By Mumal Rathore

BENGALURU (Reuters) – The Bank of Canada will cut interest rates by 25 basis points to 3.00% on Jan. 29, according to a Reuters poll of economists, but many were not confident about the outlook beyond that given uncertainty around threatened U.S. tariffs and possible Canada’s response.

The country’s central bank has been one of the world’s most aggressive in reducing rates. It has cut by a cumulative 1.75 percentage points since June 2024 and is already very close to a neutral rate that neither restricts nor stimulates the economy.

But with U.S. President-elect Donald Trump returning to the White House on Monday, his threat of slapping tariffs as high as 25% on Canadian imports looms over the economy, even as it has produced some better-than-expected data on inflation and jobs.

Several economists in the Jan. 10-16 Reuters poll said they have yet to factor in the effect of potential tariffs on their latest forecasts.

Next (LON:NXT) week could provide some more clarity after Trump takes office and Canada outlines its response, but most acknowledged it was difficult to forecast rates beyond the upcoming meeting.

“If Canada gets hit with large tariffs and we don’t retaliate then the disinflationary effects would likely prompt considerably more easing by the BoC,” said Derek Holt, head of capital markets economics at Scotiabank (TSX:BNS).

“If we do retaliate, then toeing the line on the policy rate or even hiking are possibilities. Our outlook at this point is highly uncertain and we may learn a lot more about the risks next week when Trump takes power.”

An 80% majority of economists, 25 of 31, expected a quarter- point rate cut on Jan. 29, a step down from December’s half percentage-point move. The rest expected a pause.

According to the poll’s median forecasts, another 25 bps cut will come in March, followed by one more next quarter, taking the overnight rate to 2.50%, below what interest rate futures are now pricing.

Whether 2.50% actually is the end-point for rates will depend on how relations with the United States develop after decades of free trade. 

“Tariffs are a clear, unambiguous negative for the Canadian economy and the Bank of Canada would likely be forced to react with lower rates if we do get tariffs,” said Benjamin Reitzes, Canadian rates and macro strategist at BMO Capital Markets.

“I hope it’s all temporary or it doesn’t happen at all, but there’s no way of knowing where this goes,” he said.

Canadian inflation, which eased to 1.9% in November from October’s 2.0%, was expected to remain well within the BoC’s target of 1-3% over the coming quarters and average 2.1% this year and 2.0% next.

Asked about potential deviations from their forecasts this year, all 14 economists but one said inflation could come above rather than below their projections.

The economy was forecast to grow 1.8% this year and 1.9% next, faster than 1.3% in 2024. The outlook was largely unchanged from an October poll.

(Other stories from the Reuters global economic poll)

By Jamie McGeever

ORLANDO, Florida (Reuters) – Spiking Treasury yields and the ‘wrecking ball’ dollar are creating a negative feedback loop that monetary authorities around the globe may be helping to sustain.

   The U.S. bond market selloff that began after the Federal Reserve started cutting interest rates four months ago has been as powerful as it has been surprising, splitting expert opinion on what is driving it.

    Potential culprits include strong U.S. growth, sticky inflation, debt and deficit fears, as well as uncertainty surrounding incoming U.S. President Donald Trump’s trade, immigration and ‘America First’ economic agenda.

    What has garnered less attention, however, has been the role of foreign central banks, particularly in emerging economies.

    Rising U.S. yields have lifted the dollar and simultaneously pushed down many emerging currencies, sometimes to record lows, prompting many central banks to intervene in the foreign exchange market to support their currencies. This typically involves selling FX reserves, often U.S. Treasury bonds or bills, and buying local currency.

The latest New York Fed breakdown of U.S. Treasury ‘custody’ holdings on behalf of foreign central banks, is revealing.

    Custody holdings last week stood at $2.85 trillion, the lowest since April 2020. They have fallen almost $100 billion from the $2.94 trillion in mid-September when the Fed started cutting interest rates, and this decline has gathered pace since the U.S. presidential election in early November.

    Central bank selling has been a key component of the recent bond rout, according to research by Rashad Ahmed, senior economist at the Office of the Comptroller of the Currency, and Alessandro Rebucci, professor at Johns Hopkins University.

