The ‘Year of The Tariff’ Gives Way to 2026 Worries of The Consequences

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Source: morningstar

Treasury Secretary Scott Bessent backed the idea of reconsidering the Federal Reserve's (Fed) 2% inflation target once the US has sustainably brought price increases back down to that pace.

"Once we are back to 2% — which I think will be in sight — then we can have a discussion: Is it much smarter to have a range?" Bessent said in an interview on the All-In Podcast. "Once we re-anchor to the target, then we can talk about a range."

The discussion could potentially be framed around a switch to 1.5% to 2.5% or 1% to 3%, Bessent suggested in the interview, which was posted on Dec 22. "There is a very robust conversation" to be had, he said.

Fed policymakers in 2012 formally and publicly adopted the current 2% target, which is shared by many central banks around the world. Bessent said that the idea of "decimal-point certainty is just absurd". But he said shifting the target at a time when inflation is running faster than that would risk giving the impression that "when you are above a level, you will always fudge upwards".

The interview was recorded after the Dec 18 release of the November consumer price index (CPI), which showed a 2.7% increase in the level from a year before. The Fed uses a separate gauge, the so-called personal consumption expenditures (PCE) price index. The PCE climbed 2.8% over the 12 months to September, the most recent reading showed.

People 'hurting'

"It's very difficult to re-anchor until you meet the target and maintain credibility," Bessent said. He also acknowledged affordability concerns among households — angst that surfaced in off-cycle elections held in November that saw Republican losses.

The Treasury chief said that "we understand that the American people are hurting". The price level "has gotten very high," he said, blaming that surge on the Biden administration. Inflation is now "starting to roll down", thanks in part to declines in rents that had — he argued — been driven up by a jump in undocumented immigrants.

While some economists said the most recent CPI report likely contained measurement issues thanks to federal staff being furloughed during the government shutdown of October and early November, Bessent said he thought "it was a pretty accurate number". He said while some components, including energy, recorded an increase, observable real-time figures showed they are coming down.

Bessent also indicated that stabilising the budget deficit could provide an argument for lower interest-rate levels. He cited an example from Germany before the days of the euro, where the Bundesbank agreed to "foam the runway" and decrease rates in return for the government pursuing a not-profligate "reasonable fiscal balance".

German model

"That's something that we could be doing here," he said. Germany's central bank and government "would work with each other hand-in-hand", he said. He also noted that, before World War II, the Treasury Department "had a seat at the table on the Fed".

The Treasury secretary said, "If we can stabilise the budget deficit, even bring it down, then that will contribute to disinflation."

Bessent, who has been overseeing the process for US President Donald Trump selecting a candidate to succeed Fed chair Jerome Powell, reiterated his criticism of the US central bank expanding its balance sheet too much and too long after Covid hit.

"Absolutely, large-scale asset purchases should be part of the so-called central bank toolkit," he said. He also supported the Fed's emergency powers to aid a strategic industry if needed, saying "it would not have behooved anyone" for the airline industry to collapse during Covid. As for the broader so-called quantitative initiative, "I think that the duration went on much, much too long".

Source: Theedgemarkets

China's farmers are up to their ears in milk and Beijing's decision to apply tariffs on dairy imports from the European Union is expected to give them a measure of protection as they branch out into higher-margin products like cream and butter.

"The country's milk oversupply plays a significant role in the government's decision to impose tariffs ... the whole Chinese dairy industry has been losing profits in the last four years, the industry has been bleeding," said Yifan Li, head of Dairy Asia at StoneX, a commodity-focused financial services firm.

He added that government subsidies in China decreased in 2025 as a sluggish economy weighed on state finances.

The higher duties on imports of unsweetened milk and cream and fresh and processed cheeses from the EU, which kicked off on Tuesday and range from , were the latest move in a series of tit-for-tat measures since the bloc applied tariffs on Chinese electric vehicles.

China has recently significantly lowered provisional tariffs on pork from the EU following anti-dumping investigations on brandy and pork.

MILK INDUSTRY TRENDS PROMPT SHIFT

Milk output in China, the world's third-largest producer, surged to more than 40 million tons last year from 30.39 million tons in 2017. At the same time, consumption fell to 12.6 kg per person in 2024 from 14.4 kg in 2021, hurt by the nation's falling birthrate. Prices in recent years have sat at or below average production costs of around 3.02 yuan ($0.4298) per kg, causing many loss-making farms to shut down or sell cows for beef.

