TheChek News Flow

Famed fixed-income investor warns that Republican’s proposed tax cuts would exacerbate rising US deficits

A Donald Trump victory in the US presidential election would be “more bearish” and “disruptive” for the bond markets than the re-election of Joe Biden, according to Bill Gross, the longtime fixed-income investor.

Trump’s return to the White House would exacerbate the burgeoning US deficits that have soured him on the market that earned him the “bond king” sobriquet when he was running asset manager Pimco, Gross told the Financial Times.

“Trump is the more bearish of the candidates simply because his programmes advocate continued tax cuts and more expensive things,” Gross said, although he noted that Biden’s presidency has also been responsible for trillions of dollars of deficit spending.

“Trump’s election would be more disruptive.”

Gross’s comments come with less than six months to go until November’s US presidential election, and just days before a jury in Manhattan is expected to begin deliberations in the “hush money” case in which Trump could become the first former US president to be convicted of a crime.

Trump, a Republican, is leading Biden, the Democratic incumbent, in most national opinion polls as well as several recent surveys of voters in the key swing states that are likely to decide the election. He has also racked up high-profile endorsements in recent days, including from his former opponent Nikki Haley and billionaire GOP donor Stephen Schwarzman.

But Gross’s comments undercut one of Trump’s central arguments on the campaign trail: that he would be a better steward of the US economy and financial markets than Biden.

One of Trump’s key economic plans is a pledge to make his 2017 tax cuts permanent, a move that the Committee for a Responsible Budget, a think-tank, expects to cost $4tn over the next decade.

In an interview that ranged from his current market picks to the origins of his rare stamp collection, Gross elaborated on what he has learned while compiling 40 years of his monthly investment outlooks into a new book.

The burgeoning US deficit has turned Gross off the bond strategy that made him famous and led him to declare in his most recent outlook that “total return is dead”. The US fiscal deficit hit 8.8 per cent of GDP last year — more than double the 4.1 per cent deficit figure recorded for 2022.

“It’s the deficit that is the culprit; a $2tn [annual] increase in supply . . . is going to put some pressure on the market,” he said.

Instead, Gross said, he has been putting his fixed-income allocation into a closed-end fund that invests in preferred securities, contingent capital and up to 20 per cent private credit, while using some leverage to boost returns.

“It’s certainly more attractive for an investor that doesn’t need a lot of liquidity.”

Gross is also relatively pessimistic about US equity markets, warning that investors “need to temper their expectations” rather than expect an indefinite repeat of last year’s 24 per cent return for the S&P 500.

“Over time the markets should mean revert. To me, that means prices going up less than they have.”

“If people are expecting 10 or 15 per cent, [they] are going to be working with slimmer budgets.”

Gross, who still spends five or six hours a day watching the markets on his personal Bloomberg terminal, also has chunky investments in tobacco stocks and securities known as master limited partnerships, a tax- advantaged way of funding pipelines and other companies.

In both cases, he is seeking to profit from corners of the market that others avoid. Many investors shun tobacco for its health impact, while MLPs lose some or all of their tax benefits when held in mutual funds and retirement vehicles.

Addressing property taxes that favour owner-occupation would be more productive

For every complex problem, quipped the American satirist HL Mencken, there is an answer that is neat, plausible and wrong. There could be no better verdict on rent controls as a solution to the problems of Britain’s private rented sector.

Too bad, then, that Labour politicians are sending conflicting signals on the issue as the election nears. While the official Labour line is that rent controls are not party policy, shadow chancellor Rachel Reeves recently declared that she could see a case for controlling rents in local areas even though she did not favour a “blanket approach”.

Her comment came as the party attempted to distance itself from a commissioned report recommending that rent controls be pegged to the lower of local wage growth or the increase in the consumer price index. Meanwhile, Sadiq Khan, London’s Labour mayor, has in the past asked for powers to freeze rents in the UK capital.

Concern for those at the bottom of the housing market is understandable. In the 12 months to April, private rents in the UK increased by 8.9 per cent, way above consumer price inflation at 2.3 per cent. Financial support for those struggling with spiralling rents has been progressively eroded while shrinkage in social housing since the council house sell-off in the Thatcherite 1980s has not been reversed.

Yet the history of rent control, from its introduction during the first world war to its shelving in 1989, is an object lesson in the law of unintended consequences.

The combination of inflation and controlled rents after 1945 meant that residential landlords’ real income declined relentlessly. This removed their incentive to invest in lettable new housing or spend money on the upkeep of existing property. 

Tenants could not move for fear of forfeiting below-market rents and, potentially, security of tenure. This had adverse consequences for labour market mobility and led to a wasteful use of the housing stock as downsizing in old age incorporated a severe financial penalty.

The wreck of the private rented sector reached its apogee in the 1960s and 1970s with the great wave of gentrification in Britain’s inner cities. This was sometimes portrayed in the media as a benign process whereby enterprising young professionals moved into broken down neighbourhoods and turned them into salubrious, safer places.

In reality, gentrification was all about financial arbitrage. In an investigation published in The Times in 1973, I showed how two little-known property dealers with a private business empire of about 500 companies had bought up great swaths of Islington, Camden Town, Fulham and other parts of inner London. What they and other speculators were doing was exploiting the difference between the low market value of properties with protected sitting tenants and the much higher value of the properties with vacant possession. 

