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Investors bet global central banks will be forced to delay rate cuts

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Investors bet global central banks will be forced to delay rate cuts

Investors are pushing back their expectations of interest rate cuts around the world, as the US Federal Reserve’s battle with price pressures complicates other central banks’ loosening plans.

As the US reported the latest in a string of poor inflation figures, markets reined in their forecasts for rate cuts by the European Central Bank and the Bank of England, as well as by the Fed itself.

“The Fed’s inflation problems have a global dimension and other central banks cannot ignore them,” said James Knightley, chief international economist at ING in New York. “In particular, if the Fed can’t cut rates soon it could stoke up dollar strength, which causes stress for the European economy and constrains other central banks’ ability to cut rates.”

He added: “Plus there is a worry that what is happening on inflation in the US could surface in Europe as well.” 

Senior officials at the ECB and BoE argue they are not confronting the same inflation problems as the US, implying they have more scope to cut rates earlier.

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But shifts in the futures market indicate the global impact of the persistent US inflation problem.

Traders now expect the ECB to cut rates by an average of about 0.7 percentage points this year starting at its next policy meeting on June 6, while two weeks ago they expected cumulative cuts of 0.88 points.

At the beginning of the year, when US inflation appeared on a firmer downward path, they expected cuts of 1.63 points.

Markets now anticipate BoE cuts of 0.44 percentage points this year compared with 0.56 points two weeks ago and 1.72 points at the start of the year.

The backdrop for the shift has been the market’s reduced expectations for the Fed, which is set to keep rates at their 23-year-high at its meeting next week. While at the start of the year investors had expected as many as six quarter-point cuts, this year, they now expect one or two.

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Line chart of Rate expectations in 2024 (%) showing Markets expect one or two rate cuts from the Fed and BoE this year, and three from the ECB

The US and its European counterparts have diverged in the past. But if other regions cut rates more aggressively than the Fed, they risk harming their own economies because of the impact on exchange rates, import costs and inflation.

“There’s a good macro case for divergence, but ultimately there’s a limit on how far it can go,” said Nathan Sheets, chief economist at US lender Citi. He added that it was “more challenging” for the ECB to “cut aggressively in an environment where the Fed is waiting”.

Fed chair Jay Powell conceded this month that US inflation was “taking longer than expected” to hit its target, signalling that borrowing costs would need to stay high for longer than previously thought.

In figures on Friday, the Fed’s preferred inflation metric came in higher than expected at 2.7 per cent for the year to March, and a minority of traders are now even betting on Fed rate rises in the next 12 months.

Marcelo Carvalho, global head of economics at BNP Paribas, said the ECB was neither “Fed-dependent” nor “Fed-insensitive”.

Despite the market’s expectations that high US borrowing costs will limit their freedom of manoeuvre, top European central bankers insist their less serious inflation problem requires a different response.

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Line chart of Inflation rates (annual % change) showing Price pressures have fallen sharply across advanced economies

“It is a different kind of animal we are trying to tame,” ECB president Christine Lagarde said this month in Washington.

She said the “roots and drivers” of the two regions’ price surges were different — with Europe affected more by energy costs and the US by big fiscal deficits.

BoE governor Andrew Bailey has also argued that European inflation dynamics were “somewhat different” from the US.

Top officials from the ECB and BoE have signalled rates will still be cut this summer, despite the inflation data that has led investors to price in the first Fed rate reduction in November.

The shift is a marked contrast to earlier this year when the Fed was seen as leading the way down.

“The ECB and BoE are operating in a much weaker growth environment, so I suspect they will have no compunctions about cutting rates earlier,” said Mahmood Pradhan, head of global macroeconomics at Amundi Asset Management.

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But ECB policymakers have given divergent indications on how big a rate gap with the Fed they can tolerate.

Banque de France governor François Villeroy de Galhau told Les Echos that he expects continued cutting “at a pragmatic pace” after June. However, Austria’s central bank head Robert Holzmann warned: “I would find it difficult if we move too far away from the Fed.”

The euro has fallen 3 per cent against the dollar since the start of the year to just above $1.07, but investors have increased bets it could drop to parity with the US currency.

Such a fall would add about 0.3 percentage points to eurozone inflation over the next year, according to recent ECB research. The bank’s vice-president, Luis de Guindos, said this week it would “need to take the impact of exchange rate movements into account”.

The far-reaching impact of US policy is already highly visible in Japan, where investors are increasing bets that the Bank of Japan will need to keep raising borrowing costs as a weaker yen fuels inflation. The yen has dropped to 34-year lows against the dollar, pushing up the price of imported goods.

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But some EU policymakers argue that if a more hawkish Fed leads to tighter global financial conditions, it could bolster the case for easing in the eurozone and elsewhere.

“A tightening in the US has a negative impact on inflation and output in the eurozone,” Italy’s central bank boss Fabio Panetta said on Thursday, adding that this was “likely to reinforce the case for a rate cut rather than weakening it”.