Lian Yabing, a dairy analyst at Beijing Orient Agribusiness Consultants, said over 90% of China's dairy farmers were not making a profit.

"The tariff decision is definitely an opportunity for top dairy producers like Yili and Mengniu, which are stepping up butter, cream and cheese production this year," Lian said.

China's milk glut and changing consumer dairy demands have pushed the country's suppliers to make higher-margin products over the past year, Li said, making it less reliant on imports.

"A few years ago, only a handful of top dairy producers were making cream and butter, now there are at least 40," he said.

Cream, which is easier to process than butter, has received a boost from the milk tea boom in China, with chains like Heytea and Chagee (CHA.O), opens new tab using the product in their ready-made drinks.

Han, an organic dairy farmer in southern Yunnan province, said he was part of a niche market of producers making small amounts of European-style (changed French to European, he also makes swiss cheeses) cheeses like blue cheese and brie. He said demand has lately outstripped supply for traditional Western cheeses.

"For the few premium cheese producers in China, the impact is minimal because the production volume is too small," he said. "But this can be a signal that the government is formulating this tariff policy to protect its own domestic dairy industry."

A TARGETED TARIFF REGIME

Analysts say Beijing uses tariffs to register its displeasure with trading partners and their companies. Dutch dairy conglomerate FrieslandCampina faces the highest rate of 42.7%，while around 60 companies including Denmark's Arla Foods (ARLAF.UL) will pay just under 30%. The Netherlands and Denmark both voted in favour of increased tariffs on Chinese EVs along with major dairy producers France, Ireland and Italy.

The Netherlands also angered China in September after it seized chipmaker Nexperia from its Chinese parent company, Wingtech, citing governance issues, which triggered temporary global chip shortages in the automotive sector.

The dispute has not been resolved, with the Chinese parent and a Dutch unit engaged in a struggle for control over Nexperia.

Last week's reduced tariffs on EU pork imports were a win for Spain, which has adopted a pro-Beijing stance to court fresh investment, with state visits from Prime Minister Pedro Sanchez and King Felipe VI in the past year.

Source: Reuters

The U.S. dollar was on the back foot on Wednesday and set for its biggest yearly fall since 2017, possibly with more to come, as investors wagered the Federal Reserve would have room to cut rates further next year even as most of its peers look finished with easing.

Tuesday's solid U.S. GDP reading failed to move the dial on the rate outlook, leaving investors pricing in roughly two more Fed cuts in 2026.

"We expect the FOMC to compromise on two more 25 bp cuts to 3-3.25% but see the risks as tilted lower," said Goldman Sachs Chief U.S. Economist David Mericle, citing slowing inflation as a reason for the forecast.

The euro and pound each nudged up to fresh three-month highs on Wednesday, though were last broadly steady on the day at $1.180 and $1.3522, respectively. ,

Against a basket of currencies, the dollar index fell to a 2-1/2-month low of 97.767. It was on track to lose 9.8% for the year, which would mark its steepest annual drop since 2017. Any further weakness in the last week of the year would take its fall to its greatest since 2003.

The dollar has had a tumultuous year, whipsawed by President Donald Trump's chaotic tariffs that sparked a crisis of confidence in U.S. assets earlier this year, while his growing influence over the Fed has also raised concerns about its independence.

In contrast, the euro is up just over 14% for the year thus far, putting it on track for its best performance since 2003.

The European Central Bank stood pat on rates last week and revised upwards some of its growth and inflation projections, in a move that likely closes the door to further easing in the near term.

Traders have since responded by pricing in a slim chance of tighter policy next year , mirroring expectations for Australia and New Zealand, where the next moves are seen as being hikes. ,

That has in turn lifted the two Antipodean currencies, with the Australian dollar , up 8.4% to date, scaling a three-month peak of $0.6710 on Wednesday, and the New Zealand dollar similarly touched a 2-1/2-month high of $0.58475.

Sterling has gained more than 8% for the year. Investors are betting the Bank of England will deliver at least one rate cut in the first half of 2026, and place a roughly 50% chance on a second before the year-end.

However, most currencies have lost significant ground versus precious metals such as gold, which touched a fresh record high on Wednesday.

