UBS is out with its latest forecast for the US 10-year bond yield, predicting it will rise to 4.25% by the end of 2025, with the 2-year note yield expected at 3.65%. The research firm indicated that in the near term, risks could escalate if US core PCE inflates to 2.8% in the first quarter before descending to 2% in the third quarter of 2025.

The forecast also suggests that US GDP is not expected to decelerate below trend until the second quarter of 2025. UBS highlighted potential early aggressive actions by President Trump on tariffs, immigration, and the Federal Reserve as factors that could heighten risks in the near term. Despite these concerns, UBS expressed a strong belief that the recent sell-off in UK gilts, particularly at the short end, is overdone, projecting 3.25% UK short rates by year-end.

The report by UBS also discussed the implications for bond markets, noting that bond yields exceeding 5% could be worrisome. However, if General AI technology boosts productivity by 1% starting from 2028, the equity risk premium (ERP) is estimated to be 4.3%. The current ERP is considered ‘warranted’ at 3.9%, supported by consistent ISM/PMI data and stable credit spreads.

Furthermore, UBS sees a 35% chance of a market bubble forming. In such scenarios, the price-to-earnings (P/E) ratio of bubble areas, which could include up to approximately 40% of market capitalization, would reach at least 45 times in a bond yield environment of at least 5.5%. This is compared to the current 34 times P/E ratio for the ‘Mag 6’.

The report concludes by noting the unusually strong position of corporate, especially tech, balance sheets relative to government ones, which could allow for a lower ERP.

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

(Reuters) – The new Trump administration’s policies may affect inflation in the United States but are unlikely to have much impact on price pressures in Europe, ECB policymaker Francois Villeroy de Galhau said on Wednesday.

“We could expect, but I say it very cautiously, this programme to have inflationary effects in the U.S. due to tariffs, fiscal expansions,” Villeroy told a panel at the Davos economic forum.

“On the European side I don’t think that the inflationary effects will be that significant, so I would expect this disinflation process to go on,” added Villeroy, who is also governor of the French central bank.

Investing.com — Bank Negara Malaysia (BNM) has once again opted to keep its main policy rate steady at 3.0%. This decision aligns with the anticipations of 30 economists, who predicted no changes to the policy rate. The rate in Malaysia has remained unchanged since its last increase by 25 basis points in May 2023.

Capital Economics, a leading economic research company, suggests that while other central banks may decrease their rates in the upcoming months, the BNM is expected to maintain its current rate throughout the year.

This decision is backed by the strength of the Malaysian economy, which demonstrated a robust growth of 4.8% year-on-year in Q4, according to preliminary figures released last week.

The BNM expressed confidence in the continued strength of the economy in 2025, driven primarily by resilient domestic expenditure. This was stated in their announcement today, indicating a positive outlook for the upcoming year.

However, the future of inflation in Malaysia is less certain. The headline rate was reported at a modest 1.7% year-on-year in December, with figures released today. Yet, inflation is projected to increase later in the year due to the implementation of long-planned subsidy cuts to petrol prices.

These changes, which were announced in the budget, aim to improve public finances. As a result, the headline rate is expected to rise above 3% next year.

Inflation exceeding 3% year-on-year could potentially fall outside of what is considered the central bank’s comfort zone, as BNM does not have an explicit inflation target. In its statement today, BNM noted that future inflation will be influenced by the impact of domestic policy measures.

Despite some analysts predicting rate cuts for 2025, the majority, including Capital Economics, foresee no changes to the policy rate this year.

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

By Crispian Balmer

ROME (Reuters) – He hails a fantastic woman sweeping all before her in Europe. She praises a strong and shrewd defender of the West. Donald Trump and Giorgia Meloni are fast forging a new transatlantic “special relationship”.

Italian Prime Minister Meloni was the sole European leader at Trump’s presidential inauguration on Monday, an honour that came barely two weeks after she flew to Florida to meet him at his Mar-a-Lago retreat, and propelled her into pole position to become Washington’s new go-to ally in Europe.