Tighter US policy also affects global bond markets, with Germany’s 10-year Bunds often mirroring movements by the 10-year US Treasury.

BNP Paribas estimates that if European bond yields were driven half a percentage point higher by the fallout from US markets, it would require an extra 0.2 percentage points of rate cuts by the ECB to offset the impact of tighter financial conditions. Similarly, it would require 0.13 points of extra cuts by the BoE.

Tomasz Wieladek at T Rowe Price in London argued that the ECB and BoE “need to actively lean against this tightening in global financial conditions to bring their domestic financial conditions more in line with the fundamentals in their own economies”.

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Additional reporting by George Steer in London

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Eurovision’s unity message tested by backlash over Israel

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Eurovision’s unity message tested by backlash over Israel

Eurovision organisers are braced for thousands of pro-Palestinian protesters to flood the Swedish city of Malmö this weekend to protest against Israel’s participation in the song contest.

This year will be the most politically charged event in its history after Israel’s contestant Eden Golan qualified for Saturday’s final.

The broadcasting union that runs the contest maintains Eurovision is “a unifying force, bringing together nations and cultures through the power of music”. But while the annual party often carries an undertone of geopolitics — and has included Israel for half a century — Israel’s involvement this year has increased tensions amid the country’s offensive in Gaza.

Heavily armed police have been deployed to monitor the pro-Palestinian protests in the Eurovision Village, which serves the 100,000 fans expected to descend on Sweden’s third-largest city for the event.

On Thursday, ahead of Golan’s semi-final performance, thousands of pro-Palestinian protesters — including climate activist Greta Thunberg — staged demonstrations in the city. Golan, who was booed by audience members during dress rehearsals, said she was focused on “giving the best performance”.

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Israel’s Prime Minister Benjamin Netanyahu said in a statement that the singer had “already succeeded . . . you face a wave of antisemitism while standing and representing the State of Israel with respect”.

The tensions have already coloured the competition. Ireland’s contestant, nonbinary “goth gremlin” Bambie Thug who has already qualified for the final, said on Instagram they had been asked to remove pro-Palestinian body paint from their costume. The writing in a medieval script had included the words “Free Palestine” and “ceasefire”.

Ireland’s Bambie Thug performing at the Eurovision semi-final on Tuesday © Jens Büttner/dpa

The European Broadcasting Union, which runs the event, has said it will bar flags and symbols apart from those of participating countries and the LGBT+ community.

Bambie Thug added in the post: “My heart and prayers are with the people of Palestine . . . I am anti-war, anti-occupation, anti-oppression and anti-killing of innocent civilians and children!!”

Hundreds of artists in each of the five Nordic countries including Sweden signed separate petitions earlier this year urging Eurovision to ban Israel from the competition, while many of the 26 artists performing in Malmö have faced social media abuse for taking part alongside the Israeli act.

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Britain’s Eurovision artist Olly Alexander was among those who signed a letter in response to calls for a boycott, arguing instead for the “unifying power of music”.

Israel’s national security council urged its citizens not to travel to Malmö, calling it “an anti-Israel protest hub”. Israeli media reported that the Shin Bet security service advised Golan not to leave her hotel room for anything other than her performances.

She has already changed the words of the song “Hurricane”, initially called “October Rain”, after it was seen to refer to the devastating October 7 attacks by Hamas last year that killed 1,200 people and sparked the war in Gaza. Almost 35,000 Palestinians have been killed in Israel’s retaliatory offensive.

Earlier in the contest, Swedish singer Eric Saade was reprimanded by organisers after he wore a Palestinian keffiyeh scarf around his wrist during a performance.

Jean Philip De Tender, deputy director-general of the EBU, said the organiser acknowledged “the depth of feeling and the strong opinions that this year’s Eurovision Song Contest — set against the backdrop of a terrible war in the Middle East — has provoked”. 

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But De Tender said online abuse and harassment of artists was “unacceptable and totally unfair, given the artists have no role” in deciding which broadcasters take part.

Eric Saade performing his song during the Eurovision semi-final
Swedish singer Eric Saade at the Eurovision semi-final © Martin Meissner/AP

The EBU represents Europe’s broadcasters, including Israeli’s Kan, a member since 1957 and a participant in the song contest since 1973.

Eurovision is the latest cultural event to face controversy over the inclusion of Israel, with similar calls for a boycott at the Venice Biennale late last year and clashes over other film and artistic events in Europe.

The singing competition, which is broadcast to more than 200mn people worldwide, maintains it is “non-political” but is no stranger to being used for political motives. Pacts between groups of similarly minded or geographically close nations often ensure that their acts progress, while rivals are handed “nul points”.

Russia, a former participant, was banned a day after its full-scale invasion of Ukraine in 2022. Ukraine won the contest the following year, an outcome seen as an outpouring of support for the war-torn nation rather than the quality of its musical offering. Another political flashpoint was the conflict between Armenia and Azerbaijan.