The speculators employed “winklers”, or front men, to induce tenants to vacate, by fair means or foul. This spread fear and distress among tenants while disrupting communities. The furore that followed these revelations prompted Richard Crossman, the Labour minister whose 1965 Rent Act sought to refine the rent control system, to declare that the act had failed to protect tenants.

By the time rents were deregulated in 1989, the private rented sector’s share of the housing stock had fallen to a tenth, down from nine-tenths in 1915.

The lesson here is that rent controls, with their perverse incentives, are a distraction from the reality that the housing affordability crisis stems chiefly from sky-high land prices. Oxford university’s John Muellbauer has found that more than 70 per cent of the value of homes lies in the value of the land.

The more fruitful avenue for Labour would thus be to address the current mish-mash of property taxes that strongly favour owner-occupation against renting. Cue the OECD’s recommendation, backed by Muellbauer, to shift from transaction taxes on property to annual taxes on land value, with appropriate deferral for cash-poor households.

As well as broadening the (currently stretched) tax base this has the potential to enhance labour mobility, reduce regional inequality, secure a bigger share of windfall planning gains for the public and curb property-based credit booms that crowd out more productive investments. It should be calibrated to encourage greening of the housing stock.  

Previous attempts to put land value tax on to the agenda have stalled in the face of vociferous opposition from landed interests. Still difficult, no doubt, for the Tories. But why should this scare resurgent Labour, with the wind in its sails? The prizes are many and rich.

The 37-year-old World No. 1 has yet to win a single tournament this year, but with uncertainty plaguing his rivals, he remains the favorite.

PARIS—Novak Djokovic spent his 37th birthday this week back on a clay court, celebrating a victory and being presented with a chocolate cake. Just days from the start of the French Open, the 24-time major champion was in good spirits, pacing around to share his dessert with the ball kids.

The surprising part was where the scene took place. Djokovic hadn’t yet traveled to Paris, where Roland-Garros kicked off on Sunday. He was at a fourth-tier tournament in Geneva that he had never played even a single time.

But in this strangely fitful season, Djokovic was just desperate for competitive matches.

Until last week, he had only taken the court in a tournament 17 times this year as losses piled up at a higher clip than usual. In fact, nearly halfway through the year, Djokovic has won exactly zero tournaments—despite looking untouchable after his victory at the 2023 U.S. Open. His run in Australia in January ended at the semifinal stage with a four-set loss to world No. 2 Jannik Sinner. Then he was knocked off the hard courts of the Miami Open by No. 123 Luca Nardi. And since then, Djokovic has stumbled through his clay-court campaign in fits and starts: a semifinal defeat against Casper Ruud in Monte-Carlo, a round-of-32 exit from the Italian Open.

“I just wasn’t able to find any kind of good feelings on the court, to be honest, with striking the ball,” he said after losing 2-6, 3-6 to Alejandro Tabilo in Rome. “I was completely off.”

That tournament was made even weirder by a bizarre incident in which a fan accidentally dropped a metal water bottle on Djokovic’s head while he was signing autographs. Though he seemed well enough the next day, showing up to the club in a bicycle helmet, he reported feeling nausea and dizziness right after the blow.

Though he reported no lingering effects, Djokovic still felt rusty and went to Geneva in the hope of finding some rhythm. There, he rattled off two quick wins before losing in the semifinal, which allowed him to set up in France in plenty of time. It wasn’t exactly how he had mapped out his spring, but no player on tour is more deliberate with how he spends his energy. Everything is designed for him to peak at the majors.

“I always strategically had a long-term plan in my head to play as long as possible so I can give my career a better chance to win more titles and break records,” Djokovic said. “You know, I have arguably had the better part of my career post-30 than before 30.”

Djokovic has a point. Twelve of his 24 Grand Slam titles have come since he turned 30. It’s the post-37 career that has begun to raise some questions.

Djokovic’s dip in form is just one factor contributing to this French Open men’s draw being the most open it’s been in years. For one, the twilight of 14-time champion Rafael Nadal’s career means that one of the surest things in 21st century sports is now a long shot. Sinner also arrived in Paris in less than perfect shape after dealing with a hip injury, while No. 3 Carlos Alcaraz has struggled to rediscover the kind of form that propelled him to a Wimbledon title last summer.

And yet, Djokovic remains the betting favorite to add a third title here in the space of four years to his trophy cabinet.

“It’s a crazy men’s tournament because there’s so much unpredictability at this time,” said Martina Navratilova, a two-time champion at Roland-Garros and analyst for the Tennis Channel. “It’s been Novak against the field in all the majors other than the French Open. But now that Rafa is obviously not playing his best tennis, he’s the favorite even on the clay.”

The women’s tournament is more clear-cut. World No. 1 Iga Swiatek, who has lifted the trophy in three of the past four editions here, once again landed in Paris head and shoulders above the rest on this surface. She won both of her high-profile clay-court tournaments in Madrid and Rome before heading to Roland-Garros, having beaten world No. 2 Aryna Sabalenka in both finals.

“Right now she looks pretty unbeatable,” Navratilova said. “She is beatable, but it’s going to take a monumental effort.”

But while the women’s No. 1 is in full swing, her counterpart in the men’s game knows just how much still has to happen to dominate the French Open again.

