Inflation In France, Spain Ticks Higher For First Time In 2025 — 4th Update

China’s economy is showing positive signs and confidence is building, but challenges such as insufficient domestic demand and deflationary pressure persist, according to the country’s central bank.

The People’s Bank of China, in a statement after its quarterly monetary policy committee meeting, said it will adopt a flexible approach to policymaking, taking into account both domestic and international conditions. Monetary policy will remain “moderately loose,” with the aim of maintaining stable economic growth and prices within a reasonable range, it said.

While consumer sentiment is weak, better-than-expected retail sales in May provided some relief. In a speech at the World Economic Forum meeting in Tianjin this week, Premier Li Qiang said China can turn consumption into a driver for the economy.

Officials often express confidence they can build the consumer sector into a key engine of the world’s second-biggest economy, the task is becoming more pressing as governments around the world — not least the US — push back on Chinese exports. China and the US are now working on a new trade agreement.

Source: Bloomberg Europe

Federal Reserve Bank of Minneapolis President Neel Kashkari said he sees two interest-rate cuts as likely this year — with the first potentially in September — but warned that tariffs could have a delayed impact on inflation and policymakers should remain flexible.

“While we gather more evidence on the true tariff shock affecting the economy, I believe we should put more emphasis on the actual inflation and real economic data that we are seeing without committing to an easing policy path in case the effects of tariffs are merely delayed,” Kashkari wrote in an essay published Friday on his bank’s website.

Kashari said he has left his rate projections for 2025 unchanged since December. At that point, Fed policymakers had delivered a full percentage point of cuts, all in the final four months of the year, as price pressures cooled and the labor market showed signs of weakness. He expected just two cuts then because he was unsure inflation would continue to fall in this year, he wrote.

He kept that projection in March amid heightened tariff uncertainty and little further progress on inflation. Now, though there hasn’t been much evidence of a hit to prices from tariffs, he worries that may still materialize later this year.

Kashkari said his forecast for two rate cuts implies the first would come in September.

Fed officials left rates unchanged when they met last week. Since then, two Fed governors, Christopher Waller and Michelle Bowman, have signaled they might back lowering rates as early as next month. But most policymakers who spoke this week, including Kashkari, made clear they aren’t seriously considering a move in July.

President Donald Trump has repeatedly lashed out at Federal Reserve Chair Jerome Powell over over the bank’s position to hold interest rates steady.

Earlier: Trump Says Three or Four People on List to Replace Fed’s Powell

In the essay, the Minneapolis Fed chief also said that the US central bank shouldn’t be bound to a particular policy path even if it resumes lowering rates in September.

“If the data called for it, we could hold the policy rate at the new level until we gained greater confidence that inflation was headed back to our target,” Kashkari wrote.

Kashkari praised the economy’s resilience in the face of higher-than-expected tariff announcements in April and said the labor market has “cooled gently.”

He said business leaders he’s spoken with have expressed a reluctance to pass tariff costs on to customers, but that if trade deals aren’t struck and tariff rates remain high, they might have to do so. Kashkari also pointed to the time required to ship goods to the US from Asia as another reason the tariff effect may materialize later.

Source: Bloomberg Europe

As the NATO summit in The Hague concluded, European leaders likely returned home feeling largely relieved. There was no major upheaval and Trump even seemed to have warmed to his NATO peers, saying during the closing press conference that ‘they love their country very much’.

But the ambition for this summit was low. The agenda was shortened to minimize potential disruption, resulting in an equally short summit communique. Meanwhile, Ukraine was decoupled from the summit to prevent major public disagreements between presidents Trump and Zelenskyy, and the Netherlands – and NATO Secretary General Mark Rutte – rolled out the red carpet for Trump.

There was a sense that the other NATO countries and Rutte just wanted to make it through the less than 24-hour summit without any drama – and they succeeded. Indeed, for much of it, Trump seemed more focused on the aftermath of the US strikes on Iran than on NATO.