    They note that the decline in foreign FX dollar reserves beginning in September “aligns precisely” with the steep rise in 10-year yields. They estimate that foreign central banks’ dollar reserves have fallen by a combined $113 billion, including foreign repo deposits, just as yields have rocketed by more than 100 basis points.

    This selling has often been met with weak demand from counterparties, most notably domestic and foreign private investors, they argue.

    “It is possible for even a small reduction in the U.S. dollar share of foreign reserves to have a significant short-run impact on U.S. Treasury markets,” they wrote on Wednesday.

    ROCK & A HARD PLACE

Many central banks, especially in emerging economies, thus find themselves between a rock and a hard place. Selling dollar-denominated Treasuries helps shore up a deteriorating domestic currency, but all else being equal, also helps lift U.S. yields, which burnishes the dollar’s allure and sustains the negative feedback loop.

    Official data from India, Brazil and China, three of the biggest emerging economies and holders of FX reserves, show that all have reported notable declines in their FX reserves recently.

    India’s FX reserves topped $700 billion in September but have since fallen by $60 billion, or around 8.5%, as the central bank has fought to defend the rupee, which has fallen to record lows against the dollar.

    Brazil’s reserves tumbled $28 billion in December alone, a record nominal fall and the biggest monthly percentage decrease in almost two decades. This heavy central bank intervention occurred after a perfect storm of global and local issues pushed the real to an all-time low against the dollar.

    And China’s reserves, the most closely watched of all, fell $64 billion, or 2%, in December, the most since April 2022. Again, this decline was prompted by the central bank’s need to counter strong capital flight and a depreciating currency.

    One of the fears shrouding the global financial system in the 2000s was the threat of China dumping its vast holdings of Treasuries if U.S.-Sino relations deteriorated sharply.

    This ‘balance of financial terror’, as former U.S. Treasury Secretary Larry Summers labeled it, never tipped over the edge, and the threat today is probably not as severe. China’s nominal holdings of Treasuries are the lowest since 2009, the U.S. bond market has swelled to $28 trillion, and Beijing’s share of that market is the lowest since 2002.

    Still, if Ahmed and Rebucci are right, foreign central banks can wield meaningful power over the U.S. bond market even if they have no intention to push up yields. This vicious cycle may not lead to ‘financial destruction, but it could create a decent amount of financial pain in the months ahead.

(The opinions expressed here are those of the author, a columnist for Reuters.)

(By Jamie McGeever; Editing by Christina Fincher)

FRANKFURT (Reuters) – The European Central Bank’s President Christine Lagarde can move financial markets with a frown, while her predecessor, Mario Draghi, used a smile to reinforce his message, a new study has found.

Traders are known to hang on to central bankers’ every word for cues on the direction of interest rates.

But an academic paper entitled “The Emotions of Monetary Policy” has found that even a change in facial expression or tone can affect market prices.

Researchers from Giessen University in Germany used the latest technology to recognise and classify Draghi’s and Lagarde’s facial expressions and vocal emotions during the press conferences that follow the ECB’s interest rate decisions.

Professor Peter Tillmann and colleagues then ran a machine-learning model on the transcripts of those media conferences to gauge whether the message delivered in any given minute was dovish (hinting at lower rates ahead), hawkish (hinting at higher rates) or neutral.

They found that Draghi’s messages — be they dovish or hawkish — had a bigger impact on government bond yields, the euro and euro zone stocks if they was accompanied by a smile.

“It seems that Draghi ‘kills with kindness’ – his words have the intended effect if spoken with a happy face,” the six researchers wrote in their paper published this week.

Lagarde, by contrast, could boost her market impact with an angry expression.

“For President Lagarde… more anger on her face magnifies the hawkish impact on bond yields,” the study said.

Other results showed Lagarde showed more emotion than her predecessor but both were more likely to express anger the farther inflation in the euro zone strayed, in either direction, from the ECB’s 2% target.

The authors hope the results will make policymakers and traders more aware of the importance of non-verbal communication and emotional undertones.

In the last couple of years, similar studies found that stocks rose when the chair of the Federal Reserve used a positive tone of voice, or that asset prices fell when he or she expressed emotions such as anger, disgust or fear.

The findings will resonate with financial historians: in the early 20th century, Bank of England governors were said to have only needed a raised eyebrow to discipline a banker during private conversations.

