The Week Ahead - Ice, Ice Maybe: US Geopolitics Special

I have tremendous respect for both the people of Greenland and the people of Denmark, tremendous respect, but every NATO ally has an obligation to be able to defend their own territory. And the fact is, no nation or group of nations is in any position to be able to secure Greenland other than the United States. And that's the reason I'm seeking immediate negotiations to once again discuss the acquisition of Greenland by the United States. Hello and welcome to the week ahead on the Merupodcast. My name is Dominic Bunning, ahead of G10 FX Strategy at Merup in London, and today is Friday the 23rd of January. Financial markets have been much more focused on geopolitical themes over the last week, with US President Trump's appearance at the World Economic Forum in Davos, and in particular the development surrounding Greenland, as we heard in those earlier comments, which have been central to market gyrations. Alongside expressing a clear dislike for windmills, President Trump offered a slight softening in tone during his speech, and headlines have since suggested a framework for an agreement is coming into place, which has helped to curb some market concerns about a broader risk of move. Equities have rebounded to reflect these signs of stabilization, although have struggled to break new highs in most geographies. More and exchange markets have been moving as well, with the dollar coming under pressure amid signs that the de-dollarisation trade is gaining more traction, even after that slight cooling in geopolitical tensions. Meanwhile, precious metals continue their seeming parabolic rise as investors continue to search for alternative sources of safety. On markets have been a bit more becarmed after an early spike in Japanese bond yields, although fears of fiscal profligacy in Japan and elsewhere have not been fully doused by any stretch. So much to get through this week with delighted to welcome a guest speaker from outside of Nemura's Global Research Department, Samira Fizzili, who heads up our public policy and government affairs team in the US, who will provide us with some views on the latest geopolitical and domestic political developments. We will also speak to Jeremy Schwartz, our senior US economist, who can outline how this is impacting his economic views, and will also preview the upcoming Federal Reserve meeting. Josie Anderson from our European Economics team will give us the perspective from this side of the pond, while we'll also hear from Andrew Tysers down under on the latest developments in Australia and Asia. So with all that ahead, let's get stuck in. Well, we're going to start this week with a slightly different format. We've got three guest speakers all joining me at the same time for a little bit of a round table, a working group, if you will. We've got Samira Fizzili, who's our head of public policy and government affairs in the US. We've got Jeremy Schwartz, our senior US economist, and Josie Anderson, one of our European economists all with us. So there's a lot to discuss in terms of geopolitics as well as US politics. And that's really why we've got Samira here today with us. So Samira, delighted you could join us. I want to start with Trump and the administration's kind of approach to Greenland. It's the thing that's been most topical, I guess. And even though we saw a little bit of a walking back, maybe during Davos and a little bit of a calming of the tensions, I think for a lot of people listening, it's not that clear what really the administration wants to get out of this. What is the end game and maybe even how do we get there? So if you could in some broad brush strokes, just give us your views and what you're hearing in Washington about really the goal here regarding Greenland and maybe the broader Arctic Circle kind of story in general, that would be really helpful. Yeah, thank you, Dominic. And thank you for having me today. I think the administration's approach to Greenland and its motivations are multifaceted. There's a one that I think that's talked about most is Trump wants to expand the map of the US. He's thinking about his legacy, post-presidency. He's talked about Greenland's in his first term. And so I think this is something that he's wanted to pursue. And in his second term, he feels much more emboldened to pursue this. Talking to some people in his administration who are, you know, I think they think there's a national security reason, strategic importance of Greenland as there's Arctic thought. There's the new pathways from Asia and North America. I think they're saying that's going to happen by the 2040s. So, you know, I think that's their kind of more official response. But, you know, I think talking to and speaking with members of Congress, you know, Republican members of Congress, I think there is some confusion as to why Trump is doing this now, why he's pursuing this so aggressively. You know, many of them won't come out publicly and say that somehow. But I think