As expected, allies agreed to spend 5 per cent of GDP on defence, which includes 3.5 per cent on core defence and 1.5 per cent on resilience, cybersecurity and infrastructure. This increase will serve to meet NATO capability targets and ensure allies can service the new regional plans approved during the 2023 Vilnius summit. It will also start the process of shifting the burden from the US to Europe. Spain caused perhaps the biggest upset at the summit by stating it can meet NATO capability targets by spending only 2.1 per cent of its GDP. This will have implications for alliance unity and could cause resentment among member countries who spend more.

Getting through the summit is an important signal to Putin: a public fall out among allies in the current context would have given Russia further vulnerabilities to exploit. But this low bar for the summit is problematic given the external security environment. Now that the summit is over and the alliance remains intact, allies should return with laser focus to the key issues what were left off the agenda.

Five key priorities for NATO

The first priority is support for Ukraine. The language on Ukraine in this year’s summit communique was weak compared to last year. The issue of NATO membership was cast aside altogether and it is hard to see how this will gain traction again – although Rutte insists Ukraine is on an ‘irreversible path’ to membership.

But there were some positives for Ukraine at the summit. During a press conference, Trump suggested the US might consider selling Patriot air defence systems to Ukraine. This has been a constant and clear demand from Ukraine and is particularly urgent as Russia has ramped up its aerial bombardments of Ukraine.

However, European allies must prepare for the very likely eventuality that the US will halt further aid to Ukraine once the deliveries agreed to by the Biden administration have been completed. Investing directly in the Ukrainian defence industry – the so-called Danish model – is a simple and effective way to ensure continued and consistent support, but it is not yet sufficiently common.

This model would see allies allocate a percentage of their budget to a fund that is directly procuring in Ukraine for Ukrainian-used capabilities. Such an initiative could be coordinated by the Ukraine–NATO defence contact group. An added bonus of boosting Ukraine’s domestic defence industry is that it will in turn help with Europe’s rearmament as Ukraine begins exporting its domestically produced drones.

The second priority is continuing the review of NATO’s strategic approach to Russia that was agreed at last year’s summit. This issue was shelved in the run-up to the Hague meeting as it proved difficult to get the US to agree that Russia is a threat at all, let alone how NATO should approach Russia going forward. Any recommendations towards future engagement with Russia should take into account eventual changes in Russian leadership, a stronger deterrence and defence posture for NATO, while managing relations with a nuclear-armed state. It should also build on NATO’s role in helping allies deter and respond to greyzone warfare.

Political dialogue with Russia will be difficult as long it is fighting its war in Ukraine. But where there are opportunities to do so, NATO should restart conventional arms control negotiations using instruments in the Organization for Security and Cooperation in Europe (OSCE). Dialogue in the Arctic Council may also offer opportunities to avoid instability in the region and preserve the Council’s work on climate change.

The third priority is preparing for US troop reductions in Europe. Although the US force posture review has not yet started, it is already clear there will be US troops reductions in Europe – potentially returning to pre-2022 surge numbers, possibly even lower. This should accelerate action by European NATO allies and Canada regarding troop recruitment and retention, but that is just the starting point. If NATO’s Article 5 is tested, rapid first response will be crucial. This requires sufficient troops along the eastern flank, supported by appropriate capabilities such as heavy armour and deep strike.

Until the review has concluded, it is unclear what the impact might be on NATO command structures. But what is clear is that other allies must be ready to step in and take over responsibilities if necessary. There will also be an impact on capabilities based in Europe. The timeline for withdrawal matters greatly here as European allies will struggle to replace US strategic enablers – such as ISR (intelligence, surveillance and reconnaissance), integrated air and missile defence and air-to-air refuelling – in less than a decade, if ever.

This brings us to the fourth priority: the need to build industrial capacity. Ukraine has shown the importance of having a pre-existing defence industrial and technological base to be able to innovate and scale quickly in the event of a crisis. Europe and Canada need to increase capabilities by approximately one third to service NATO regional plans but, accounting for redundancies, in practice this means about a 50 per cent increase. Improving access to finance across the EU to support defence innovation should continue to be a key priority.

The fifth and final priority is engagement with NATO’s Indo-Pacific Four (IP4) partners to help counter China. After three of the four IP4 heads of government skipped the NATO summit, the perception is that the relationship is cooling. Yet much closer engagement and cooperation is needed on advanced maritime domain awareness and joint undersea monitoring – a threat both NATO allies and IP4 countries face from Russia and China.