“Trump has chosen her for credibility, reliability and for the stability of our government as the preferred interlocutor in the EU,” Italian Deputy Foreign Minister Edmondo Cirielli, a member of Meloni’s Brothers of Italy party, told Reuters.

“This is useful for Italy and will also be useful for the EU.”

Indeed, in theory, Meloni has much to benefit by being in Trump’s good books. NATO member Italy has a big trade surplus with the United States and a diminished defence budget, putting her on a collision course with the new administration, unless she can leverage her ties with the president to deflect this.

But aligning herself too closely with the mercurial American commander-in-chief also carries potential dangers. Meloni has worked hard to convince Brussels she is a reliable partner and could undermine her standing if she blatantly promotes Italian interests at the expense of the rest of the 27-nation bloc.

“Meloni is actually in a very awkward position,” said Francesco Galietti, founder of political risk firm Policy Sonar.

“She hopes that having Trump’s ear will prove valuable, but she risks isolating herself in Europe, while having no guarantees that she can shield Italy from threatened American tariffs or blowback for the underwhelming defence spending.”

In less than 10 years, Meloni has gone from being the leader of a marginalized, ultranationalist party, to head of one of the most stable governments in post-war Italian history, serving as a bridge between far-right and conservative factions in Europe.

The election of Trump, a natural ideological partner, has given her the opportunity to play a similar role on a much bigger stage – one that has seen the emergence of powerful personal alliances between leaders such as Margaret Thatcher and Ronald Reagan in the 1980s who cemented what is widely termed the “special relationship” between Britain and America.

“Italy will always be committed to consolidating the dialogue between the United States and Europe, as an essential pillar for the stability and growth of our communities,” Meloni said in a statement after applauding Trump’s swearing-in.

Despite Meloni’s move away from her far-right roots, some analysts in Rome who have followed her meteoric rise believe her deep-rooted eurosceptic instincts will prevail.

“Thinking that she’s going to do things in Europe’s interest and be the Trump whisperer is totally naive,” said Nathalie Tocci, director of the Italian international relations think-tank Istituto Affari Internazionali (IAI).

“She will always instinctively opt for national interests rather than European interests.”

TRUMP: MELONI IS A FANTASTIC WOMAN

Trump and Meloni have showered each other with praise since the president sealed his return to the White House.

“This is very exciting. I’m here with a fantastic woman,” Trump said during Meloni’s visit to Mar-a-Lago this month. “She’s really taken Europe by storm.”

Meloni, for her part, has insisted the U.S. president-elect will defend Western interests and said his geopolitical skills could force Russian leader Vladimir Putin to the negotiating table to resolve the Ukraine conflict.

“Trump has the ability to balance diplomacy and deterrence,” she said after her Florida trip.

Potentially, Italy has much to lose from a Trump presidency, especially from his threat to reverse the U.S. trade deficit with the European Union, possibly through hiked excise tolls.

The G7 member state registered a 42.1 billion euro ($43.6 billion) trade surplus with the United States in 2023, according to the EU statistics office, the second-highest in the bloc after Germany, making it especially vulnerable to tariffs.

Italian newspapers have said Meloni will look to use her alliance with Trump to deflect tax hikes away from local firms, such as its food producers. Meloni’s office refused to comment on such speculation, but analysts say Italy would still suffer, even if Trump directed his ire elsewhere. 

“The Italian economy is so tied to the European economy that thinking tariffs could only penalize France or Germany without hurting us is an illusion,” said Arturo Varvelli, director of the European Council on Foreign Relations in Rome.

“Meloni knows this, so for better or worse, she will have to represent Europe’s interests to Trump,” he added.

A senior EU official in Brussels, speaking on condition of anonymity, said it was not yet clear that Trump wanted to build any bridges to Europe, with or without Meloni. Another official said Meloni’s friendship with Trump would be valuable if she can persuade him to stick by Ukraine in its war with Russia.

The White House didn’t immediately respond to a request for comment on relations between Trump and Meloni.

MELONI: ELON MUSK IS PRECIOUS GENIUS

Meloni is also close to billionaire Elon Musk, who has emerged as a key mover and shaker in the president’s inner circle, and the pair have engaged in a flurry of praise.