there is sort of a head scratcher for some of them, given that we're in a midterm year here in the US. There's this big focus on domestic issues, affordability is the buzzword of the day. So I do think from Congressional Republicans, there is some frustration and maybe some confusion as to why this is the time to really pursue, you know, this goal of his. So, you know, I think it's multifaceted and somewhat unclear. I think it's important to remember that Trump wants to reframe the European-US relationship. And I think Greenland is a part of that effort for him. You know, I think many observers believe this Greenland situation, followed the typical Trump negotiating track where Trump makes a kind of dramatic announcement, a kind of extreme request. The party's negotiate. They make some concessions that are not quite what President Trump wanted, but enough that he can come back and tout them as wins to the American people. I'll note that I don't think this Greenland situation is 100% over. I would not be surprised if this comes up again. But in the near term, I think that, you know, the threat is somewhat neutralized. The party seemed happy, but I would not be surprised if in a year or two years, you know, these demands come back. Okay. Thank you very much. I mean, I think, a straight answer would always be tricky there, given the administration has come up with, you know, various different rationales and things. Josie, I just wanna jump to you in terms of Europe quickly, because, you know, this impacts Europe quite directly. What have you thought about sort of Europe's response and the ultimate dialing down of the threats? You know, do you think this is the new way forward for Europe? Do you think there's gonna be increased military coordination? Do you think there's kind of a sense that Europe needs to come together on this, and it has some impact there? Yeah, I think in fact, you know, if you're looking at silver linings of this, perhaps Europe coming together more and taking joint action is perhaps one of the benefits because I think European leaders will remain wary, despite the tariff threat being removed for now. And the main result of this whole saga is likely to raise the probability of European dispense fending increasing, you know, compared to already raised commitments, and that's both the national and member state, and joint EU level potentially, because we've got countries like France and Italy that have, you know, tight fiscal limits. And so therefore you might see some joint EU defense spending potentially in order to account for that, for that tight fiscal position of many countries. Okay, interesting. So I mean, I remember we spoke about last year, the idea that Trump was all about make America great again, but there may be almost a collateral impact that has elements that could make Europe great again. I don't know if we're quite there yet, but certainly something to watch. The obvious thing here with Europe was around the potential threat of tariffs regarding Greenland. And that brings us a little bit to tariff more broadly. You know, the Supreme Court is currently, I think, ruling on some of Trump's first round tariffs. Samira, what are you sort of hearing or what sense are you getting in terms of what the Supreme Court might find with these IEP tariffs? Do you think it's likely they'll end up standing? Or does it seem maybe a bit more likely that Supreme Court could rule against Trump in this case? So, you know, with the Supreme Court it's interesting. You know, it's unlike Congress or even other branches of government where you really don't get leaks. It's very hard to, you know, it's not like there's rumblings of things. Usually the decision comes out and that's when most people see it for the first time. But in terms of speaking with legal scholars, speaking with people, you know, who have studied this, it does seem like, and based on the oral arguments, it does seem like the Supreme Court is inclined to rule against Trump. You know, they experience a lot of skepticism that Trump is using this IEPA law to, you know, impose tariffs on so many different countries. You know, I think there was some concern among the justices about what the remedy would be and how kind of messy that remedy could be. But I think the expectation is that they are likely to rule against Trump, because the Trump administration has already laid out, you know, what they're going to do if the tariffs are overruled. They have other authorities ready to go. So I think they're preparing for them to be overruled. And I think most people think they will likely be overruled, but it's really hard to know until you get a decision from the Supreme Court. I mean, if they're, you know, notoriously very closed off, you don't really get leaks, you don't really get, you know, there's this mostly speculation without really any intel. So, but that's what most people are expecting in DC at this point. Sounds right on my alley as an FX strategist speculation without any real, you know, detail behind