Another busy week for news with tariffs never being too far from the headlines, after President Trump announcing his intentions to place “reciprocal tariffs” on US trading partners without a huge amount of detail other than saying “very simply, if they charge us, we charge them”.
Trump also announced 25% tariffs on US steel and aluminium imports, effective next month. Trump suggested these tariffs “may go higher” at some point.
The President directed his trade advisers to come up with new tariffs on a “country by country basis” in retaliation against anything the US decides is “unfair” such as levies, regulations and subsidies. The White House made specific reference to the risk of extra tariffs for the EU, Brazil, India, Japan and Canada. Trump described the EU as “very nasty”, criticising the EU’s VAT regime, digital services tax and regulatory actions against US tech companies. White House officials said they expect to use different legal powers within the Trade Act and International Emergency Economic Powers Act to circumvent Congress. The lack of detail and a specific timeline on tariffs saw something of a relief rally in markets. The prevailing view still seems to be that tariff talk is more of a starting point for negotiations and the lack of immediate implementation allows for lobbying and dealmaking.
President Trump also delivered significant geopolitical news, with the announcement of negotiations to begin with Russia over a peace deal in Ukraine. On Wednesday Trump said he had a “lengthy and highly productive” phone call with President Putin and that they have “agreed to have our respective teams start negotiations immediately”. Trump will also meet Putin at a date to be agreed in Saudi Arabia and they have invited each other to their respective capitals. Trump will also meet Putin at a date to be agreed in Saudi Arabia and have invited each other to their respective capitals. Trump said it was unlikely Ukraine would return to pre-2014 borders but “some of that land will come back”. The President also said there was no likelihood of Ukraine joining NATO, echoing comments from his Defence Secretary Pete Hegseth earlier in the day that “the United States does not believe that NATO membership for Ukraine is a realistic outcome of a negotiated settlement”. Hegseth told a defence summit in Brussels that European nations must provide the “overwhelming” share of funding for Ukraine, and it was “unrealistic” to expect a return to pre-2014 borders. Hegseth said, “we must start by recognising that returning to Ukraine’s pre-2014 borders is an unrealistic objective… chasing this illusionary goal will only prolong the war and cause more suffering.” Around 20% of Ukrainian territory is currently under Russian control. President Zelensky says he later spoke with Trump about a “lasting, reliable peace”. Zelensky has previously said “there can be no talks on Ukraine without Ukraine”, but it is quite possible that decisions may be taken without his involvement.
The US approach to Russia very is different under Trump than under Joe Biden, who described Putin as a “murderous dictator, a pure thug”. Direct talks with the US are a huge diplomatic shift, with Wednesday’s phone call the first time the US and Russia had spoken at the highest level since the 2022 invasion began. Russia does not need to make huge concessions here; time is on their side. Putin’s ‘peace proposal’ last summer made no concessions on territory, blocked NATO membership for Ukraine and involved the scrapping of all western sanctions on Russia. What is clear though is President Trump wants to deliver a deal that ends US involvement and monetary support for Ukraine. Preserving that peace, with Ukraine remaining outside of NATO, will be a financial and political problem for Europe, not the US, to deal with over future years. Ukraine is unlikely to have very little say in the outcome, and Russia will likely end up with the territory it has gained. From a wider perspective, the spectre of the US, Russia and China all having wider territorial ambitions has the potential to set the tone for geopolitics over the next decade and beyond.
In economic news, the focus has been on the US, with the latest employment and inflation data reported. Last Friday saw the US release the non-farm payrolls report for January, and while the headline figure, at 143,000 new jobs, was lower than expected, positive revisions of 100,000 to prior data softened the impact. The unemployment rate fell back slightly, to 4.0% while wage growth remained solid, at 0.5% month on month. The US inflation data surprised to the upside, with CPI at 3.0% year on year in January, versus 2.9% expected. The month on month figure was 0.5% versus 0.3% expected. Inflation is not behaving in a way that points to policy being restrictive right now but it is best not to draw too many conclusions from one set of numbers, not least when there are seasonal adjustments in the January data that will be smoothed out in February. All the same, the financial market reaction was negative, with investors concluding that we are set for a prolonged period of rates on hold. In terms of the reaction from the Federal Reserve, Chair Jay Powell gave his semi-annual testimony to Congress this week, and told the Senate Banking Committee “we do not need to be in a hurry to adjust our policy stance”. Powell said that he saw inflation expectations as “well anchored” and added, “if the economy remains strong and inflation does not continue to move sustainably toward 2%, we can maintain policy restraint for longer”. New York Fed Reserve President John Williams said he expected inflation to continue to move towards target, “but it’s important to note that the economic outlook remains highly uncertain, particularly around potential fiscal, trade, immigration and regulatory policies.” Market expectations for the interest rates continue to retreat, with the next interest rate cut not expected until December and only one further cut in 2026. With political policy uncertainty elevated, we are likely to see market expectations for interest rates continue to evolve, though we have already seen a significant shift since last autumn, when the market was expecting eight rate cuts over 2025 and 2026.
Closer to home, with the Spring Statement from the Chancellor just under six weeks away, the outlook for economic policy and rates is equally uncertain. The Chancellor had a boost yesterday with fourth quarter GDP stronger than expected, with the UK economy growing by 0.1% versus an expected contraction of 0.1%, mainly thanks to relative strength in the services sector. Less positive was a report from Bloomberg that the draft economic growth forecast from the OBR would see a significant reduction from their previous forecast of 2% growth for 2025, thereby removing all of the Chancellor’s fiscal breathing space from the Autumn Budget. Such a reduction in the growth forecast would be more consistent with the Bank of England, who now expect growth of only 0.75% this year, and the market consensus figure of 1.2%. As Bank of England Andrew Bailey noted this week, the growth issue is one for wider policy makers. Bailey said “on slow growth, we have to tackle this question. We have structurally slow growth, it has fallen since the financial crisis and we need to address that.”
With interest rates at 4.5% after last week’s rate cut and inflation at 2.5% there appears to be scope for the Bank to be more aggressive with rate cuts. This was the argument of Catherine Mann, a member of the Monetary Policy Committee, who told the Financial Times this week that she voted for a 50bps rate cut last week due to a weakening jobs market and slowing consumer demand that is dampening pricing power for businesses and therefore lowering inflationary pressures. During 2024, Mann was one of the most hawkish MPC members, opposing rate cuts due to “persistent inflation risks”. However, Mann now says “demand conditions are quite a bit weaker than has been the case — and I have changed my mind on that.” Mann said the Bank should move away from “gradual” rate cuts with a larger cut needed to “cut through the noise” and make clear the need for easier financial conditions. Chief Economist Huw Pill last week said he would not be “rushing into” sizeable rate reductions. The path for the Bank is likely to be more cautious in cutting rates, not least because inflation is expected to reach 3.7% later this year, driven by higher energy prices, and the impact of higher national insurance contributions and increases in the minimum wage. Interest rates will play a role in helping the UK avoid a stagflationary style slump though it will be a fine line given persistent inflationary pressures, with plenty of scope for policy error.
Source: Columbia Threadneedle Investments as at 14 February 2025