“Everything needs to be better in order for me to have at least a chance to win it,” Djokovic said.

Mary-Kate and Ashley Olsen, the child actresses-turned designers, have hired Goldman Sachs to find an investor willing to finance the growth of their high-end fashion brand The Row, industry sources told Miss Tweed.

The twin sisters rose to fame in the 1980s with the popular TV sitcom Full House in which they started playing when they were toddlers. Like Drew Barrymore who featured in Steven Spielberg’s E.T. and Shirley Temple who was a hugely popular child actress in the 1930s, Mary-Kate and Ashley Olsen were for many years the ultimate children sweethearts of America’s entertainment industry. They got into fashion at a young age and founded The Row in 2006 when they were 20. When they won the Womenswear Designer of the Year award from the Council of Fashion Designers of America (CFDA) in 2012, the two sisters officially left show business to focus on their career in fashion.

The twins, now aged 37, have built The Row into a highly desirable brand, known for its timeless designs and top-quality materials. The New York-based label is said to be profitable and generate turnover of around $250 million, several industry sources say. Some private equity firms have already been looking at the company’s books. One of the parties potentially interested is Téthys, the secretive holding company of the Bettencourt-Meyers family, the largest shareholder of French cosmetics giant L’Oreal. The Row and Téthys did not reply to requests for comment. Goldman Sachs declined to comment.

The Row – whose name comes from Savile Row, London’s chic tailoring strip – has become the go-to brand for the affluent and sophisticated fashion-conscious. Over the years, it has established itself as a credible American rival to Hermès in terms of market positioning, design and price point. One of its best-sellers is the no-logo Margaux bag selling for €6,340. Adopted by celebrities such as Kendall Jenner, it rivals Hermès’ Birkin in terms of cachet, some fashion experts say. The brand’s flat shoes costing $1,000 also sell well. Many of The Row’s bags and shoes are described as “sold out” on the brand’s website.

“The Row is the most desirable American brand, it’s at the top of the pile,” explains Euan Rellie, co-founder and managing partner of investment banking firm BDA Partners. “The term ‘quiet luxury’ applies to it in every way with the single gold chain as the identifier. The style is very minimalist with very high-end fabrics and an obsession with tailoring.” Now is a good time to sell a business, Rellie believes. “We are in an improving market. We’ve had a tough 18 months but now the sun is coming out even though interest rates have not come down yet.”

When The Row presented its collection during Paris Fashion Week in early March, viewers were asked to not take photos or videos, in contrast with every other brand that expects showgoers to advertise and publish photos and videos on their social media accounts. At The Row’s show, a notebook and pencil was provided on every seat to record thoughts and make sketches – like fashion critics, wholesale buyers and customers used to do before the digital age. The Row wished to make the point that luxury was also about living in the moment and being physically present at an event, fashion veterans said at the time. Photos of the show were published only a few days later – which never happens in a world in which images are instantly available and spread around the world in seconds thanks to smartphones.

The Olsen sisters are said to be very discreet. They rarely give interviews and try to stay below the celebrity radar as much as possible. Four years ago, Mary-Kate went through a bruising divorce from Olivier Sarkozy, the half-brother of former French president Nicolas Sarkozy. The news was covered by many celebrity and fashion magazines who offered their readers various explanations about why the couple split up.

The sisters may want to stay private but The Row has courted controversy on many accounts in the past. It has been accused by employees of hiring and promoting mainly white managers. Some of its staff have taken legal action on that point. The twins also ignore pressure from powerful animal rights associations like Peta, publicly wearing fur whenever they like. “The Olsen sisters break all the rules,” Rellie said.

In 2017, the Olsens had to pay $140,000 to a class action of 185 interns who complained about not being paid and working in harsh conditions.

During the pandemic, The Row was criticized for the brutal way in which it sacked around half of its staff. The job cut came on the heels of Barneys New York’s bankruptcy in 2019. Court filings from the bankruptcy revealed that Barneys owed The Row $3.7 million, making the brand the department store’s second-biggest creditor.

The two sisters have launched two other labels, Elizabeth and James and Olsenboye. They appear to be no longer active.

Industry sources say the Olsen sisters are keen to find an investment partner who will buy a minority stake and they would like to spend the funds on hiring talent and investing in new boutiques. The Row has only three stores, albeit in prestigious locations: Los Angeles’ Melrose Place, New York’s Upper East Side and London’s Carlos Place.

The Row has been trying to raise funds for more than a year now, industry sources say. It’s a rare asset but it has one major weakness: governance. The two sisters insist on controlling everything. That’s why they’ve been through several designers and CEOs in the past 15 years. “When they hire someone, they promise a post which the person eventually realizes he or she is actually not allowed to fulfill,” one former senior manager at The Row told Miss Tweed. “The sisters have amazing taste and they have created an amazing brand, but history shows that they don’t know how to manage people.”

Luckily, the two sisters get along very well. “They understand each other without speaking with one another,” the former manager said.

Today, the Olsen sisters run the company. Mary-Kate looks after design and Ashley acts as the CEO. The Row has been the training ground for many designers who now work for big brands such as Dior. Hermès’ current ready-to-wear creative director Nadège Vanhee Cybulski was The Row’s women’s design director before joining the French luxury brand in 2014.