Musk described Meloni as “someone who is even more beautiful inside than outside” at a black-tie event in New York in September last year, for example, prompting the Italian leader to reply that the entrepreneur was a “precious genius”.

Meloni’s government has entered into talks to sign a possible five-year contract with Starlink, part of the Musk empire, worth 1.5 billion euros. Italian officials say the nation’s military and diplomats need secure satellite communications of the type offered by Starlink and cannot wait until 2030, when a rival European system IRIS2 is expected to go on line.

“The government says this deal isn’t detrimental to Europe, but it’s clear that if you spend 1.5 billion on Starlink, you won’t walk away from it in five years to join IRIS,” said IAI’s Tocci. “This is a very obvious example of Meloni putting national interests above European interests.”

A Starlink contract would provide a small boost to Italian defence spending, but nowhere near enough to satisfy Washington.

While NATO has said the military budget of member states should total 2% of national output, Trump has called for this to jump to 5%. In Italy, spending is hovering around 1.5%, with the country’s huge debt mountain preventing any additional splurge.

Policy Sonar’s Galietti said he didn’t believe Washington would accept the sort of vague pledges that Rome has offered over the past decade to lift spending. 

“We will not deliver on our promises and just being Trump’s bestie isn’t going to help Meloni on this one.”

($1 = 0.9663 euros)

Investing.com — Analysts from Nordea Bank Abp (OTC:NRDBY) predict that the central banks of Sweden and Norway will end their current easing cycle within the next six months. This comes as an expected rebound in domestic demand is anticipated across the Nordic region.

The Riksbank in Sweden and Norges Bank in Norway are both projected to reach their terminal rates by July, set at 2% and 4% respectively. These rates are 50 basis points beneath their current levels, according to the largest lender in the Nordic region’s latest economic outlook, released Wednesday.

Nordea’s forecast for Sweden aligns with the consensus projection from the most recent Bloomberg survey of economists. The bank had previously predicted that the Riksbank would reach the 2% key rate by the end of the year.

However, Nordea’s projections for Norway are significantly lower than the median forecast in Bloomberg’s latest survey. This survey indicates a consistent decrease in Norges Bank’s key rate through to the end of next year, with borrowing costs predicted to be at 2.9%.

In contrast, Nordea’s September forecast saw officials implementing a total of three quarter-point cuts, bringing the rate to 3.75% by the end of next year.

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

Investing.com — Yannis Stournaras, a member of the European Central Bank’s Governing Council, has advised that the bank should continue to gradually reduce interest rates, with a goal to bring them close to 2% by the end of the year.

This information was disclosed in an interview with Greece’s Naftemporiki newspaper.

Stournaras noted that Euro-area inflation is slowing down, possibly even more than anticipated, in line with forecasts. He also mentioned that the economy might be weaker than expected due to the potential threat of US tariffs.

Stournaras explained that the ECB should proceed cautiously due to the high level of uncertainty. He suggested that the interest rate cuts should be at the rate of 25 basis points each time. This approach would enable the bank to bring the rates closer to 2% from the current 3% by the end of 2025.

Discussing the potential imposition of trade tariffs on Europe by President Donald Trump, Stournaras expressed his belief that the US government will reconsider before implementing these measures. He also suggested that Europe should appoint a negotiator, such as the European Commission, to handle this crucial issue.

Stournaras added that the ECB is working on various scenarios regarding the potential impacts of the tariffs. However, he emphasized that it is crucial for Europe’s leaders to consider how Europe should respond to possible tariffs.

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

ING analysts project that Sweden’s central bank, the Riksbank, will lower interest rates twice more, including a cut expected this month. This anticipation comes as Sweden’s economy, which is particularly sensitive to interest rate changes, begins to show signs of recovery after being significantly impacted by the rate hikes throughout 2022 and 2023.

The Riksbank has already reduced rates by a total of 150 basis points, a move that is starting to yield positive results. Various sentiment indicators, ranging from consumer confidence to the economic tendency survey, have demonstrated consistent improvements throughout 2024.