(Reuters) – Fox Sports has signed a multi-year media rights agreement with LIV Golf to broadcast its league competition in the U.S. starting next month, the network announced on Thursday.

Nearly all of the LIV Golf league season will be shown live across Fox Sports platforms, the network said in a statement.

“LIV Golf is getting bigger and bolder, and this relationship signals the next phase of growth,” said Scott O’Neil, who replaced Greg Norman as LIV Golf CEO on Wednesday.

LIV Golf caused a major disruption in the golf world when it first launched, luring top players away from the PGA Tour with the promise of huge paydays and causing a bitter divide in the sport.

Ongoing negotiations between the PGA Tour and LIV Golf on a deal that would unify the professional game have yet to produce an agreement.

(Reuters) – A gauge of manufacturing activity in the U.S. Mid-Atlantic region shot up by the most in about four-and-a-half years in January, with new orders and shipments both surging, a potential indication that the factory sector’s long slump may be ending.

The Federal Reserve Bank of Philadelphia said on Thursday that its monthly manufacturing index rose to 44.3, its highest since April 2021, from a revised minus 10.9 in December. The net increase was the largest since June 2020 after factories began reopening from the initial wave of COVID-19 shutdowns and was the second largest increase on record.

The result far outstripped the median forecast among economists polled by Reuters, which was for a reading of minus 5.0. Negative readings indicate a contraction in activity.

The report’s new orders index rose to 42.9, its highest since November 2021, while the shipments index climbed to 41.0, its highest since October 2020. Employment levels also rose to a six-month high.

The U.S. manufacturing sector has been struggling for the better part of three years after the Federal Reserve began raising interest rates in early 2022 to beat back the stiffest inflation in a generation. The rise in borrowing costs cut into demand and investment.

January’s report, though, dovetails with a number of other surveys of business sentiment in the two months since Donald Trump was elected U.S. President. Trump takes office next week with promises to cut taxes and regulation, and also to crack down on immigration and impose a broad range of tariffs. A wider survey from the Fed released on Wednesday showed businesses were optimistic about the outlook but also concerned by the risks that tariffs and immigration restrictions posed to prices and labor availability.

Inflation is already proving harder than expected for the Fed to bring back to its 2% target, even before Trump formally unveils his plans, many of which are expected to be announced as early as his inauguration day, Jan. 20. Indeed, the Philly Fed’s prices paid index measuring production input costs rose to a two-year high in January.

Investing.com – The US economy has entered 2025 with a “strong head of steam” although uncertainty around President-elect Donald Trump’s policy plans has clouded the outlook for the year, according to analysts at Wells Fargo (NYSE:WFC).

In a note to clients on Thursday, the analysts estimated that the US economy grew at an annualized rate of 2.7% in the fourth quarter, slowing from a 3.1% in the third quarter. If accurate, then this would mean that real gross domestic product expanded 2.8% on an annual average basis in 2024, they added.

They argued that, considering real output increased at an average rate of 2.4% per year during a period of economic expansion from 2010-2019, “the American economy appears to be in solid shape at present.”

Meanwhile, most businesses are looking strong, they suggested, pointing to data indicating that even though the pace of hiring has eased in recent months, most firms neither need workers nor “want to cut staff.”

Progress has also been made on returning inflation to the Federal Reserve’s 2% target level, the analysts added.

So-called “core” consumer price growth, which strips out volatile items like food and fuel, edged up by 0.2% month-on-month and 3.2% year-over-year in December, data from the Labor Department’s Bureau of Labor Statistics showed on Wednesday. Economists had estimated the numbers would match November’s pace of 0.3% and 3.3%, respectively.

However, the deceleration in inflation may be halted if the incoming Trump administration follows through on a threat to impose sweeping new import tariffs on both allies and adversaries alike, the analysts said.

They added that “higher prices resulting from [the] tariffs” would subsequently weigh on real income growth, denting consumer spending activity.

“Higher tariffs, if imposed, would impart a modest stagflationary shock to the economy,” the analysts argued, predicting that the levies could lead to a downshift in economic growth in the second half of 2025.

But they still see activity accelerating in 2026 thanks to the impact of a possibly more business-friendly environment, including looser regulations and tax cuts, during Trump’s second term in the White House.