“They’ve been running this company for a long time now,” said one financial source who is close to the Olsen sisters. “I think there is a weariness on the sister’s (Mary-Kate) part at this point. With all the retail turmoil, Saks’ credit situation, Matches bankruptcy and Net-a-Porter’s poor financial situation, I sense that they’re both just tired of the pressure of all the decisions they have to make, and the risks they have to take on inventory and production. It’s all a lot of pressure that doesn’t let up.”

It's not the first time The Row is opening up its shareholder capital. In 2013, the Olsen sisters sold a 20 percent stake to a group of private investors, who included billionaire Byron Trott, founder of the merchant bank BDT & Company. Last year, his firm merged with MSD, an investment company that manages funds on behalf of Dell founder Michael Dell and his family and friends. The new entity is called BDT & MSD. A source close to the bank confirmed that BDT & MSD was a shareholder in The Row as well as in Tory Burch, another fashion business that has been trying to find investors for some time, as Miss Tweed reported earlier this month.

Back in 2013, the deal with BDT & Company valued The Row at $100 million even though it was making around $9 million in revenue, one source with knowledge of the matter said. “Some people are ready to pay a lot of money to sit alongside celebrities at board meetings,” the source said. It is expected that Byron Trott and other investors will want to sell part or all of their stake – depending on the price – if and when a deal is agreed.

The Row is likely to attract more interest from private equity firms than from big luxury groups such as LVMH, Kering or Zegna Group, banking sources say. The Olsen sisters do not like being told what to do. Few luxury groups and investors will feel comfortable with that no matter how desirable The Row is as a brand.

A bold bet on rising rates lifted a small Massachusetts fund near the top of the performance rankings

Plymouth County is known for Pilgrims, cranberries—and a top-performing pension fund run by a 65-year-old former schoolteacher.

After a decade of mostly ho-hum performance, the $1.4 billion Plymouth County Retirement Association ranked in the top 10% of U.S. pensions over the past three years. Key to that success was an early—and prescient—bet that interest rates would rise. That buoyed the fund through big chunks of the past two years, when climbing rates hammered both stocks and bonds.

Now markets of all kinds have posted a six-month rally, stocks are hitting records and Plymouth risks falling behind again. But Peter Manning, the fund’s director of investments, is sticking to his guns. The hope that rates will fall soon is misplaced, he said. Another downturn could be coming for Wall Street.

And so, to Manning, the best way to enlarge the pension long term is by avoiding big losses, rather than chasing high returns.

“It ain’t about what you make. It’s about what you keep,” he said.

Beating the big guys

The fund, which manages savings for the county’s firefighters, bus drivers and custodians, delivered average annual net returns of 5.7% in the three years ending Dec. 31. That put it ahead of 92% of pensions nationally. The median U.S. public retirement fund returned 3.7% over the same period, according to Investment Metrics, a portfolio analysis provider.

Plymouth County surpassed bigger peers by slashing exposure to Treasurys and public stocks before they tanked in 2022. The fund then reinvested the money in infrastructure, private equity and inflation-protected debt.

While many other public plans have followed suit, the trades were also unusually quick for pension funds, which often change investments incrementally rather than in bold strokes.

“A lot of our clients made moves on the margin,” said Daniel Dynan, a managing principal at Meketa Investment Group, Plymouth County’s investment consultant. “The difference in Plymouth is the magnitude of the change.”

An unlikely trendsetter

With only 10,500 members, the fund is an unlikely trendsetter. U.S. public pensions guarantee retirement and benefit payments to 34 million members nationally, according to data from the Urban Institute, a nonprofit think tank. Plymouth County, which lies south of Boston, encompasses mostly middle-class suburbs, but also some wealthy enclaves and gritty urban areas. It is split between Democratic and Republican voters.

A decade ago, Plymouth County had only about half of the money it needed to make expected payments for its retirees. An accounting change in 2012 drastically widened shortfalls for most public pensions across the country.

At the same time, the board overseeing the fund, which had spent years relying solely on an outside consultant, was dissatisfied with its investment performance. The approach resembled the classic mix of 60% stocks and 40% bonds popular with ordinary investors.

“We were doing what everyone else was doing, running a 60-40 portfolio and hoping for the best,” said Tom O’Brien, Plymouth County’s treasurer and chairman of the pension board.

From teacher to investor

The county hired Manning to advise the board on investment strategy in 2012. He had never managed a pension fund before.

“I was a schoolteacher [in the 1980s] in a suburb of Boston and one day, after staring at 20 vacuous stares, I had a talk with my Uncle Bill, a currency trader,” Manning said.

He spent two decades trading commodity futures at his uncle’s brokerage in Boston and stocks at brokerages in Chicago. Then he became a financial adviser to wealthy individuals and families at Merrill Lynch on Cape Cod.

The job at Plymouth County involved a small pay cut, but offered the opportunity to run a nine-figure portfolio for public employees. He got a taste of how painful rising rates could be in May 2013, when comments by Fed Chairman Ben Bernanke sent bond prices tumbling in what became known as the “taper tantrum.”

“We lost $20 million in three trading days and it took us 36 months of clipping coupons to make that back,” Manning said. Coupons are the interest payments bondholders receive.

Initially, Manning and O’Brien focused on boosting alternative investments such as private equity and infrastructure, which made up less than 5% of the fund. They were part of a flock of pension funds seeking alternative investments for higher returns.

