28 February 2025: A Fine Bromance

When negotiating with a self-centred leader like Donald Trump, the UK has an ace in the hole, and the Prime Minister played perfectly yesterday.

Upon arrival at the White House yesterday, the Prime Minister handed Trump a handwritten letter from King Charles inviting President and Mrs Trump for an unprecedented second state visit later this year.

Trump is fascinated by the Royal Family, and the invite was a stronger weapon than almost anything Starmer could have used.

Following the meeting, Trump called the two leaders’ talks “tremendously productive”.

Trump has specialized in heaping scorn on America’s traditional allies since arriving in the White House, but on Thursday he adopted a strikingly novel approach, lavishing praise on a “fantastic” Britain and his “special” guest, Sir Keir Starmer.

The UK Prime Minister was a “special man”, King Charles was “a beautiful man” and Starmer’s wife Vic was “a beautiful, great woman”. Trump even described Starmer’s accent as “beautiful”.

The show of appreciation, conducted over several hours of negotiations in the White House, was reciprocated in some convivial press events, in which both sides seemed determined to show that it was possible to have a positive relationship with Trump.

There was substance behind the honey-glazed words. Trump surprisingly endorsed Starmer’s deal to transfer sovereignty over the Chagos Islands to Mauritius, an agreement previously criticized by senior members of his administration, which had concerned some of Starmer’s party in the lead-up to the talks.

Regarding free speech, Starmer said he “got on well” with Vice President J.D. Vance. “We had an excellent discussion over lunch, and I made clear we’ve had freedom of speech in the United Kingdom for a very long time, and we guard it preciously.”

Asked if the UK’s Online Safety Act meant it was trying to censor speech, Sir Keir responded: “No, we don’t believe in censoring speech, but of course we do need to deal with terrorism. We need to deal with paedophiles and issues like that.”

I talked to the Vice President about it today, and we had a good exchange.

Back in London, British businesses turned more optimistic for the first time in seven months in February as they took a brighter view of the economy and ramped up their hiring plans, according to a survey that will be published later today.

Striking a more upbeat note than other recent gauges of sentiment among employers, the Lloyds Bank “Business Barometer” hit its highest since July and August of last year at 49%, up from 37% in January, which was its lowest in more than a year.

Hann-Ju Ho, senior economist at Lloyds Bank Commercial Banking, said the rise in confidence suggested firms were coping with higher costs and uncertainty.

The pound has had a strong week but continues to run into selling pressure as it climbs close to its technical resistance level. It reached a high of 1.2689 yesterday but could not sustain its gains and fell back to close lower at 1.2612.

The U.S. economy is facing one of those moments when if enough people express an opinion, even if there is no evidence of their concerns happening, it must be true.

There has been no evidence that the U.S. economy is doing anything other than performing robustly, with the Federal Reserve acting responsibly in delaying any further loosening of monetary policy while it catches up with the effect on inflation of its earlier actions.

Fed Chair Jerome Powell and several of his colleagues on the FOMC agree that there is no reason for the Central Bank to rush into decisions, no matter what the President and members of his Cabinet think.

Nonetheless, even the Treasury Secretary has joined those expressing concern that “beneath the surface, the economy may be “brittle.”

It may be that Scott Bessent is doing no more than “toeing the party line” as the Administration justifies its decision to cut the numbers of people the Federal Government employs.

It is understood that every Government employee has received an email from the Director of Government Efficiency, Elon Musk, in which they must explain exactly what they did over the past week, with those who cannot “justify their existence” facing redundancy.

The U.S. economy is currently supported by three pillars: spending by the wealthy, spending by the Government and anything tech-related, particularly AI-driven.

The consumer has long powered America’s economy. Lately, though, just one out of 10 consumers are powering the expansion, a sign, according to the naysayers, that America’s robust growth could be teetering.

No one at the Federal Reserve is admitting to having these thoughts, while members of the Administration may only be using such rhetoric to further their cause.

Some Wall Street economists are now quoting obscure “facts" to support their claim that the economy is beginning to weaken.

Moody’s, in an analysis first shared with the Wall Street Journal, found the U.S. economy has never been as dependent on high-income spenders as it is today, with the top 10% responsible for nearly half of all consumer spending. In contrast, when the government first started tracking the data 35 years ago, the top 10% drove just over one-third of spending.

Only if today’s publication of PCE numbers together with next week’s employment report for February exhibit signs of economic weakness, will these views enter the mainstream.

Back in the real world, Kansas City Fed President Jeff Schmid expressed growing caution about inflation trends amid surging consumer expectations for future price hikes. According to a report, Schmid emphasized that with inflation recently reaching a four-decade high, maintaining vigilance is crucial.

The remarks coincided with the Conference Board's recent survey, which noted the most significant monthly decline in consumer confidence in nearly four years. Inflation expectations for the coming year surged from 5.2% to 6%, driven by increased egg prices and concerns over tariffs from the Trump Administration, which are becoming the great economic unknown.

The dollar index saw its strangest rally in almost two weeks yesterday as it reached a high of 107.31 and closed at 107.29.

There appears to be no doubt that the meeting of the ECB’s Governing Council scheduled to take place next week will agree on another cut in official interest rates.

Despite the misgivings expressed by ECB Board member Isabel Schnabel, there is still sufficient dovish sentiment among Council members to carry the day.

In its latest economic report, the ECB reiterates earlier statements on inflation staying well on track toward the 2-percent target.

Current pressure comes mainly from energy prices, while the wage growth effects have started moderating. The minutes also reaffirm recent statements from the Governing Council members advocating for more cautious policy adjustments, as the rates have already been significantly lowered.

The report showed that the majority of Governing Council Members favoured lower rates, but there is concern that policy is reaching the point where more cuts may see inflation increase, while not cutting would dampen demand just when it is starting to flourish.

That is a long-winded way of saying that the neural point has almost been reached.

The ECB cut rates in January for the fifth time since June and hinted at even more policy easing next week, arguing that inflation was now well on its way back to its 2% target and there was no longer any need to restrict economic growth.

Sources told Reuters after the January meeting that a further rate reduction was likely in March, but any move in April and beyond would be subject to a more heated debate.

"Members concurred that the disinflationary process was well on track," the ECB said in its accounts. "But there was some evidence suggesting a shift in the balance of risks to the upside since December."

It added that some policymakers argued for "greater caution" on the size and pace of further rate cuts, as policy rates were approaching the neutral level that neither spurs nor stifles economic growth.

Eurozone economic confidence strengthened to a five-month high this month on improving confidence among industrial managers and consumers, a closely watched survey revealed yesterday.

The economic confidence index registered 96.3 in February, up from 95.3 in the previous month, survey data from the European Commission revealed. The reading was above economists' forecast of 96.0 and was also the highest since last September.

The strengthening of the ESI in the EU stemmed from improved confidence in industry and among consumers, which was moderated by a decrease in construction and services confidence. Confidence in retail trade remained broadly unchanged.

The industrial sentiment index improved more than expected to -11.4 from -12.7 a month ago to 12 in February. Moreover, this was the second consecutive rise and hit a three-month-high.

The Euro experienced renewed selling around the 1.05 level yesterday. This drove it to a low of 1.0400, and it closed at 1.0405.

Have a great day!