In 2009, Georgia tried to submit a song “We Don’t Wanna Put In”, widely interpreted as a criticism of Russian President Vladimir Putin. Organisers rejected the song.

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After Israel was included in the 1970s, Arabic broadcasters refused to show Israeli artists and threatened not to show the contest at all in years when it was hosted by the Jewish state. Israel has won several times, including with transgender singer Dana International in 1998.

Dana International performing
Israel’s Dana International won in 1998 © Peter Bischoff/Getty Images

Local dynamics have compounded the pressure this year. Home to one of Sweden’s largest immigrant populations, many of them Muslims, Malmö has suffered from a reputation for antisemitic incidents. That culminated in videos of cars driving around the city celebrating Hamas’s attack on Israel in October, as well as protesters burning an Israeli flag next to Malmö’s synagogue in November.

Tensions have risen further since Swedish police allowed a couple — one of them wrapped in an Israeli flag — to burn a Koran at the weekend. Sweden’s successful bid to join Nato was delayed for more than a year over multiple incidents involving Koran burning by anti-Islam activists.

Malmö officials apologised this week after cleaning away pro-Palestinian graffiti ahead of the competition, saying it was “an unfortunate mistake”.

Protesters marching in Stockholm
Pro-Palestinian protesters holding a rally in Stockholm in February © Fredrik Persson/TT NEWS AGENCY/AFP/Getty Images

The contest’s organisers have also sought to defuse the situation. EBU boss Noel Curran said it was a “competition between public service broadcasters who are members of the EBU. It is not a contest between governments.”

Curran said the EBU had been aware “of the many voices calling to exclude Israel in the same way as we excluded the Russian broadcaster in 2022 “.

But he added: “Comparisons between wars and conflicts are complex and difficult and . . . not ours to make. In the case of Russia, the Russian broadcasters themselves were suspended from the EBU due to their persistent breaches of membership obligations and the violation of public service values.”

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Donald Trump gets Barron’s age wrong in TV interview

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Donald Trump gets Barron’s age wrong in TV interview

Donald Trump got his son’s age wrong during an interview on Thursday, saying that Barron Trump is 17 when he is actually 18.

The former president was speaking to Miami’s Telemundo 51 on May 9 when he was asked a question about his son Barron entering politics. The teen will be a delegate for Florida at the upcoming Republican National Convention in July.

“He’s pretty young, I will say. He’s 17. But if they can do that, I’m all for it,” Trump told Telemundo 51, NBC Universal’s Spanish-language network. However, Barron Trump turned 18 in March.

Newsweek has reached out to Donald Trump for comment via email.

Main image, former President Donald Trump is seen in Massapequa, New York, on March 28, 2024. Inset, Barron Trump is pictured in New York City on July 20, 2022. Donald Trump got his son’s age…


Michael M. Santiago/JNI/Getty ImagesStar Max/GC Images

Barron Trump is the 77-year-old’s fifth child and is the son of his wife Melania Trump.

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His older half-brothers Donald Trump Jr. and Eric Trump—whose mother is the late Czech-American businesswoman and Donald Trump’s first wife, Ivana Trump—will be joining him as delegates for Florida. His half-sister Tiffany Trump will also be a delegate for the state. Her mother is Trump’s second wife, TV star Marla Maples.

The Trumps have largely kept Barron out of the spotlight until now. After the business mogul was elected president in 2016, the couple waited until the end of the school year to move the 10-year-old into the White House, to avoid disrupting his education.

At the time, the Republican politician said Barron found the move from New York to Washington, D.C., “a little scary,” but that his son is “strong and smart and he gets it.”

Slovenian native Melania Trump has reportedly raised her son to be bilingual, and is said to be very protective of Barron. The high-schooler will be graduating from Oxbridge Academy in Palm Beach, Florida, on May 17, with Donald Trump asking to pause his New York criminal trial to attend the ceremony.

The real estate tycoon is facing 34 felony charges of falsifying business documents, allegedly to conceal “hush money” payments to Stormy Daniels ahead of the 2016 general election. The adult film actress said that she and Trump had a one-night stand in 2006. The Apprentice star has denied the claim and charges against him.

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Although presiding Judge Juan Merchan has granted Trump permission to attend his son’s graduation, the issue initially sparked outrage among MAGA supporters. Trump previously suggested he was banned from attending his son’s graduation ceremony, calling Merchan “seriously conflicted and corrupt.”

However, Merchan said Trump is fine to attend the ceremony, as long as the trial remained on schedule, later confirming it would “not be a problem.”

Trump, who is the presumptive 2024 Republican presidential candidate, will also reportedly deliver the key-note speech at the Minnesota Republican Party’s annual Lincoln Reagan Dinner on the same date.

Update 05/10/24 4:10 a.m. ET: This article has been updated to include further information on Barron Trump and Donald Trump’s New York criminal trial.