The housing market in Sweden is also experiencing a resurgence, attributed in part to the country’s high prevalence of variable-rate lending. This financial structure means that the effects of rate changes are felt more quickly in Sweden than in nations with a greater proportion of fixed-rate debt, such as the United States.

Despite these optimistic signs, the hard economic data has yet to fully reflect the upswing. Unemployment rates have ceased climbing but are still relatively high, remaining above the average levels seen before the Covid-19 pandemic. Household consumption saw an uptick in November, but it is premature to declare this the beginning of a sustained trend.

The Riksbank is hopeful for a recovery in demand during the current year, but it is still considered the early stages of recovery. Furthermore, inflation has persistently fallen short of the Riksbank’s predictions. In December, the Consumer Price Index-Fixed (CPIF) excluding energy was reported at 2%, which was below the central bank’s most recent forecast.

Adding to the cautious approach is the potential risk posed by US President Donald Trump’s trade policies, which could impact Sweden’s export-driven economy. With these factors in mind, ING analysts suggest there is room for an interest rate cut next week and another later in the year, potentially bringing the policy rate down to 2%, slightly below the Riksbank’s projected rate for the year.

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

Investing.com – US stock futures edge higher on Wednesday as traders analyzed comments from President Donald Trump on his plans for possible tariffs and poured over fresh corporate earnings. Trump takes aim at America’s trade relationship with the European Union and China in remarks on Tuesday. Elsewhere, Netflix (NASDAQ:NFLX) posts solid fourth-quarter returns, fueling a spike in shares of the streaming video giant in extended hours trading.

1. Futures inch higher

US stock futures hovered above the flatline on Wednesday, with investors gauging trade policy statements from President Trump and assessing a string of company results this week.

By 03:42 ET (08:42 GMT), the Dow futures contract had added 59 points or 0.1%, S&P 500 futures had edged up by 24 points or 0.4% and Nasdaq 100 futures had advanced by 169 points or 0.8%.

The main averages on Wall Street ended the previous session higher as traders digested Trump’s first actions following his return to the White House. Equities were somewhat buoyed by Trump’s move to avoid slapping harsh day-one import tariffs on friends and foes alike, although he told reporters he was considering placing levies on Mexico and Canada as soon as February 1. Tariffs on the European Union and a punitive duty on China were also being discussed, Trump said (more below).

Shares in American carmakers rose on Tuesday, while utilities stocks also increased following a string of orders from Trump which aimed to boost US energy production.

Markets have been closely monitoring any developments around Trump’s plans for a more protectionist trading stance, which some analysts have argued could fuel inflationary pressures and cause the Federal Reserve to delay rolling out potential interest rate cuts in 2025. The Fed is widely tipped to leave borrowing costs unchanged at its meeting next week.

“You can be sure that big changes are coming as far as US trade is concerned, even if we didn’t get any new tariffs on President Trump’s first day in office,” analysts at ING said in a note.

2. Trump issues tariff threats to EU, China

Despite signs of some relief in financial markets after Trump’s orders stopped short of introducing immediate tariffs, sentiment remained cautious as comments from the new president underlined the tougher trading position he could assume during his second term in power.

Trump hit out at the EU and China in particular on Tuesday, accusing the former of being “very, very bad to us” and claiming that fentanyl is coming into the US from the latter through Mexico and Canada.

The EU had a troubling trade surplus with the US, Trump said, adding that the bloc is “going to be in for tariffs” because it is the only way to “get fairness”.

China, meanwhile, is facing a 10% levy on all goods sent to the US as early as February 1, Trump noted, aligning with a deadline he set for Mexico and Canada earlier this week. Trump, who had previously vowed to impose as much as a 60% tariff on China, said that the threat of the duties may force Beijing to clamp down on the trade of fentanyl across US borders.

On Monday, Trump threatened to hit Canada and Mexico with 25% tariffs on imported goods unless they crack down on the drug and the trafficking of illegal migrants. Leaders in both countries moved to strike conciliatory tones with Washington in the wake of the statements.

