UK Unemployment to Hit 9-Year High on Rising Labor Costs

India and the United States have forged a significant trade pact that lowers tariffs on Indian exports from 25% to 18%. The agreement, announced by Trump, also includes a commitment from India to halt purchases of Russian crude oil and instead buy from the U.S. and potentially Venezuela.

According to the announcement, India has pledged to purchase $500 billion worth of American agriculture, technology, energy, and other products. This development comes less than a week after India finalized a major free trade agreement with the European Union, signaling a rapid realignment of its global trade relationships.

While many specifics of the U.S. deal are still being finalized, investors are already identifying key sectors poised to benefit.

Manufacturing and Exports Set for a Major Boost

India's labor-intensive export sector is seen as a primary winner. According to James Thom, senior investment director at Aberdeen Investments, industries like textiles, clothing, leather, jewelry, toys, and furniture now have a clear opportunity to reclaim market share from regional manufacturing rivals.

The new 18% tariff rate positions India more competitively against:

• Pakistan: 19% tariff

• Vietnam: 20% tariff

• Bangladesh: 20% tariff

Thom noted that small and medium-sized companies are particularly well-positioned to gain from the tariff reduction. He added that the agreement should also provide a lift to banks, non-banking financial companies, and export-focused manufacturers, boosting overall retail sentiment in small and mid-cap stocks.

A Strategic Win with Geopolitical Implications

Analysts at Bernstein suggest that last week's India-EU treaty likely prompted the U.S. to accelerate its own deal with India. The agreement brings India more in line with its peers in the Association of Southeast Asian Nations (ASEAN), which analysts called "incrementally a big positive." It also enhances India's competitive standing relative to China.

While certain industries like autos and metals might still face sector-specific tariffs, the improved diplomatic climate is expected to create broad-based advantages.

IT and Pharma Emerge as Key Beneficiaries

Bernstein analysts Venugopal Garre and Nikhil Arela highlighted that India's information technology sector stands to gain significantly. Although the trade pact primarily covers manufactured goods, the improved U.S.-India relations are expected to reduce regulatory scrutiny on I.T. services and lower the risk of future punitive actions, such as additional taxes.

Based on this, the analysts outlined a tactical "buy" recommendation for Indian equities, with a short-term rebound expected in financials, I.T., and telecoms.

Meanwhile, the recent EU trade deal has put a spotlight on India's pharmaceutical industry. According to BMI, Fitch Ratings' research unit, the elimination of 11% tariffs on EU drug imports—covering cancer therapies, biologics, and GLP-1s—is a game-changer. These imports amounted to $1.2 billion in 2024.

BMI forecasts that lower import costs and more efficient supply chains will drive India's pharmaceutical market from $31.2 billion in 2025 to $45.7 billion by 2035, representing a compound annual growth rate of 5.2%. The EU agreement is also expected to help Indian firms diversify their export markets and reverse recent stagnation by streamlining regulatory compliance and reducing administrative costs.

Market Reaction and Investor Outlook

The trade announcement immediately lifted market sentiment. Russ Mould, investment director at A.J. Bell, pointed to the Sensex's 2.5% rise as evidence of renewed investor confidence. The Sensex index tracks 30 of the largest and most actively traded companies on the Bombay Stock Exchange.

The positive momentum extended to UK-listed investment trusts with Indian exposure. Ashoka India, for instance, saw its shares climb 5.6% on the FTSE 250.

"India has been a rich source of returns for investors over the past few decades, but Trump's tariff regime stalled momentum in the Sensex index," Mould said. "Investors will now be wondering if the trade deal effectively removes the shackles on the market and breathes new life into it, rather than simply resulting in a short-term relief rally."

China's booming export sector is fueling a powerful rally in its currency, the yuan, creating a critical challenge for policymakers. While most analysts believe officials will step in to halt further gains, mounting market pressure suggests the yuan could test levels that strain the country's economic model.

The currency's strength is being driven by record-breaking foreign exchange inflows. In December, a staggering $452 billion in foreign currency flowed into Chinese banks, with a record $311 billion of that converted into yuan, according to data from the State Administration of Foreign Exchange. This wave of demand pushed the yuan to 6.9378 per dollar, its strongest point since 2023.

The Consensus: A Managed Exchange Rate

Most bank analysts believe the People's Bank of China (PBOC) will draw a line in the sand to prevent the yuan from appreciating much further. The consensus forecast from 13 global investment banks sees the currency ending the year at 6.92 per dollar, while derivatives markets are pricing it closer to 6.8.

To maintain control, authorities have a well-established toolkit:

• Official Guidance: Setting the yuan's daily midpoint trading fix at a level that signals disapproval of rapid gains.

• State Bank Intervention: Directing state-owned banks to buy U.S. dollars in the open market to absorb upward pressure on the yuan.

• Reserve Ratio Adjustments: Tweaking the foreign exchange reserve requirements for banks, which can compel them to hold more dollars.

"Given that China's economic growth is still highly dependent on exports, the People's Bank of China may not yet be willing to risk a more significant appreciation of the currency," explained Wei He, an economist at Gavekal Dragonomics.

Traders have already noted that the PBOC's midpoint has been consistently weaker than market estimates since November, a clear sign of official resistance. Janice Xue, a strategist at Bank of America Global Research, also anticipates policy tweaks, stating, "We see a high chance for the 20% risk reserve on banks' forward FX sale to be removed and expect FX reserve requirement ratio to be raised."

Upside Risks and the Exporter Dilemma

Despite the central bank's influence, some analysts see risks skewed toward a stronger yuan. Goldman Sachs recently upgraded its 12-month forecast to 6.7 per dollar, which would represent a 3.5% appreciation from current levels.