it. Jeremy, in terms of, you know, the tariffs potentially, therefore, maybe if we go with that base case, there is also what sort of price in on prediction markets, I guess. The tariff season is a tariff of rollback. Does that really change your outlook in terms of inflation or growth or do you just sort of think they'll just get replaced very quickly and then therefore it's a bit of a nothing burger? How are you thinking about it? Yeah, so I think in the medium term we would expect the Trump administration could largely recreate the tariff regime with other authorities that are not AEPA. So, I mean, they have the opportunity to implement across the board tariffs with some time limits on them, but then also increase the kind of section 232, 301 tariffs that Trump relied on more in his first term to kind of end up in a very similar place in terms of the overall tariff regime. You know, I would say one potential bit of fallout from this is if Trump loses the AEPA tool that would make it a little bit more difficult for him to negotiate trade deals like he did in the first year of his term where you saw, you know, he would retaliate for tariff against any kind of potential moves by trade partners, you know, the threats against Europe last summer, where whatever you retaliate against us will raise your tariff rate by even more than that. Which clearly encouraged some trade partners to back down preemptively. You lose that tool to kind of raise a lower tariffs with a tweet. So, I don't think it really changes the growth and inflation outlook, but maybe it changes some of the negotiation postures. So, Josie's point maybe allows Europe to have a bit more of a cohesive response. Yeah, I think it's actually interesting that point, you know, maybe taking a little bit of that pure executive power away from Trump. And it's something we're seeing maybe a bit more broadly, you know, we've spoken about a Supreme Court. We've got this fed case going on, you know, Samir, you mentioned maybe elements of Congress starting to show a little bit more reticence to sort of support Trump as much. Are we getting to this point in the administration now, Samir, where, you know, Trump is going to find it increasingly hard to actually execute what he wants? Are you getting a sense here that maybe it's going into the midterms or other factors, but actually that maybe we're going to start to see some of these sort of institutional guardrails, if you will, become more of a constraint on what Trump wants to do. Yeah, you know, I do think with the Congressional GOP, they are, I think, approaching the threshold for what they're willing to accept, especially with respect to this Greenland situation. You know, I tell you there, you saw a lot more frustration, as I've mentioned before. I do think Trump still has a very strong hold on congressional Republicans. You know, he's, his first year, obviously, it was, I mean, he had unfettered control really of Congress. You know, but I think, now it's slipping slightly. I think there's a condescence that the midterms are coming up, the elections at the end of 2025, you know, did not go well for Republicans. And I think there's a concern that, you know, if Trump is, you know, focused on issues that are not of importance to voters, you know, there could be big losses come this fall for Congressional Republicans. So I think that the hold is slipping slightly. You've seen it in the Senate with, you know, more support for war powers, a war powers act to constrain Trump's military authority. You know, so I do think you'll see cracks. I don't think it'll be dramatic shifts, but I think you'll see things here and there, like even in this search for a new Fed chair and who could get confirmed, one of the senators on Nurtilis from North Carolina, who is retiring, has said that he won't support anybody until this case against current Fed chair Powell is dropped. You know, that's, and he's a key vote on the Senate banking committee and a huge impediment. It would be a huge impediment if he didn't vote in favor of Trump's dominion. So I think you're seeing more cracks. I don't think it's a, you know, full-scale collapse, but I do think there's a few more obstacles popping up that were not there in his first term, but I don't think it's dramatic, but I think it's building. And I do think if we get closer to the midterms and polling is still not, you know, not looking great for Republicans or for Trump, I do think you could start to see more separation and maybe more guardrails. Okay, fantastic. Yeah, I would agree with Samira on that. And I mean, the, you're seeing some signs of pushback. It's not non-existent, but it's certainly sporadic. I think one thing we can take away from the Greenland episode is that the market pushback to Trump is still fairly potent. You know, the whole episode kind of reminds us of the Taco theme from 2025. And if anything, it seems like the pain tolerance for market stress could have even gone, gone further down. You know, there's always this question of