(Reuters) -Major brokerages stuck to their predictions on interest rate cuts in 2025, after U.S. inflation data came in line with expectations on Wednesday, easing investor nerves, following a surprisingly strong U.S. employment report last week.

Wells Fargo (NYSE:WFC), however, lowered its forecast to two rate cuts by the Federal Reserve from three after U.S. consumer price index (CPI) showed a marginal rise to 0.4% last month and advanced 2.9% on an annual basis. Economists polled by Reuters had forecast the CPI gaining 0.3% and rising 2.9% from a year earlier.

Market participants are betting on a 34.5 basis point cut by the end of this year, as per data compiled by LSEG.

After cutting rates by a quarter of a percentage point at the Dec. 17-18 meeting, Fed Chair Jerome Powell said policymakers could now be “cautious” about further reductions.

Here are the forecasts from major brokerages after inflation data:

Rate cut estimates (in bps)

Brokerages Jan 2025 2025 Fed Funds Rate

No. of cuts

in 2025

BofA Global No rate cut No rate cut 4.25-4.50%(end of

Research 0 December)

Barclays (LON:BARC) No rate cut 25 (in June) 4.00-4.25% (end of

1 2025)

BNP Paribas (OTC:BNPQY) No rate cut No rate cut 4.25-4.50%(end of

0 December)

Goldman Sachs No rate cut 50 (June and 3.75-4.00% (through

December) 2 December)

J.P.Morgan No rate cut 50(June and 3.75-4.00% (through

September) – September 2025)

Morgan Stanley (NYSE:MS) No rate cut 50 (through 3.75-4.00% (through

June 2025) 2 June 2025)

Deutsche Bank (ETR:DBKGn) No rate cut No Rate Cuts 4.25-4.50% (end of

0 2025)

ING No rate cut 75 3.50-3.75%

3

UBS Global No rate cut 50 3.75-4.00% (end of

Wealth – 2025)

Management

Citigroup (NYSE:C) No rate cut 125 (starting 3.00-3.25% (end of

in May) 5 2025)

Macquarie No rate cut 25 4.00-4.25%

1

Berenberg No rate cut No rate cut 4.25-4.50% (end of

0 2025)

No 50

Wells Fargo rate cut (September and 2 3.75-4.00% (end of

December) 2025)

Nomura No rate cut – –

1

Here are the forecasts from major brokerages before inflation data:

Rate cut estimates (in bps)

Brokerages Jan 2025 2025 Fed Funds Rate

BofA Global No rate cut No rate cut 4.25-4.50%(end of

Research December)

Barclays No rate cut 25 (in 4.00-4.25% (end of

June) 2025)

Goldman Sachs No rate cut 50 (June 3.75-4.00% (through

and December)

December)

J.P.Morgan No rate cut 75(starting 3.50-3.75% (through

in June) September 2025)

Morgan Stanley No rate cut 50 (through 3.75-4.00% (through

June 2025) June 2025)

Deutsche Bank No rate cut No Rate 4.25-4.50% (end of

Cuts 2025)

ING No rate cut 75 3.50-3.75%

UBS Global No rate cut 50 3.75-4.00% (end of

Wealth 2025)

Management

Citigroup No rate cut 125 3.00-3.25% (end of

(starting 2025)

in May)

Macquarie No rate cut 25 4.00-4.25%

Berenberg No rate cut No rate cut 4.25-4.50% (end of

2025)

Scotiabank (TSX:BNS) No rate cut 50 3.75-4.00% (end of

2025)

Wells Fargo No rate cut – –

* UBS Global Research and UBS Global Wealth Management are distinct, independent divisions in UBS Group

Investing.com — Capital Economics analysts have maintained their forecast for Norges Bank, predicting that the central bank of Norway will start reducing its policy interest rate in March 2023, despite December’s inflation figures coming in lower than expected. The firm anticipates a gradual rate reduction, with cuts occurring once per quarter until the key policy rate reaches 3% by mid-2026.

In its December meeting, Norges Bank kept the policy rate steady at 4.5%. The bank had indicated a potential reduction in the policy rate come March if the economy developed as projected. However, the December inflation data showed a decrease to 2.2% from November’s 2.4%, contrary to the central bank’s expectation of an increase to 2.8%. Core CPI-ATE also declined from 3.0% to 2.7%, slightly below the forecasted 2.8%.