Currencies of smaller European countries, often with low debt, have been among the best performers this year.

The dollar has shed 12% on the Norwegian crown, 13% on the Swiss franc -- to last trade at 0.7865 francs - and 17% on the Swedish crown, hitting its lowest since early 2022 on Wednesday at 9.167 crowns. , ,

TRADERS ON YEN INTERVENTION ALERT

For now, the main focus for the foreign exchange market remains on the Japanese yen, with traders alert to the possibility of an intervention from Japanese authorities to stem the currency's slide.

Finance Minister Satsuki Katayama said on Tuesday that Japan has a free hand in dealing with excessive yen moves, issuing the strongest warning to date on Tokyo's readiness to intervene.

Her remarks arrested the yen's decline, with the dollar last down 0.3% on the Japanese currency at 155.83 yen on Wednesday, having fallen 0.5% in the previous session.

While the Bank of Japan delivered a long-anticipated rate hike last Friday, the move had been well-telegraphed and comments from Governor Kazuo Ueda disappointed some in the market who had been betting on a more hawkish tone, leaving the yen sliding in the aftermath.

That has left investors vigilant to official yen-buying from Tokyo, particularly as trading volumes thin towards the year-end, which analysts say would make an opportune time for authorities to strike.

Source: Reuters

Dongfeng Motor Group Co. and BAIC Motor Corp.'s Spanish partner is lining up European suppliers and planning a small battery assembly operation as a way to comply with tightening European requirements for local manufacturing.

Spanish carmaker Santana Motors aims to source 60% of all vehicle components locally within three to five years, according to Chief Executive Officer Eduardo Blanco. Santana vehicles are currently assembled from 21 imported parts in what are known as semi knocked-down kits, he said.

Santana Motors highlights Chinese manufactures' growing reliance on local partners to navigate European rules designed to protect domestic production. All Chinese brands "are working under the assumption that the tariffs are here to stay," Blanco said in a phone interview earlier this month. "In a second phase, we plan to add a small battery assembly plant," he said.

Santana has been revived after ceasing production in 2011, reopening a factory in Linares, Andalusia, to assemble off-road vehicles from parts supplied by its Chinese partners. The strategy mirrors that of Ebro Motors EV, another defunct Spanish brand relaunched in a partnership with China's Chery Automobile Co. and where Blanco was among the founding executives and a board member.

Santana was created in the 1950s and for decades a made off-road vehicles used mostly by security forces and in rural areas. These were produced mainly under licenses from Land Rover, but in later years it also made cars under agreements with Suzuki and Iveco.

The company shuttered in 2011 after struggling for years with plummeting sales and financial mismanagement.

Together, Santana and Ebro underscore Spain's growing role as a gateway for Chinese carmakers adapting to tougher EU trade rules. Prime Minister Pedro Sánchez has made courting Chinese investors a key part of his foreign policy, and Contemporary Amperex Technology Co. Ltd is building a €4.2 billion battery plant in the region of Aragón in partnership with Stellantis NV.

Sourcing parts locally would help cut import costs and position the cars as European-made under EU rules. Brussels is set to present new regulations that will favor cars with locally made components, pushing companies to move beyond shipping finished cars or kits and instead anchor production, sourcing and jobs in the common region.

Meeting minimum local-content thresholds could be difficult without local battery production, which accounts for the largest share of an electric vehicle's value.

Santana has a third Chinese partner, Anhui Coronet. The two companies co-own the factory in Andalusia through a joint venture called Santana Factory.

At the factory, Santana Motors is already assembling cars produced by Dongfeng's ZNA — such as the Dongfeng Z9 or Nissan Frontier Pro — and re-branding them as Santana. ZNA is a joint venture between Dongfeng and Nissan.

A second assembly line using "completely knocked-down" production will go live in about nine months, Blanco said. The line will produce BAIC vehicles, with the Chinese carmaker providing the underlying platform and technology for three models, a step closer to full-scale manufacturing.

The BAIC vehicles will have their own, distinctive exterior design, Blanco said.

Separately, Anhui can also use the plant to produce vehicles for clients.

Vehicle assembly at the Andalusia plant started last month with a workforce of about 80 employees, which is expected to rise to up to 300 direct jobs. The plant's annual assembly annual capacity is around 5,000 vehicles.