where is the Trump put. It might be fairly close to at the money coming into the midterm election year, where a lot of people are focused on the economy. Yeah, I think that's a really good point, Jeremy, actually. And you know, we saw it certainly in FX, the dollar selling off almost across the board. You know, obviously you mentioned equity markets coming off, bond yields rising a little bit. So definitely seems that there's a little bit more, more, more concern there. But I also just add from my side, I think what's interesting is, you know, does this latest sort of curbing of tensions? Does it actually get some of those investors back on side or is it almost crossing the rubric on where we've had so much policy volatility that some of those international investors are just more skeptical about, you know, investing in the US. We've seen a number of headlines about various pension funds, for example, divesting out of US Treasury. It's not big numbers by any stretch, but certainly the theme is there. And I think it's going to be harder to shake that for a little while, at least. We mentioned the Fed debris fee and sort of the drone power case. We've also got this lease of cut case, which I think the Senate, sorry, the Supreme Court heard the initial sort of oral cases for earlier this week. It seemed like they, you know, leaned a bit more towards the idea that the Fed should remain independent, maybe leaning a bit again, more against Trump. Is that a fair assessment just of what we've heard so far on that case? Yeah, I would say so. I mean, the oral arguments on the cook case showed a lot of skepticism from both liberal and conservative justices about whether, you know, Trump really does have this removal authority. And if the kind of for cause question could potentially include something as minor as the the allegations against Lisa Cook. So there's a question now about how they go forward, whether they send it back to the lower courts, whether they rule more conclusively. But I think there is a high likelihood at this point that Cook is allowed to remain in her seat for the time being. Yeah, I will say that I think even among congressional Republicans, the independence of the Fed is very important to them. And so, you know, I think you see with the Supreme Court, you see it with congressional Republicans. That's, I think people are concerned about that. And you'll, I think that's where you could see more breaks with Trump at this point from Congress and, you know, like on this and informed policy issues. I think this is where he's probably weakest with with Congress. Brilliant. Thanks both of you for that. I mean, I feel like I've learned a huge amount just in those last 10, 15 minutes or so. And I'm going to bring it up to speed a bit more just in terms of the week ahead. That is the name of the podcast. So the week ahead, we do have a Fed decision. It's not going to be predicated too much on on those specific points about independence. But Jeremy, if I come back to you on that, we're looking for an unchanged rate decision. It seems it's a pretty consensus view. What sort of things are you looking at within the statement and within powers press conference in terms of where rights might go from here or what kind of what you're thinking? Yeah. So we do think that they're going to stay on hold. We think that powers likely to signal that there is a higher threshold for rate cuts now after the insurance cuts from 2025. You know, the data since December really have been mixed. You had some reassuring reports on the labor markets, but at the same time, the inflation data have maybe come in a little bit softer than expected. So again, I don't think either the Hawks or Doves feel particularly emboldened to kind of press at this point for something decisive. Powell probably insists that things stay data dependent. There are risks to both sides of the mandates and that they're going to kind of let the data determine where they go from here. One thing we do expect Powell to say is that race are now within the range of neutral estimates. So that's something he brought up in December. And again, I think that suggests that they would likely need to see something a little bit more than just cracks in the labor market before resuming insurance easing potentially a more decisive kind of move towards a weakening labor market or rising unemployment rates. You know, a couple things to look out for. There's likely to be one, maybe two, to sense, Governor Myron will likely descend, and Governor Bowman hinted she might as well. One theme that we're looking out for really for the year as a whole is this question about labor productivity. And you saw Trump mention this in Davos. We've seen a number of federal officials mention this idea that, you know, maybe if productivity is the driver of strong growth, then the Fed wouldn't necessarily have to react in a hawkish way to that. You know, you had Governor Myron, Governor Bowman, and Philadelphia President Paulson, who's a voter this year, all making