Plymouth County hired Meketa as a consultant in 2015, and private-equity and infrastructure investments climbed to nearly 15% by 2020, according to fund financial reports. Returns improved.

“They have a level of comfort being different,” said Dynan.

A contrarian call

Markets were on a tear the following year, lifted by the economy’s reopening from the pandemic. But Manning grew concerned in the summer about inflation. While many on Wall Street were calling price increases transitory, he worried inflation would persist, triggering rate increases and declines in stocks and bonds.

“We were going to conferences and being told that inflation was a paper tiger, or ‘this is not your father’s inflation,’” O’Brien said.

Manning consulted Bob Sydow, a high-yield bond fund manager at Mesirow who manages part of the pension’s money. Like Manning, he has worked on Wall Street since the 1980s.

“The money supply grew 43% over 26 months during Covid,” Sydow said. “I called it ‘free-range’ money and I thought it would generate a lot of inflation.”

From October 2021 to February 2022, Plymouth County pension sold about $80 million of its public stocks, or 6% of the fund’s assets, according to an email viewed by The Wall Street Journal. It shifted into real estate and infrastructure as well as short-term and floating-rate debt that is less sensitive to rising rates than traditional bonds, Manning said.

The fund lost 6.5% in 2022 while the median U.S. pension plan lost 14%. That outperformance has helped it stay ahead of other funds, even after it lagged behind the average in 2023.

Now, inflation remains above the Fed’s targets, and analysts’ forecasts for multiple rate cuts this year seem less certain. Plymouth County is keeping its strategy relatively unchanged, betting that rates will remain steady—or even climb.

Many investors are buying back into bonds because yields are at multiyear highs and they expect cuts by the Fed to trigger a rally. Manning takes a different tack. He thinks rates could stay high far longer than the Wall Street consensus, so he is using infrastructure funds to deliver income rather than bonds.

“Why do you have to own bonds at all in 2024?” Manning said. “It’s a legitimate question.”

Will Eurozone inflation derail the ECB’s rate cut plans?

Market Questions is the FT’s guide to the week ahead

Eurozone inflation has been gliding gently downwards for the past four months. But some analysts think price pressures will pick back up again this month, which could cause the European Central Bank to adopt a more cautious approach to cutting interest rates.

Consumer prices in the single currency bloc are expected to be 2.5 per cent higher in May than they were a year ago, a slight acceleration from 2.4 per cent a month earlier, according to a Barclays forecast of what the data will show when it is released on Thursday.

“Unfavourable base effects in energy will be the primary tailwind for headline inflation, pushing it to accelerate slightly,” said Mark Cus Babic, an economist at Barclays, adding that services inflation could tick up due to last year’s launch of subsidised German train tickets.

The figures come just a week before the ECB is widely expected to start lowering borrowing costs on June 6.

ECB president Christine Lagarde said last week there was “a strong likelihood” of a cut at its next meeting and most analysts believe it would take a massive surge in inflation to delay it. But other policymakers have warned that higher inflation readings will make the central bank less likely to follow up with another cut in July. 

“The ECB will probably deliver a first rate cut at its June 6 meeting but then pause in July, on the back of sticky wages but also services inflation, which we expect to remain elevated on a sequential basis in May, not least due to base effects in Germany,” said Frederik Ducrozet, an economist at Pictet Wealth Management. Martin Arnold

How healthy is China’s manufacturing sector?

Chinese factory data, released on Friday, will shed further light on the trajectory of the world’s second-largest economy after a period of heightened focus on its manufacturing sector.

President Xi Jinping’s government has emphasised the need for “high-quality production”, from electric vehicles to artificial intelligence, at a time when broader economic momentum and business confidence have come under pressure.

The official purchasing managers’ index, a gauge of manufacturing activity, is expected to have edged higher to 50.5 in May, according to economists’ forecasts compiled by Reuters. The index slowed in April to 50.4. A reading above 50 represents expansion compared with the previous month. 

A separate survey from Caixin showed factory activity expanding last month at the fastest pace in 14 months, at a level of 51.4.

Economic data released in mid-May showed that industrial production last month beat forecasts to rise 6.7 per cent year on year, though a real estate slowdown that began in 2021 continued to weigh on the economy. Exports returned to growth in April after a year-on-year decline in March.

Carlos Casanova, senior economist for Asia at UBP, noted recent economic data that “strong manufacturing output likely supported activity in April”, but added that, based on weak retail sales and investment, “the nature of China’s recovery remains lopsided”.

The data will be closely watched in the US, where President Joe Biden this month placed tariffs of 100 per cent on Chinese electric vehicle imports, and in Europe where policymakers have launched a probe into subsidies for the production of the vehicles. Thomas Hale

Will the Fed’s favoured metric show progress on inflation is stalling?

The Federal Reserve’s preferred measure of inflation is expected to show that prices in April rose at the same pace as March, despite a slowdown evident in the consumer price index last month.

The Bureau of Economic Analysis will release on Friday the personal consumption expenditures index data for April. Economists surveyed by Bloomberg forecast a 2.7 per cent year-over-year rise in the index, unchanged from the prior month. The core measure, which strips out the volatile food and energy sectors and is most closely watched by the Fed, is expected to be 2.8 per cent, also unchanged from March.

