Archive

US vs EU Part 2: Tax War

• Even though Donald Trump has held fire for now in the case of Canada and Mexico, the threat of tariffs on America’s allies suggests that the tax war he launched, almost unnoticed, on 20 January against Europe could get even bloodier than battles over trade-in-goods.

By Alastair Newton

HEM: One More For The Road

• BoE, ECB and Fed cuts are likely at their next meeting
• We expect at least a policy pause beyond that
• Labour cost rises remain above target-consistent levels
• Activity trends signal monetary policy as nearly neutral
• The ECB is not as exceptional as markets dovishly price

US: Policy Rate Held At 4.5% (Consensus 4.5%) in Jan-25

• The Federal Reserve held the federal funds rate at 4.25%-4.50%, pausing after prior cuts in response to stable labour market conditions and still-elevated inflation.
• Inflation has declined significantly but remains above target, with core PCE at 2.8%, justifying a cautious approach to further easing.
• Future rate moves will depend on inflation and labour market trends, with the Fed retaining flexibility. We still expect a final cut in March.

AI: Attack Of The Clones

• AI investors were shocked by China’s DeepSeek successfully matching the performance of OpenAI’s GP4-o1 at a fraction of the build cost and despite export restrictions.
• Innovating a more productive use of capital does not negate the potential gains from increasing processing power. Either way benefits the economy with faster AI progress.
• Foundation model IP needs better protection against the attack of cloning distillation techniques to reap a return on investment while pushing the performance frontier.

By Philip Rush