the case the productivity means you can have growth without necessarily having inflation. Now, we've seen both sides of this. Some people say that actually means that neutral rates are higher, and maybe they should cut a little bit less. But, you know, seeing just how Powell comes down on that question, I think probably could tell us a little bit more about the appetite for a Greenspan 90s run it hot type monetary policy strategy, which it seems the administration and the the federal officials appointed by Trump appear to be aiming for. Brilliant. Thank you very much, Jeremy. I'm going to go back to JC, because we've got another central bank decision in Europe, maybe not quite as in the limelight as the Fed, but the Rix bank meets on Thursday the 29th of January. JC, what are you expecting in Sweden? Yeah, thanks. So we're not expecting any change in the policy rate at 1.75%. The executive board has been pretty clear that its confidence is inflation is approaching target, and it was very close to target in the latest print. And also, the economic activity is recovering from a protracted period of weak growth, and a number of indicators are showing that, including the monthly GDP indicator coming out quite strong in the latest print. So therefore, the policy rate can remain unchanged and they're saying it's likely to be like that for some time. I'd flag one interesting thing in Sweden, which is the inflation is likely to slow quite considerably this year in 2026, but that's mainly because of tax cuts in quite a generous government budget for this year. And so the Rix bank is likely to look through those tax cuts and not cut policy rate because of that lower inflation. Thanks, JC. That's actually an interesting point about sort of trying to bring down inflation through through fiscal measures. I'm going to bring it back to the US because Jeremy, you guys have published a sort of special report about some of these measures that Trump's trying to enact around affordability. I don't know if you could just give us a quick overview of what you've found there. I know there's a lot of different things that they're suggesting could come through. How likely do you see many of these proposals? Are they going to bring inflation down or actually could they have the opposite effect? Yeah, so I mean, we're seeing in the midterm election year, this increased focus on a affordability agenda. And that really is a whole grab bag of potential policies. I think some a lot more likely to pass than others. I think there hasn't been much appetite in Congress for a major fiscal package. So we're focusing more on things that the administration can achieve through executive action. And there, I would say it is a mixed bag. There are things that policy can do to lower inflation. Terrap rate reductions would be the easiest one to accomplish in the near term. And to some extent, we have seen that since late last year. Another point would be either formal or informal pressure to get pharma companies to reduce prices, which could have an impact on consumer inflation, although likely with a fairly long lag. I think our concern, though, and what we really highlighted on our note earlier this week, is that affordability isn't quite the same thing as inflation. And a lot of the policies that the administration are pushing on actually deliver stimulus or ease financial conditions in a way which could make things easier for home buyers, but potentially actually worse than the inflate should not look in the longer run. So moves like getting the GSEs to increase mortgage purchases to bring down mortgage rates, easing credit restrictions, reducing down payments, 50 year mortgages, things like a credit card interest rate cap, or in a really extreme sense, the $2,000 tariff dividends, which the administration have proposed, are all good for consumers, and all plausibly something you could shoehorn into in affordability agenda, trying to ease the cost of living and financial burden for lower and middle-class households. But those are more likely than not to boost inflation, and we think that this is actually one of the areas where the administration is probably likely to be most aggressive about the policies they pursue. Brilliant. Thanks, Jeremy. Thanks once again, Samiri, Jeremy, Jacee for joining us. We've got through a huge amount, really interesting stuff, and I'm sure all of your inboxes will be filled out with further requests to talk through all of this in more detail. But for now, I just want to say thanks again for joining us. It's been a super insightful one. We hope to have you all back. The podcast very soon as well. Thank you very much. We're going to go all the way down under now to Australia, where I'm joined by Andrew Tyshurst, our Chief Economist for Australia and New Zealand. Andrew also, a fellow podcast host, a nice time for you on the other side of the mic for once, Andrew. Thanks for joining us. Look, we've got quite a lot to going on in Australia, particularly. We've got CPI next week, and