The PCE data will come in the wake of cooling inflation evident in April’s consumer price inflation figures. While April’s CPI data was still far above the Fed’s 2 per cent inflation target, the slowdown — after months of stronger-than-expected numbers — was a welcome relief for the market.

The PCE data will not reflect the same improvement, if the forecasts prove correct. But analysts argue that unchanged PCE data probably will not change the optimistic tone that has infused markets since the CPI data.

“Despite core PCE’s status as the Fed’s preferred measure of inflation, we’re less convinced it will change the market’s prevailing perception of the pace of consumer price inflation as the second quarter got under way,” said Ian Lyngen, head of US interest rate strategy at BMO Capital Markets. “In short, investors are cautiously optimistic that the Fed’s characterisation of the first quarter as a bump in the road towards cooling inflation is, in fact, an accurate read.” Kate Duguid

Move comes as Washington seeks to improve relations with Gulf state

The US is expected lift its ban on the sale of offensive weapons to Saudi Arabia, potentially in the coming weeks, according to US officials.

US President Joe Biden suspended the sale of such armaments to the kingdom three years ago, shortly after he entered the White House, criticising the conduct of the kingdom’s war in Yemen amid concerns about American-made weapons being used in air strikes that killed civilians.

But the decision has been under review after the UN brokered a truce in 2022 that has largely held as Riyadh has sought to extract itself from Yemen’s civil conflict, which it entered nine years ago.

Lifting the ban would be the latest sign of improving ties between the Biden administration and Riyadh.

Washington has already signalled to Saudi Arabia — traditionally one of the biggest buyers of US weaponry — that it was prepared to lift the ban, according to one person familiar with the matter.

The White House declined to comment.

Biden came to office promising to make Saudi Arabia a “pariah” because of his concerns about human rights in the kingdom, notably after the brutal 2018 murder of veteran journalist Jamal Khashoggi by Saudi agents at its consulate in Istanbul.

On the campaign trail in 2019, Biden also accused the Saudis of “murdering children” in an apparent reference to the war in Yemen, in which thousands were killed.

But relations have significantly improved since then, particularly after Russia’s invasion of Ukraine reinforced the belief in Washington that it needed Saudi Arabia’s co-operation on key issues, including energy, and to support US Middle East policies.

Senior US officials said this week that Washington and Riyadh were close to finalising a series of bilateral deals, including a defence pact and US co-operation on the kingdom’s nascent civilian nuclear programme.

The agreements would be part of a broader US-brokered compact that would lead to Saudi Arabia normalising ties with Israel, but it is dependent on the Jewish state agreeing to take steps towards the establishment of a Palestinian state.

Lifting the ban on offensive weapons sales was not directly tied to these talks, US officials said.

Saudi Arabia led an Arab coalition that entered Yemen’s civil war in 2015 to fight Iranian-backed Houthis after the rebels ousted the government and seized control of Sana’a, the capital, as well as most of the country’s populous north.

The kingdom, which shares a border with Yemen, drew widespread criticism for its conduct in the conflict. But in recent years, Riyadh has engaged in peace talks with the Houthis as Saudi Crown Prince Mohammed bin Salman has focused on his ambitious domestic development plans and on de-escalating tensions with regional foes, including Iran.

Progress on the Yemen talks stalled after Hamas’s October 7 attack and Israel’s retaliatory offensive against the Palestinian militant group in Gaza. The Houthis, which are part of Iran’s so-called “axis of resistance”, have launched missiles at Israel and attacked shipping in the Red Sea, disrupting flows through one of the world’s key maritime trade routes.

Washington designated the rebels as a global terrorist group in January, reversing the decision it took in 2021 to delist the movement.

But Saudi Arabia has continued to engage with a UN-mediated Yemeni peace process. In a sign that it did not want to escalate tensions with the Houthis, Riyadh did not join a US-led maritime task force designed to counter their attacks on shipping.

In Washington, the regional hostilities triggered by the Israel-Hamas war have reinforced the Biden administration’s belief that it needs Saudi Arabia as a key regional partner.

Ali Shihabi, a Saudi commentator close to the royal court, said lifting the ban on offensive weapons sales “would be an important step in continuing to rebuild the relationship between the US and Saudi Arabia”.

“And lifting the ban has become more important given the way the Houthis have behaved since October 7,” he added.

Far-right and far-left parties set to become largest forces in parliament after June 9 vote

When Belgians go to the polls on June 9, many of them will be voting for a party that wants to break their country apart.

Fringe parties are gaining traction across Europe and in Belgium — a country divided along ethnic and linguistic lines — voters are set to elevate both the extreme right and the far left as the two largest parties in the federal parliament.

“The explanation could be similar for both: it’s populism,” said Audrey Vandeleene of Ghent University. “You reject established parties and you look for alternatives.”

Belgium’s far-right Vlaams Belang (VB) party, which openly advocates for the secession of Flanders — the more affluent, Dutch-speaking region in the country’s north — is set to win the most seats in the highly-fragmented parliament: 26 out of 150 seats, according to polls.

The second-largest parliamentary faction is likely to be the far-left Workers’ Party (PTB/PVDA) based in Wallonia — the country’s French-speaking southern region — which is forecast to win 20 seats.

The formerly fringe parties coming out on top is likely to further complicate Belgium’s notoriously difficult government formation, which is usually comprised of a handful or more parties.

