wrecking balls, the only thing certain is that the music won't stop -- until it does. Traders, keep your running shoes on." Europe bounced on the news of the tariff delay, and European Commission President Ursula von der Leyen's pledge to move swiftly on a trade deal with the White House. But Asia swung between gains and losses. Hong Kong, Sydney, Singapore, Jakarta, Manila and Wellington rose, while Tokyo, Shanghai, Seoul and Taipei were slightly lower. The yen rose against the dollar after BoJ boss Kazuo Ueda said he intended to keep raising borrowing costs if the economy performs as expected. He told a conference in Tokyo that "we will adjust the degree of monetary easing as needed". His remarks came after officials earlier this month cut their economic growth forecasts in light of Trump's tariffs blitz. "In light of growing uncertainties, particularly those related to trade policy, we have recently revised down our economic and inflation outlook," Ueda said, but added that he still expected price rises to temper and fall back to the bank's two percent target. The yen strengthened to 142.12 per dollar, with analysts saying the greenback is facing increasing pressure because of worries over US policy. "In a way, all roads have led to a weaker dollar. Higher perceived US deficits have raised concerns about increased future Treasury issuance, pushing up term premium and seeing people migrate away from the dollar," said Pepperstone's Chris Weston. "Concerns of weaker US growth in the second half of 2025 sees dollar sellers. Tariff risk resurfaces, the dollar trades lower and when the tariff risk and the implementation date is subsequently pushed back, again we see the dollar lower." Traders are also awaiting the release of minutes from the Federal Reserve's May policy meeting, hoping for an idea about its plans in light of the trade war, while the central bank's preferred inflation gauge is due at the end of the week. - Key figures at around 0230 GMT - Tokyo - Nikkei 225: DOWN 0.2 percent at 37,440.32 (break) Hong Kong - Hang Seng Index: UP 0.1 percent at 23315.99 Shanghai - Composite: DOWN 0.1 percent at 3,344.95 Dollar/yen: DOWN at 142.12 yen from 142.81 yen on Monday Euro/dollar: UP at $1.1405 from $1.1382 Pound/dollar: UP at $1.3585 from $1.3563 Euro/pound: UP at 83.95 pence from 83.91 pence West Texas Intermediate: DOWN 0.3 percent at $61.36 per barrel Brent North Sea Crude: DOWN 0.2 percent at $64.60 per barrel New York - Dow: Closed for a holiday London - FTSE 100: Closed for a holiday dan/lb