then we've got the RBA, the following. Let's focus on inflation if we can for now. How are you thinking about the specific data as we go into next week? Yes, you're dumb, and hey, thanks for the invite. We've already seen monthly CPI data in Australia for October and November, but the monthly series is pretty new here and there's uncertain seasonality in that data. The RBA has told us it's going to give most weight to the quarterly inflation data, and that's out next week. We've got the headline and trimmed means CPI rising by 0.7% quarter on quarter in Q4 each. That would see the trimmed mean measure, which is the most important one, tick up a little bit in annual terms to 3.1% year over the year. There's a lot of moving parts there, some volatile items jumping, some other volatile items falling sharply, but in terms of the details, I think it could look a little disappointing. I'm tracking service prices at about 0.8.9 quarter on quarter, so a little high. And some of the lower price pressures that we're seeing in things like rents appears to be reversing as well. Interesting. You're slightly bit under there in terms of the consensus, but now as we go into the RBA, I think it's been fascinating. The RBA is really priced now for two hikes this year by the looks of it, and we haven't got quite as an aggressive view. What are the key factors you're looking at as you just go into that meeting the week after? What could push them over the edge to high core or what's really driving a view that they'll stay unchanged for the time being? Yeah, of course. Well, I always think the RBA is a central bank with a dual mandate, maximum sustainable employment, low and stable inflation. So unemployment rate and CPI are probably the key drivers. We have had a big surprise just this week with a much hotter than expected labor market report, the unemployment rate dipped to 4.1% down here. That was quite a big surprise, and with that, the market's currently expecting or currently pricing about 15 basis points for this next meeting next week, implying that it thinks it's slightly better than even chance that we do get a rate hike. This CPI that we're talking about will be the final key input for that. As noted, I've got that tracking a little bit uncomfortable in terms of the details, but nevertheless, I've got the result coming in a fraction below the RBA's forecasts. So look on balance, I'm still leaning towards them, not delivering a rate hike in February, but with the unemployment print here, so low today, it's introduced a lot of uncertainty. So that RBA meeting next week is really quite live now. Yeah, I mean, and just notable as well. I think you've had a very positive view on both your Australian dollar and the New Zealand dollar, which is sort of benefited, I guess, from this shift in pricing. So great call on that, by the way, but another thing driving that I think is probably what's been happening in China, at least in some part with the currency there being very stable and actually being allowed to appreciate. We've obviously got also some China data just coming up over the weekend. How are we thinking about the China PMIs this weekend? Yeah, look, we've got them both a little softer. Our China team have had a cautious new term outlook on China growth, and we expect that to be reflected in the data next week. For the official manufacturing PMI, a team have got one dropping a couple of tents to 49.8. There's a few little forces on the positive end, the negative side there, but overall they've got a dipping a little bit. And for the official non-manufacturing PMI, they've got that one dropping a little bit to 49.9 from 50.2 in December. They're noting ongoing austerity rule there, which is discouraging government officials from going out and spending too much and really seeing limited wealth effects from the stock market rally. So look generally a cautious medium term view in China again, and thinking that that's going to be reflected in that data next week. Great, thanks, Andrew. So quite a lot to watch there, whether it's Australia or China, but certainly Aussie and Focus, which I'm sure will keep you even busier than usual over the weekend. So thanks a lot, and we'll catch up with you soon. Excellent. Thanks, Tom. Well, that's it for this week. Thank you, as always, for listening to the podcast, which is edited and produced by John Dalton. Please like and subscribe to numerous podcasts on Apple, Spotify, SoundCloud or your usual podcast provider. We'd love to hear your feedback, so please do feel free to write a review and let us know what you like or what you want to hear more of and share this podcast far and wide with anyone you think might be interested. You can also check out numuraconex.com for more of our research and updates. Thanks once again and good luck for the week ahead. In a complex and unpredictable world, where a sunset in one market means a sunrise in another, one investment bank always looks beyond the horizon. 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