In 2011, the country broke the world record for the longest time without a government in peacetime. The current seven-party coalition under Prime Minister Alexander De Croo took office after almost 500 days of negotiations. “For the extreme right in Belgium, one of the main points is to put the country in two, which would lead to chaos,” De Croo told the Financial Times.

While parties at a federal level are likely to exclude VB from any power-sharing agreement, the secessionist party could become part of the regional government in Flanders. On June 9, Belgian voters will elect lawmakers for the federal and the regional parliaments. VB is for the first time set to outperform the less radical nationalist N-VA party, which currently governs Flanders.

N-VA has not ruled out forming a coalition with VB at a regional level, despite the latter party growing out of the extreme-right Vlaams Blok, which was in effect banned in 2004 for incitement to racism and segregation. VB has capitalised on the discontent among people who do not feel represented by mainstream parties and blames immigration for economic issues such as the rising cost of living.

At a village fair in Vlimmeren, around 60km north-east of Brussels, VB recently set up a stall under the banner “Flanders is ours again”.

Bart Claes, a VB member of the Flemish parliament, said the rural area was “fertile ground” for his party. “People have a feeling, a righteous feeling, that they’re being let down and forgotten by the policymakers.”

Party leader Tom Van Grieken argues that Flanders’ secession from Belgium is not just a “romantic” ideal, but that “it is also a financial thing”, arguing that the northern region should no longer be footing the bill for less wealthy Wallonia.

“Belgium has to change,” said Van Grieken. “The elite in Belgium is very conscious and aware about climate change and the end of the world. A lot of Flemish people are worried about the end of the month.”

Jarno Princen, a 26-year-old dock worker at the port of Antwerp originally from Vlimmeren, said VB was the only party that takes the issue of “illegal immigrants that are coming to Belgium” seriously. He complained about asylum seekers receiving better treatment than Belgians without working. “I find that negative to the other people that work hard and earn less,” he added.

Despite Van Grieken’s push for secession, analysts and even Vlaams Belang voters are sceptical it will ever materialise. The move would trigger a constitutional crisis and throw into question the status of the capital Brussels, which is its own bilingual region within Flanders.

“They are a little bit extreme. When they come into [power] they must calm down,” said Veerle Oosthuizen, a 44-year-old VB voter who works in building renovation.

If Flanders is dominated by right-wing parties, the polar opposite is true of Wallonia, where the Socialist Party (PS) is dominant and its challengers come from the far-left, not the far-right.

At a PS congress on May Day in the city of Charleroi, supporters waved red flags and chanted the international workers’ anthem. “I vote socialist because I come from a socialist background,” said Guillaume Thyrion, a 23-year-old communications student whose family has been working in factories for generations. “It’s the only true workers’ party.”

But that banner has also been taken up by the Workers’ Party, which is one of the few cross-border parties that also campaigns in Flanders, with moderate success.

In Wallonia, the Workers’ Party campaign for a tax on millionaires and an end to austerity measures is gaining traction. It is now polling third at 16 per cent in the French-speaking region, compared with 11 per cent in the last regional election. The party would come second in the federal parliament because of its strong showing in Brussels, where it is also polling at 16 per cent plus the 11 per cent it would gain in Flanders, according to polls.

“People don’t see themselves represented anymore,” said Peter Mertens, general secretary of the Workers’ Party. “There is this huge gap between the political landscape . . . and reality on the factory floors.”

Mertens said that unlike the far right, his party is trying to frame this in a “positive” way. “They’re trying to mobilise people’s anger against other people who are in misery, against the refugees.”

VB’s “dangerous agenda” on independence would fail, Mertens predicted. “It’s no coincidence that this is the place of surrealism,” Mertens said in reference to Belgium’s famous artistic movement. “There is more unity about staying together in this surrealistic Belgium than being apart.”

Didier Caluwaerts, professor at the Free University Brussels (VUB) said the two regions had been historically divided along party lines: “Flanders has always been more conservative, more right-wing than Wallonia.”

With its large industries, Wallonia was Belgium’s “economic powerhouse” until roughly the 1950s, after which investment shifted to Flanders and the francophone region’s industrial base declined, according to Caluwaerts. This “economic legacy” together with high unemployment and lower economic growth were all reasons why the left was stronger in Wallonia, he added.

If VB entered a coalition with N-VA at a regional level, it could have repercussions for the federal government, as other parties would be forced to shun them both, said Paul Magnette, head of the PS. “Working with people who work with the far right is out of the question.

“It’s true there is a general tendency in Europe towards political fragmentation,” said Magnette. “Belgium has always been able to govern itself, whatever happens. We are the example that even when it’s too complicated, we will get there.”

EU support at risk if group keeps key ‘georeturn’ principle in awarding contracts, says Philippe Baptiste

The European Space Agency will have to abandon one of the core principles driving multilateral investment in its space programmes or risk losing EU support, says the head of France’s space agency, CNES.

Philippe Baptiste, who took over at CNES in 2021, said the policy of awarding contracts to countries in proportion to their investments in individual programmes meant Europe would struggle to develop competitive sovereign launch capability in future.

The process, known as georeturn, often compels prime contractors to award contracts by nationality rather than competitiveness.

It has been blamed for delays and budget-busting costs on Europe’s newest heavy-lift rocket, Ariane 6, which is due to fly for the first time this summer — four years later than planned and substantially over budget.