3. Trump calls memecoin returns “peanuts”

Trump largely brushed off questions about adding billions of dollars to his personal wealth through the release of the $TRUMP memecoin before his inauguration.

Responding to questions from a reporter about the memecoin, Trump confirmed that he had launched the token, but claimed to not have too much knowledge of his personal benefit from its performance.

“I don’t know about benefited, I don’t where it is, I don’t know much about it other than I launched it, I heard it was very successful,” Trump said in a White House event on Tuesday.

When responding to a reporter telling him that he had made “several billion dollars” from the memecoin, Trump said “that’s peanuts for these guys”, referencing a group of tech billionaires who were with him to unveil a new artificial intelligence initiative.

Shortly after $TRUMP was launched last week, the token surged to a market capitalization of over $14 billion at its peak, netting Trump, who is a major holder, billions in paper gains. But the memecoin has swung wildly in volatile trade, raising some questions over potential price manipulation.

4. Netflix shares jump on strong fourth-quarter earnings

Netflix shares surged in extended hours trading Tuesday after reporting better-than-expected fourth-quarter results bolstered by a spike in subscriber additions.

In the three months ended December 31, Netflix reported earnings of $4.27 a share on revenue of $10.25 billion, topping estimates of $4.20 on revenue of $10.1 billion, according to an average of analysts’ projections cited by Reuters.

The streaming giant raked in 18.9 million users in the fourth quarter, well above the 9.2 million estimated, underpinned by a strong content slate and growing demand for membership to its ad-sponsored tier.

A slate of other corporate returns are due out this week, including quarterly figures from Procter & Gamble (NYSE:PG), Johnson & Johnson (NYSE:JNJ) and Abbott Laboratories (NYSE:ABT) on Wednesday.

5. Oil slips

Oil prices slipped lower Wednesday, adding to the previous session’s losses on the back of President Trump’s declaration of a national emergency to ramp up energy production.

By 03:43 ET, the US crude futures (WTI) dropped 0.4% to $75.50 per barrel, while the Brent contract fell 0.3% to $79.03 a barrel.

The benchmarks retreated on Tuesday after Trump laid out his plan to maximize oil and gas production, including by declaring a national energy emergency to help the rolling back environmental protections, and withdrawing the US from the Paris climate pact.

(Reuters contributed reporting.)

Investing.com — The UK Chancellor is facing significant challenges due to an overshoot in the country’s borrowing and a backdrop of slowing GDP growth and high interest rates, according to Capital Economics.

The recently released figures for December have shown a higher than expected level of public sector borrowing, excluding banking groups, at £17.8bn, surpassing the Office for Budget Responsibility’s (OBR) projected figure of £14.6bn.

A portion of this overshoot, however, is attributed to a one-off £1.7bn payment made by the government to the private sector for the repurchase of military accommodation. This payment, recorded as an investment, is not included in the current budget deficit measure of borrowing, which the Chancellor’s fiscal mandate is based upon.

Therefore, the overshoot of the OBR’s current budget deficit forecast of £8.7bn was a smaller £1.3bn. The overshoot in borrowing in December, and in the 2024/25 fiscal year as a whole, was largely driven by local government and public corporations borrowing.

These figures are often heavily revised. Total (EPA:TTEF) tax receipts of £85.6bn were slightly higher than the OBR’s forecast of £85.4bn. While central government expenditure exceeded the OBR’s forecast in December by £1.9bn, it has been less than the OBR’s forecast by a cumulative £2.3bn in the fiscal year as a whole.

The report also noted that, despite market interest rate expectations and gilt yields having fallen in the last week, they are still higher than at the time of the Budget. This suggests that the Chancellor’s headroom against her fiscal rules has been reduced from £9.9bn in October to £2.0bn. This, combined with a weakening economy, indicates that the Chancellor may need to raise taxes and/or cut spending in the next fiscal statement, scheduled for 26th March.

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

By Mike Dolan

LONDON (Reuters) – In many respects, Donald Trump inherited the “golden age” he claims to be ushering in. All he really needs to do is not screw it up.

In economic and financial terms, the United States has rarely been in better health.