Despite the lower-than-expected inflation, Capital Economics does not believe this will lead Norges Bank to accelerate its planned rate cut to the upcoming week. Historically, even when inflation rates were below the bank’s forecasts, the policy rate remained unchanged, influenced by factors such as strong wage growth and the weak Norwegian krone. Current wage growth trends and the trade-weighted exchange rate support the analysts’ view that the central bank will stick to its March timeline for the rate cut.

The pace and extent of future rate cuts by Norges Bank after March are less certain, according to Capital Economics. The bank’s own forecasts suggest a more conservative approach, with the policy rate hitting 3% by early 2027. However, the firm cautions against relying too heavily on these projections, citing the historical inaccuracy of central banks’ forecasts for their own policy rates.

Capital Economics expects the Norwegian economy to grow steadily in the coming years, implying that there is no urgency for aggressive rate cuts. Policymakers have expressed concerns about maintaining overly tight monetary policy, aiming to avoid undue economic restrictions while achieving inflation targets within a reasonable timeframe.

The firm also forecasts a decline in core inflation, albeit at a slower rate than last year, as the labor market eases and wage growth potentially slows. This, combined with a predicted strengthening of the krone, is expected to contribute to lower services inflation.

Considering these factors, Capital Economics believes Norges Bank will move towards a more neutral monetary stance, with the equilibrium real rate estimated to be between -0.5% and +0.5%, according to a central bank research paper published in 2022.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.

The European Central Bank (ECB) released the minutes of its December meeting, revealing a growing inclination towards monetary easing. The discussion mainly revolved around the necessity of rate cuts to stabilize inflation, with ECB staff projections indicating that achieving the forecasts would require rate reductions in line with market expectations.

The minutes highlighted an increasing easing bias, with the ECB concentrating on the pace of future rate cuts rather than their general necessity. The central bank also moved away from its strict 2.0% inflation target, now aiming for inflation to “stabilize sustainably at the target,” reflecting a shift in its communication strategy.

Concerns were raised regarding the optimism of growth forecasts in the staff projections. The baseline scenario, which anticipated unchanged trade policies and stronger foreign demand bolstering euro area exports, was considered potentially too positive given the unpredictable trade policies of key trading partners, particularly the United States.

The term “undershooting” was noted three times in the minutes, pointing to an increased likelihood of inflation falling short of the target if the economy fails to gain momentum.

The debate over the size of the rate cut was intense, with some members advocating for a 50 basis point reduction to provide insurance against the downside risks to growth that are exacerbated by global and domestic political uncertainties.

In summary, the ECB’s minutes from December underscore the central bank’s readiness to cut rates more swiftly to counter the risks of inflation undershooting and to address doubts about the growth outlook amid various uncertainties.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.

By David Lawder

WASHINGTON (Reuters) – Donald Trump came to Washington eight years ago vowing to rewrite U.S. trade relationships, shrink a massive goods trade deficit and rebuild America’s industrial base with new tariffs.

The president-elect is about to embark on an even more aggressive effort in his second term, pledging to impose 10% duties on all U.S. imports and 60% on goods from China. 

Just how that will play out is unclear, but data from his first run at upending the trade landscape show it did shift U.S. imports away from China to other countries, especially Mexico and Vietnam. Still, the U.S. trade deficit continued to grow, topping $1 trillion over the last four years, and factory employment has flatlined amid an overall jobs boom since the COVID-19 pandemic.

STEEL SLIDE

Steel producers in the U.S. benefited the most from Trump’s tariffs, winning a 25% global duty while aluminum producers saw a 10% duty. Those were somewhat diminished after Trump’s first administration negotiated quota deals with Mexico and Canada and the Biden administration followed up with quota deals for the European Union, Britain and Japan.

Meanwhile, China’s dominance of these sectors globally has kept prices low, contributing to lower capacity use rates.

Some plants initially revived by the duties, including a U.S. Steel mill in Granite City, Illinois, visited by Trump in 2018 to herald the industry’s resurgence, have shut down blast furnaces. A Missouri aluminum smelter revived by the tariffs also was idled last year by Magnitude 7 Metals.  