“You don’t know how many warehouses there are for Ariane 6 and how many companies are working all over Europe on the same product,” he said. “This is much too expensive. We have to get rid of that. That is what we are pushing here in France.”

As Europe increased funding for space, it would require a space agency that could implement programmes more efficiently, he said. “Georeturn is poison. Either ESA is able to change, or if it does not change . . . the European Commission at some point will do without,” he added.

ESA’s director-general Josef Aschbacher rejected Baptiste’s criticism.

“With the system we have in place, we have created some of the most successful programmes worldwide,” he told the Financial Times. “Galileo and the science programmes are top of class, despite having to manage 22 member states and georeturn.

“Why would you change a winning horse in a race which is getting faster?”

The clash comes as the ESA prepares proposals for a reform of georeturn, as a result of the decision last year to introduce a competitive procurement process for Europe’s launch requirements.

The decision was driven by Germany’s frustration with the Ariane 6 programme, and has sparked a fierce reaction in France, which sees it as a threat to its decades-long dominance of Europe’s rocket manufacturing.

Several ESA officials said France’s push to end georeturn was no more than an attempt to strengthen the EU’s hold over the agency and by implication France’s influence over programmes.

Founded in 1975, ESA acts as the EU’s procurement agency for space systems, but it is an intergovernmental organisation whose members include non-EU countries such as the UK, Canada and Switzerland. 

EU procurement may be open to competition, said one veteran ESA official, but the final decisions were “just politics . . . So without georeturn, decisions are more influenceable”.

“If you want to deviate from this principle it’s the end of ESA,” said another senior ESA official. “It’s really pointing towards ending ESA as an intergovernmental organisation and letting the EU take over.”

The debate highlights the delicate path Aschbacher has to tread as he attempts to hold together European collaboration on space while introducing greater competition and efficiency into programmes.

Other countries were pushing to “keep ESA as a very strong intergovernmental organisation”, Aschbacher said. “The majority of countries [are] very satisfied with the way it works.”

ESA officials believe the policy can be adapted without sacrificing the principle of guaranteeing a fair return on investment. In essence, the industry will be free to choose its own suppliers, and governments will only then be asked to contribute funding proportionate to the contracts awarded to their industry.

“This is still georeturn but in reverse,” the ESA official said.

The ESA is also expected to reduce the number of programmes to which georeturn applies. The agency will present proposals for reforms in June.

Germany insisted on the competition in launch as a quid pro quo for agreeing to a near €1bn subsidy for Ariane 6 flights between 2027 and 2030. France, Italy and Germany agreed to the injection, which will enable Ariane 6 to compete on price with SpaceX’s reusable heavy-lift Falcon 9 rocket.

Unlike Falcon, Ariane is not reusable, a decision now widely regarded to have rendered the rocket uncompetitive even before it makes its first flight.

Ariane 6 has been designed to be a flexible but expendable heavy-lift rocket that in its most powerful version will be able to carry satellite payloads of up to 20,600kg into space.

How capturing carbon from the air might reshape the green transition

The nascent technology is expensive but its projected cost decline might transform the energy switch

Take a bird’s-eye view of the decarbonisation landscape, and the divergence between the fortunes of the different technologies is striking.

For those relying on smallish equipment that can be made in factories — think solar panels — costs have plummeted and adoption soared. Those that require big, bespoke engineering projects, such as conventional nuclear plants, have suffered delays and cost increases. Wind turbine troubles also suggest that scale works best when what is being scaled up is manufacturing capacity, rather than the size of the product.

Proponents of direct air capture (or DAC) are hoping to harness the magic of the learning curve. This nascent technology sucks CO₂ out of the air and then stores it underground. The world’s largest plant, inaugurated by Climeworks in Iceland, will capture 36,000 tonnes of CO₂ per year — roughly the amount emitted by 4,500 UK households. At an estimated cost of $1,000 per tonne of CO₂ today, it is also eye-poppingly expensive.

Yet unlike large-scale nuclear, DAC plants are modular — made up of lots of boxes with fans and filters. That raises hopes for an entirely different sort of cost curve.

Take the boxes. Spreading their cost over the CO₂ they will capture over their useful life yields a capex cost of $330/tCO2, or a third of the total. As this kit moves from being custom-made to manufactured at scale, however, its price will fall sharply. Add in improvements in energy efficiency and operating costs, and — if DAC really does scale up to the multi-gigatonnes of capacity required by most net zero pathways — its cost may end up in the region of $100-150/tCO2 by 2050.

Of course, 25-year forecasts are not much more than lines on charts. Yet the DAC story looks broadly plausible, and would make it competitive with some of the costlier carbon-abatement options.

For example, one of the (speculative) options for decarbonising long-distance flying relies on making synthetic jet fuel using green hydrogen and then reacting it with CO₂ captured from the air. That is an expensive way round the problem: rough numbers suggest it might cost $220 per tonne of avoided CO₂, twice as much as DAC.

It is not hard to see why airlines might well prefer homegrown decarbonisation options, which create a supply chain they can work with and even perhaps invest in. Current regulation pushes them in that direction too.

But such hard-to-abate sectors would do well to support the scale up of DAC. Its projected cost decline could reduce the growing burden of the energy transition.