The world’s largest economy has been humming at annualized growth rates close to 3% over the past year, its potential growth has increased since before the pandemic and a technology-led performance gap with the rest of the world is stark and widening. Less than 5% of global investors see any chance of a U.S. downturn on the horizon.

Jobs are plentiful, the economy remains at full employment by any reasonable definition, and inflation-adjusted annual wage growth is running at twice the 40-year average.

The post-pandemic inflation spike that forced a brutal squeeze in borrowing costs has subsided. Inflation has fallen back down near the Federal Reserve’s 2% target, and interest rates are declining again as a result.

To be sure, part of the steep price paid to get here is the bloated U.S. government deficit, which has expanded to a worrying 6% of national output and nudged the U.S. public debt pile north of a full year’s gross domestic product.

But thanks in part to the dollar’s durable role as the world’s dominant reserve currency, creditors at home and abroad remain relatively relaxed, and there have been few signs of stress in government funding channels.

In fact, America has been attracting overseas direct and portfolio investment like never before, with its world-beating, mega-sized companies. U.S. equity now accounts for some two-thirds of the entire capitalization of global stock indexes.

What’s not to like? Even if not “golden,” this is a rare period of sustained prosperity that everyone else on the planet seems envious of and wants to invest in. Keep it quiet, but the global investment world has been thinking “America First” in many ways for at least the past four years.

RICH ‘AGAIN’?

And yet, in his inauguration speech on Monday, Trump insisted “the golden age of America begins right now.”

“We will be a rich nation again,” Trump added later.

That’s an odd aspiration for an economy that is already one of the richest on the planet, with annual GDP per capita of nearly $87,000 last year. That’s some 60% more than Germany or Britain, more than twice that of Japan and seven times that in China.

Meanwhile, investors don’t appear entirely convinced that there will only be sunshine ahead. Since the election, markets have been agitated by the risk that many of Trump’s proposed policies – additional tax cuts, fewer migrant workers and resulting higher wages, and elevated import costs due to broad tariffs – could rekindle inflation and add even more to budget deficits.

And with an economy operating at near perfect pitch, there is considerable trepidation that over-stimulation at this point could trigger some bad outcomes.

One of the biggest fears is that bond markets could react to aggravated inflation and deficits by puncturing the whole bubble with a brutal rise in credit costs – a brief glimpse of which was seen at the turn of the year.

The Trump team retort is that inflation risks will be curbed by a mix of oil and gas drilling that cheapens energy prices and swathes of deregulation. Meanwhile, tax cuts will be funded by reducing public spending, downsizing government and hiking import tariffs to bring in overseas revenues.

Yet anxiety remains that Trump’s policies will ape his hyperbolic rhetoric, prompting the eclipse of a golden era rather than its dawn.

MARKET LOOP-THE-LOOPS

Investors examining the first 24 hours of the new administration for clues about what to expect in the next four years might conclude we are going to get a lot of fiery speeches and market price loop-the-loops.

But it’s still far less clear whether the rhetoric will be matched by the scale of the eventual outcomes.

In advance of the inauguration, the dollar had risen and overseas stock markets had cowered, partly due to Trump’s repeated promise of implementing day-one tariff increases. Yet the speech and related executive orders and directives have contained no specifics.

The dollar duly retreated, but then Trump insisted tariffs on Mexico and Canada would come next month, if they do not make further commitments to halt illegal migration and drug trafficking. Implementing universal tariffs and a review of the U.S. relationship with China, he said, would take longer.

The dollar and stocks perked up again, with many prices returning roughly to where they were before the inauguration.

The upshot is that the tariffs may come, but it’s still not entirely clear where or when. And while markets will continue to gyrate around the president’s rattling sabre, it’s possible that neither the eventual policy measures nor the net market outcomes may ultimately amount to very much.

For the economy at large, that may well be the most sensible course Trump’s team can take. Plenty of loud headlines around marginal tweaks – but no crash, bang or wallop.

That way the golden age Trump aspires to has some chance of mirroring the gilded one he’s stepped into.

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

(by Mike Dolan; Editing by Rod Nickel)