Trump’s biggest first-term trade impact was to shatter decades of political consensus favoring ever-lower trade barriers that had allowed China to become the world’s largest goods producer. Indeed, when Trump left office in 2021, the theme was taken up and amplified by President Joe Biden. 

“Waking the world up to the economic threat from China was one of the top accomplishments of Trump’s first-term trade agenda, as was the renegotiation of some of our major trading relationships,” including a North American free trade deal, said Kelly Ann Shaw, a trade adviser during Trump’s first term.

“We’re now having a healthy debate in America about what industries we want to keep, which supply chains are critical and where we should focus our trading relationships,” said Shaw, a trade lawyer at law firm Hogan Lovells in Washington.

Trump’s tariffs of 25% on $370 billion of Chinese imports helped reduce the U.S. trade deficit with China from $418 billion in 2018 to $279 billion in 2023. But as companies shifted production elsewhere, new winners emerged: Mexico and Vietnam. The growth of their U.S. trade surpluses more than made up for China’s decline.

RETALIATION, PRICING COSTS

This shift came at considerable cost. China hit back with retaliatory tariffs of 25% on U.S. soybean exports and largely shifted aircraft purchases away from Boeing (NYSE:BA) to rival Airbus for years.

U.S. whiskey distillers were hit by EU retaliation over metals tariffs, but exports rebounded when those tariffs came off, said Chris Swonger, CEO of the Distilled Spirits Council of the United States.  

In the 2020 “Phase 1” trade deal that ended the U.S.-China trade war, Beijing pledged to boost its purchases of U.S. goods and services by $200 billion over two years, but failed to do so as COVID-19 hit.

China’s promised increases in U.S. soybean volumes instead went to Brazil and Argentina. Scott Gerlt, the chief economist for the American Soybean Association, said that’s a permanent shift. 

“We never recovered the volume of China soybean exports since that trade war,” Gerlt said. “A lot of land came into production in Brazil. Brazil surpassed us in exports to China.”   

The shift could help China weather a new trade war, but the crop remains the top U.S. export to China.

Commercial aircraft once held the top spot but have been slow to recover, while motor vehicle shipments to China also declined as China’s electric vehicle industry has surged. Displacing them is crude oil, going from zero a decade ago to $13 billion in 2023.   

The U.S. remains highly dependent on China for technology imports, including smartphones, laptop computers and video game consoles. Many of these products were spared Trump’s first-term tariffs, but duties of 60% or more would raise costs considerably.     

China’s vast scale and efficiencies in sectors such as electronics and toys cannot be easily replicated elsewhere, creating difficult choices for companies facing steep tariffs, said Mary Lovely, a trade economist who is a senior fellow at the Peterson Institute for International Economics. 

“These are enormous enterprises. How do you recreate that in another country that’s a tenth of the size of China? You don’t,” Lovely added.

Trump’s first-term tariffs did not cause a spike in consumer price inflation, but they were limited in scope and caused only one-time price increases, said Doug Irwin, an economics professor at Dartmouth College who specializes in trade.

“Tariffs are just a tax, and so they lead to a one-off level increase in the price of those goods,” Irwin said. “They’re not this continuous rise in the general price level, which is inflation.”

The price impact from further tariffs also depends on factors such as U.S. fiscal and monetary policy that may lift the dollar’s value, trade retaliation that could lower other domestic goods prices, and whether or not importers or exporting firms absorb some of the tariff costs.

TARIFF REVENUE

Trump also has pledged to pay down U.S. debt with tariff revenues. On Tuesday, he promised to create an “External Revenue Service” to collect tariffs, duties and all revenue from foreign sources. Collections from his punitive duties since 2018 suggest a vast increase would be needed to make a dent in U.S. deficits now approaching $2 trillion a year before an expected extension of expiring tax cuts, estimated to add more than $4 trillion in new debt over a decade.

Total (EPA:TTEF) collections from the China, steel, aluminum and solar panel tariffs have totaled $257 billion over seven years, a rounding error amid cumulative deficits of $12.57 trillion during that time. 

The conservative-leaning Tax Foundation estimates that a 10% universal Trump tariff would raise about $1.7 trillion over 10 years, including accounting for a negative impact on economic growth.