Source: Bloomberg Europe

The year is almost over, traders are partly — already — on vacation. Investors have largely reshuffled their portfolios; many have closed positions to call it a day. Trading volumes are thin — around 30–35% below the past month's average — yet… yet the year keeps on giving.

Yesterday, the US announced a set of GDP data that blew everybody's mind. The US economy grew 4.3% in Q3 vs 3.3% pencilled in by analysts.

Read that again: in dirt and dust, in the middle of trade tensions, tariffs, geopolitical chaos, job losses and uncertainty, the US economy managed to grow 4.3%. That's the fastest pace in two years, driven by AI investment but also by strong corporate profits — up 4.4% QoQ — and very strong consumer spending, with sales up 4.6% QoQ.

Naturally, price pressures also flared up, with PCE prices rising to 2.8% on the quarter from 2.1% previously.

The good news is that expectations were for price pressures to rise slightly more — to 2.9% — keeping the Federal Reserve (Fed) hawks at bay. Meanwhile, weaker industrial production and softer consumer confidence helped balance out the euphoric growth and uncomfortably high inflation figures.

Still, the US 2-year yield — the best barometer of Fed expectations — jumped past 3.50% after the strong GDP and PCE data. The probability of a January Fed cut fell to 15% (from 20% before the figures), while Fed funds futures price a June rate cut at around 80%.

Did equity investors care? Yes — but selectively. Major US equity indices rallied on the strength of earnings and consumer spending, but small caps underperformed as rate cuts were pushed further out. The S&P 500 equal-weight index also fell, meaning the post-GDP rally was carried by technology stocks rather than a broader rotation into non-tech sectors. In other words, index gains masked a step back from the optimistic "rotation" narrative, and rising prices came with rising reversal risk.

The US dollar, meanwhile, eased despite more hawkish Fed pricing — suggesting downside pressure on the dollar is strong enough that even a 4.3% GDP print can't fully revive the bulls.

The softer dollar pushed gold, silver and copper to fresh all-time highs once again. Gold traded above $4'500.

We can say it: it's been a golden year. Gold has renewed record highs more than 50 times this year and rose more than 70%, while silver's gains have been even more impressive. The grey metal is up around 150% since January, driven by the so-called debasement trade — the idea that fiat currencies lose purchasing power over time due to heavy debt, persistent deficits, loose monetary policy and financial repression (rates below inflation). Add rising demand for silver and copper to limited supply, and the performance of these metals becomes easier to explain.

The question everyone is asking: can the rally run further — or is this a bubble?

The reasonable answer is that the forces pushing metal prices higher remain firmly in place: heavy government debt into 2026 — check; persistent and widening deficits in developed markets — check; loose monetary policy and low real yields — check; geopolitical uncertainty — check; tight supply and rising demand — check. In theory, the medium- to long-term outlook remains positive.

In the short term, however, prices have risen too far, too fast, and a correction would be healthy. The gold volatility index is rising again, suggesting we may see a pullback in the continuation of the latest positive push. A sell-off could hit silver harder than gold, as the gold-silver ratio — historically in the 60–80 range — is falling rapidly toward the lower end (currently at 62). Assuming that the ratio remains within its historical range, silver may either underperform gold on the way up or correct more sharply on the way down. In both cases, pullbacks could offer attractive opportunities to add gold/silver to portfolios. Traditional investors typically allocate 2–5% to gold for diversification.

Anyway, it's gently time for me to say goodbye. Recent sessions suggest Santa may still arrive this year. The so-called Santa Rally — the last five trading days of the year and the first two of the new year — could deliver another 1.5% gains – if history is any guidance.

And after that? Reality may bite.

The first two years of the AI boom were about funding, funding, funding — buying chips and building data centres, models and applications. The third year — this year — raised questions about viability, profitability and revenue. The fourth year — next year — is likely to be about clear winners and losers: those who turn investment into cash flow, and those who don't.

So yes — for one last time — parts of the technology market probably look bubbly, and next year's earnings season will be less about shiny numbers and more about where revenues actually come from.

First thing to watch: whether OpenAI's planned chatbot ads can generate enough revenue to reassure investors that the money really circulates through the ecosystem. I genuinely believe it will be fine.

On this note, I wish you, All, a Merry Xmas, and a Happy and a Healthy New Year !

Source: Swissquote Bank SA