15 April 2025: Chinese sabotage or Trump-style rumour mongering?

There is a form of paranoia pervading the markets right now, which is making participants from every industry, nation, and government believe that they can detect the hand of Donald Trump or his associates in every issue in global trade that is associated with China.

The UK Government decided late last week that the country could not afford for its only remaining blast furnace to be shut down, leaving the country as the only member of the G7 group of industrialized nations that cannot produce its own “virgin” steel.

Domestic steel production is vital since the country could find itself without the raw material vital for the construction of the new homes it has promised to deliver, as well as several other infrastructure projects.

A Chinese state entity bought the company out of receivership from British Steel in March 2020 and had threatened to turn off the blast furnaces, which would have made it “practically impossible” to bring them back into action.

Rumours have been spreading that the Chinese have “malicious intentions” to ensure that the country becomes even more reliant upon imported Chinese steel.

Former Conservative Party Leader, Iain Duncan Smith, told the BBC over the weekend that the Chinese threat is “not a coincidence” and is “all part of its plan”. Meanwhile, Trade Secretary Jonathan Reynolds, who has appeared unable to stay out of the headlines recently, stopped short of accusing the Chinese of sabotage, commenting instead that the actions of the owners had forced the Government to act.

One of the UK’s most prominent economists has said that the UK may have to consider its first increase in the basic rate of income tax since 1975 if Rachel Reeves continues to enforce her “iron clad” fiscal rules in the face of Donald Trump’s trade policies.

Paul Johnson, Director of the Institute for Fiscal Studies, said yesterday that given the buffeting that the economy is taking from Trump’s trade policies, the country may need more money to meet the fiscal plan. This could mean tax rises in the Autumn, with the Chancellor using “exceptional circumstances” as an excuse.

Johnson went on to justify his reasoning by telling reporters that such a plan would be far less damaging than several other ideas that have been floated recently.

“Ironclad” and “nonnegotiable” is how UK prime minister Keir Starmer recently described the country’s fiscal rules. The government has been coming under pressure to relax the rules and cut itself some financial slack. But according to the PM, these self-imposed restrictions are vital for maintaining UK economic stability.

What Starmer is referring to is notably the “stability” rule, which says that the UK will balance day-to-day public spending with tax receipts, rather than by borrowing, throughout the parliament.

The pound appears to have a “ceiling” in place around the 1.32 level versus the dollar for the time being. Yesterday, it came close to that level on several occasions but fell short, topping out at 1.3197 and closing at 1.3171.

Jerome Powell has been given a hard time by Donald Trump almost since he was nominated to be Chairman of the Federal Reserve way back in 2018. Powell was an unusual choice for the role, having come from a legal background, not the economics fraternity, which in the past has provided Fed Chairs.

During his first term, Trump “put up” with Powell’s slavish compliance with the Central Bank’s mandate, but during his time away from the White House and even more so during his election campaign, he appeared to grow tired and frustrated by Powell’s constant ignoring of what Trump believes is the blindingly obvious, and that is monetary policy needs to be loosened as a matter of urgency.

Powell is, and has been for at least a year, more concerned with inflation than he is with growth potential. Using Personal Consumption Expenditures and Non-Farm payrolls as his guide, Powell has steered the economy to the point where several market commentators believe he has achieved the “fabled” soft landing.

This is despite the extraordinary level of support poured into the economy by the Biden Administration in the immediate wake of the Pandemic, which saw inflation top out at close to double figures. Powell has received the support of his colleagues on the FOMC, and it is remarkable that during the recent past, there has been just one dissenting vote in a cycle of FOMC meetings at which rates have been left on hold.

Americans’ expectations for near-term inflation hit the highest level since the Autumn of 2023 in March, amid a souring in the public’s assessment of their finances and hiring prospects, a report from the Federal Reserve Bank of New York said on Monday.

The Bank said that in its latest Survey of Consumer Expectations, respondents see inflation a year from now at 3.6%, up from 3.1% in February, matching the same level last seen in October 2023. The rise came as households predicted accelerating inflation for food and rent but smaller gains for petrol and home prices.

The sharp increase in near-term expectations came as the projected level of inflation three years from now held steady at 3%, while the forecast for inflation in five years tipped down to 2.9% in March from 3% the prior month.

The rate of price increases is still projected to be well above the Fed’s target of 2%, although an absolute level for inflation is not part of the Fed’s mandate.

The New York Fed consumer expectations data lands in a climate where other indicators are pointing to a deteriorating economic situation as President Donald Trump pursues an aggressive trade war heavily reliant on the highest levels of tariffs in decades.

Economists and the public believe these import taxes will lead to increases in inflation pressures, although there’s great uncertainty about how long the boost in price pressures will last.

The dollar is currently subject to opposing forces. Some market practitioners see Trump’s policies forcing the Fed into an emergency rate cut to support the economy and weaken the currency, while others feel that the economy is inherently stronger than other G7 nations and is close to a long-term bottom.

The Greenback made its low for the day in relatively early Asian trading yesterday, reaching 99.25, but spent the rest of the day in a narrow range, closing at 99.80.

A couple of months ago, the ECB’s cycle of rate cuts appeared to be set in stone, as it seemed that the Central Bank had broken the back of rising inflation and found itself in a position to support the economy. Most observers saw rate cuts reaching well into the second quarter as the economy flirted with recession.

Although those fears remain, the situation has become clouded by the uncertainty wrought by the arrival of Donald Trump and his policies on trade, which he believes will balance the discrepancies in the treatment of U.S. manufactured goods compared to those manufactured in the European Union.

The imposition of tariffs on European exports to the U.S. may be balanced in some respects by the retaliatory tariffs added to U.S. goods entering the EU. Still, the inflationary effect of those tariffs is causing concern to the Hawks on the ECB’s Governing Council.

The outcome of this week’s ECB meeting, which begins tomorrow and concludes on Thursday, is less straightforward than it needed to be. While the relative calm in the French political outlook and the building of a Eur 500 billion fund to aid infrastructure and defence spending in Germany have been both worthwhile and expected to promote activity towards the end of the year, the economy is facing a recession in the next two to three quarters.

A rate cut this week is still close to certain; the vote may be closer than it has any right to be.

European Central Bank board member Isabel Schnabel recently said that the eurozone’s economic recovery may have been held back by households’ “misperception” of inflation and income, which has made them reluctant to spend.

Policymakers and economists have long been puzzled by how little of their income eurozone consumers are prepared to spend, even as inflation in the region slows and salaries catch up with past price hikes.

Schnabel said this may be due to many households failing to recognize a recent increase in their real income.

While their caution is understandable, given what has gone before, the ECB is making every effort to be more expansive in its policy decisions, but the public will take time to come around to the idea that the ECB is no longer “all about inflation.

The euro is still driven by the uncertainty surrounding U.S. economic policy. While it has seen a “meteoric rise” over the past two weeks. Its foundations still look weak, and it would not be a great surprise to see it tumble to more “natural” levels.

Yesterday, it reached a high of 1.1414, and although the breach of 1.14 did not attract the expected level of selling, there has been little follow-through buying as it has broken several resistance levels on the way up. It seems that traders are content to allow the latent buying interest to “burn itself out” before re-entering short positions.

Have a great day!