This NATO summit was about footing the bill for the return to collective defence and starting the process of shifting the burden from the US to Europe. But the real work begins now. The strategy has been set and the next few years are about planning, implementation and execution. Given the need make progress, the secretary-general should consider carefully whether next year’s summit is needed – or even wise. NATO cannot afford to take risks with President Trump, and European allies will not cower indefinitely.

Source: Chatham House

NATO's agreement to more than double allies' defense spending targets will rebalance Europe's trade relations with the U.S. and see the region buy more American weaponry, European Union Council President Antonio Costa told CNBC on Friday.

Earlier this week, NATO allies agreed to more than double their defense spending target from 2% of gross domestic product to 5% by 2035.

The move has solved the main trade-related issue between Europe and the United States, Costa told CNBC's Silvia Amaro.

"What we have decided to do is strengthen our position and to assume greater responsibilities in our own defense. Then I think we solved already the main issue, and then I think the path is paved to solve the other issues," he said.

At least some part of this higher defense expenditure will be used to "buy American," according to Costa.

"And of course, if we buy more American, that means then the trade relations rebalance. Then that's the reason — because I have said always that we cannot separate these two negotiations about defense — [that this] was the most important issue for the United States, and [it] is already solved."

Costa, who served as prime minister of Portugal up until last year, reiterated Trump's previous statements that the military agreement is a "big win," adding that it effectively rebalances the burden sharing on defense.

The EU is among the trade partners rushing to strike an agreement with Washington ahead of U.S. President Donald Trump's early July deadline for hiking so-called reciprocal tariffs on imports from nearly all countries.

Steps toward a deal were made this week after the U.S. presented the European Commission with a new proposal. Markets were also buoyed by the Thursday announcement from White House Press Secretary Karoline Leavitt that the July 8 and 9 deadlines for restarting tariffs on nations are "not critical."

"Perhaps it could be extended, but that's a decision for the president to make," Leavitt said.

When asked whether the EU could reach a deal ahead of the July deadlines, Costa said the European Commission is currently assessing the White House's trade proposal.

"Both parties are very engaged to find a solution, and I hope that we will and that we achieve this before the ninth of July," he said.

Source: CNBC

Federal Reserve Bank of Minneapolis President Neel Kashkari is sticking to his view that cooling inflation will allow the world's most important major central bank to cut its policy rate twice this year, starting in September.

In an essay released on Friday, Kashkari also signalled that if progress on inflation stalls or reverses the Fed could simply pause its rate-cutting cycle until prices ease again.

Tariffs suggest an inflation boost is "likely coming," he said, as more goods from Asia, subject to the biggest tariff increases, arrive on the shelves of U.S. businesses.

While businesses may not want to risk angering customers by charging more for their wares, they will start passing on price increases in the absence of trade deals lowering tariffs, he said.

In this scenario, the effect of tariffs on inflation may simply arrive later than expected, Kashkari said.

At the same time, Kashkari said, the economic data so far has revealed "only a modest imprint of the effects of tariffs on prices, activity or the labor market," with inflation making renewed progress toward the Fed's 2% goal.

That may suggest, he said, that companies have won exemptions, have adjusted their supply routes, or are otherwise finding ways to avoid the tariffs altogether, limiting the impact on inflation.

"Those opposing signals have led me to maintain my outlook for two cuts over the remainder of 2025, implying a possible first cut in September, barring some surprising development before then," Kashkari said.

"If we were to cut in September and then the effects of tariffs showed up this fall, I believe we should not be on a preset easing course" but could adjust to fit the new data, he added.

"If the data called for it we could hold the policy rate at the new level until we gained greater confidence that inflation was headed back to our target."

For now, though, Kashkari said: "We should put more emphasis on the actual inflation and real economic data that we are seeing without committing to an easing policy path in case the effects of tariffs are merely delayed."

Last week, Fed policymakers left their overnight target rate for lending between banks unchanged at between 4.25% and 4.5%. Uncertainty over the outlook is keeping the central bank on the sidelines amid expectations the tariffs will push up inflation this year while depressing growth and hiring.

Source: Yahoo Finance

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