Top stories
- President Trump warned Iran that it has a “maximum” 15 days to reach a deal with the US or “bad things will happen”. Trump said yesterday, “we’re either going to get a deal or it’s going to be unfortunate for them”. Both sides had reported “progress” in talks earlier this week but said they remain far apart on certain issues, particularly the US insistence that Iran permanently disable its capacity to enrich uranium. The talks concluded with some “guiding principles” for a nuclear deal, according to Iran’s foreign ministry but the US said there remained “a lot of details to discuss” and that Iran would present proposals to address “gaps” in the next two weeks. Trump commented that the US’s assault on Iran last June had “totally decimated [Iran’s] nuclear potential. Now we may have to take it a step further or we may not… they can’t have a nuclear weapon. Very simple. You can’t have peace in the Middle East if they have a nuclear weapon”. Brent Crude is currently trading at six-month highs with the oil price following the usual pattern of rising as tensions escalate given potential risks to oil supplies or the risk of Iran closing the Strait of Hormuz – a choke point for oil exports from the Gulf. Yesterday in Washington, at the inaugural meeting of Trump’s Board of Peace, which Trump has framed as a guarantor of Middle East peace to rival the United Nations, Trump said “they [Iran] cannot continue to threaten the stability of the entire region, and they must make a deal”. Trump declined to say whether new strikes would be designed to damage Iran’s nuclear programme and military facilities or to go further and seek regime change. The US military build-up continues, with the US’s largest aircraft carrier the USS Gerald R Ford now in the Mediterranean having sailed from the Caribbean. The US now has 12 warships, including eight destroyers and two aircraft carriers in the region. In addition, flight tracking data shows the deployment of dozens of additional resources to Europe and the Middle East in the past week, echoing the moves seen before the US attacks on Iran last June.
- The Munich Security Conference resulted in a collective sigh of relief from European leaders thanks to a more conciliatory tone from US Secretary of State Marco Rubio. Rubio’s words contrasted with the speech 12 months ago by Vice President JD Vance but still pushed the US’s view that Europe needed a policy shift on energy policies, trade and mass migration. Rubio called for a “reinvigorated” partnership between the US and Europe based on a shared “great civilisation”. Rubio sought to reassure European leaders unsettled by a year of US threats to the NATO alliance, but European Commission President Ursula von der Leyen, speaking directly after Rubio at the Munich conference said that despite the softer rhetoric, the US-European relationship remained strained, and Europe had suffered “shock therapy”. She added, “some lines have been crossed that cannot be uncrossed anymore . .. the European way of life, our democratic foundation and the trust of our citizens, is being challenged in new ways.”
- UK Prime Minister Keir Starmer said the country needs to “go faster” in raising military spending and is said to be considering accelerating the timetable for committing the UK to spending 3% of GDP on defence. Starmer’s speech came on his return from the Munich Security Conference where he raised his ambition for the UK to join its allies in a multilateral defence initiative to finance and oversee joint rearmament. The UK and NATO allies have committed to a 5% target by 2035, of which 3.5% of GDP is committed to “core defence” with the remaining 1.5% spent on defence related infrastructure and security. Under the current schedule, defence spending is expected to rise to 2.5% of GDP from 2027, up from 2.3% when Labour came to power in 2024. Increasing spending to 3% will require the Chancellor to find an additional £32-35bn a year from the public finances.
By the numbers
- 2.4% – the year-on-year change in US inflation in January. This was the lowest year on year increases since the current wave of inflation began in spring 2021. Markets are now pricing 63 basis points of interest rate cuts from the Fed this year, up 7.7bps on the week.
- 5.2% – the UK unemployment rate in the three months to December, up from 5.1% in the previous period and the highest level since the pandemic. Youth unemployment (for ages 16-24) hit 16.1%, the highest level in over a decade. An increased national minimum wage and higher employer national insurance contributions were blamed for the increasing number of young people outside of the workforce. Wage growth slowed to 3.4% year on year, closing in on the 3.25% level the Bank of England sees as consistent with their 2% inflation target. HMRC payrolls fell by 6,000 in December and by a provisional 11,000 in January.
- 3.0% – the year-on-year change in UK inflation in January, easing from 3.4% in December and in line with expectations. The figure was the lowest since last March. The easing in price rises was led by food prices and transport, particularly air fares. Core CPI eased to 3.1% from 3.2% previously while services inflation eased to 4.4% from 4.5%.
Market movers
Much like the UK, US inflation is heading in the ‘right direction’ but the language from the Federal Reserve (Fed) remains circumspect. Indeed, were it not for the fact that Fed Chair Jay Powell was about to be replaced, market expectations for rate cuts would likely be lower. The minutes from January’s Fed meeting, released this week, highlighted the Fed remains in ‘wait and see’ mode. Concerns remain that companies will begin ‘passing through’ tariff rises, in addition with the labour market holding up reasonably well and fiscal stimulus on its way via additional spending and tax rebates, an economy ‘running hot’ could see inflation remain elevated. But ‘real time’ inflation data paints picture of inflationary pressures easing, thanks to lower housing costs, yet to be reflected in the official data which tends to smooth such moves out over time. With plenty of unknowns, and an economy in reasonable shape, ‘wait and see’ appears to be the correct stance for the moment. Kevin Warsh may think otherwise…
The investment lens
It’s been a mixed bag of data for the UK economy this week. On one hand the inflation data eased to 3% but on the other, unemployment continued to climb. Starting with inflation, while CPI remains significantly above the Bank of England’s target, the coming months should see a more dramatic easing in the figures, with a sub 2% reading possible for April’s data, followed by inflation stabilising around the 2% level for the remainder of the year. We should be mindful of course that prices are still rising, and the cumulative impact of inflation significantly above target since 2021 has resulted in the ongoing cost of living issues that have weighed so heavily on consumer confidence. Since the middle of 2021, when the latest inflation wave began, the UK has only seen one inflation print below the Bank of England’s target; the average headline CPI rate has been 5.24%. Hence the direction of travel we are now seeing in the inflation data is most welcome. As for unemployment, the data published this week is already very close to the Bank of England’s expected peak of 5.3%, and the underlying data on youth unemployment, ‘underemployment’ and economic inactivity highlight some of the structural issues facing the UK economy. In addition to almost 2 million registered unemployed, a further 9 million people in the UK are ‘economically inactive’, of which around 25% are students, and a further 33% are on sick leave. The ONS does not specify a percentage around the additional percentages that are ‘carers’ or have taken early retirement. Despite a huge parliamentary majority, the past year has shown the current government does not have enough support from its own MPs to consider major welfare reforms. Aside from the longer-term issues, the data this week suggests that assuming the direction of travel for inflation and employment continues, there is plenty of scope for the Bank of England to cut interest rates further. A rate cut in mid-March is now seen as extremely likely, but beyond March, only one further cut is expected. The trajectory of the UK economy may well justify further easing from the Bank of England if the economy continues to stagnate.