"The pace of appreciation has exceeded our expectations," Goldman analysts noted, citing the record currency flows and what they perceive as a shift in tone from the central bank.

A key risk is the creation of a positive feedback loop. As the yuan strengthens, exporters are incentivized to convert their dollar earnings into yuan more quickly to avoid future losses. This increased demand for yuan then pushes the currency even higher.

This dynamic is already playing out. An electrical industry exporter based in Shanghai, who gave his surname as Ding, confirmed his firm was converting dollars to yuan faster in response to the recent exchange rate moves. While the 68.8% of export receipts converted to yuan in December was not a record, it signals a growing trend.

Balancing Growth with Currency Stability

The yuan's trajectory presents a fundamental dilemma for Beijing. China's 5% GDP growth last year was heavily reliant on a record $1.2 trillion trade surplus, an increase of about 20% from the previous year. A runaway currency rally would erode the competitive advantage of Chinese exporters and could put this growth engine at risk.

"Our base scenario remains a strong export performance, which could support the yuan," said Chaoping Zhu, global market strategist at J.P. Morgan Asset Management. "However, as foreign governments become more cautious about the impacts on their economies, uncertainties are rising for Chinese export growth."

This suggests a future of "higher two-way volatility," with the exchange rate likely fluctuating around the 7-per-dollar mark.

For now, the PBOC appears focused on ensuring any appreciation is "on a gradual, measured pace," according to Kelvin Lam, senior China+ economist at Pantheon Macroeconomics. By managing a slow and stable nine-month rally that has lifted the yuan nearly 6% against the dollar, policymakers aim to boost the currency's appeal for international trade and investment without derailing the export machine that powers the economy.

A long history

In June, Altman appeared with Advanced Micro Devices

Source: CNBC

Futures pared some gains after White House Press Secretary Karoline Leavitt said US President Donald Trump wants to pursue diplomacy “first” with Iran. Prices advanced in post-settlement trading, rising as much as 3.3%.

Source: Bloomberg

Private-sector analysts have raised their expectations for Mexico's economic growth in 2026, according to the central bank's January survey. The updated outlook follows stronger-than-anticipated economic performance at the end of 2025.

Stronger Growth Spurs Upgraded Forecasts

The median forecast for Mexico's 2026 GDP growth now stands at 1.3%, an increase from the 1.15% projected in the mid-December survey. In contrast, the outlook for 2027 saw a slight downward revision to 1.8% from 1.85%.

This optimism is rooted in new data showing Mexico's economy expanded by 1.6% year-over-year in the fourth quarter of 2025. The expansion was led by solid performance in the agriculture sector, with more modest growth recorded in the industrial and services sectors.

USMCA Renewal and Key Economic Risks

According to market sources, growth prospects for both 2026 and 2027 hinge on the successful and timely renewal of the US-Mexico-Canada (USMCA) free trade agreement. Negotiations are scheduled to conclude in July.

Optimism surrounding the talks is reflected in the survey’s quarterly breakdown, which projects GDP growth will accelerate to 1.54% in the third quarter of 2026, up from 1.1% in the second quarter.

Despite the positive outlook, analysts identified public security as the primary short-term risk to economic growth. This concern significantly outpaced foreign trade issues, with both factors cited far more frequently than any other potential headwind in the survey.

The Outlook on Inflation and Interest Rates

Analysts slightly increased their inflation expectations for 2026, with the forecast moving to 3.95% from 3.88%. The estimate for core inflation, which excludes volatile food and energy prices, remained unchanged from the previous survey at 3.75%.

Annual inflation slowed to 3.69% in December—the lowest December reading since 2020. However, core inflation, despite easing to 4.33% from 4.43%, remained above the central bank's 4% upper target for the eighth consecutive month.

The central bank cut its target rate to 7% on December 18, down from 10% at the start of 2025. Analysts expect the tightening cycle to end this year and forecast the rate will close 2026 at 6.5%. The bank's next monetary policy decision is scheduled for February 5.

Analysts Project a Stronger Mexican Peso

The survey also revealed a stronger forecast for the Mexican peso. Analysts now project an exchange rate of Ps18.50 per US dollar by the end of 2026, a significant improvement from the previous forecast of Ps19.23. The end-2027 forecast was also strengthened, moving to Ps19.00 from Ps19.45.

This view aligns with recent market performance. The US dollar weakened by roughly 4% against the peso over the last month, trading at Ps17.26 on February 3 compared to Ps17.9 on January 3.

U.S. Treasury yields declined on Tuesday as traders weighed the possibility of a major policy shift at the Federal Reserve and navigated economic data delays caused by a partial government shutdown.

Market focus has intensified on Kevin Warsh, who President Donald Trump selected on Friday to lead the central bank when Jerome Powell’s term concludes in May. Though previously known as an inflation hawk, Warsh is now advocating for lower interest rates.

This potential change at the top is creating complex crosscurrents in the bond market, pushing yields lower while reshaping expectations for the Fed's long-term strategy.

A New Fed Playbook Under Warsh?

Jason Pride, chief of investment strategy and research at Glenmede, anticipates the Fed will cut rates twice this year by 25 basis points each—a scenario he notes is already largely priced into the market.

However, the more significant impact of a Warsh-led Fed could be on its massive balance sheet. Warsh has been a vocal critic of the Fed's large holdings, arguing they distort the financial system. In a November Wall Street Journal opinion piece, he stated, "the Fed's bloated balance sheet, designed to support the biggest firms in a bygone crisis era, can be reduced significantly."

This stance is causing the yield curve to steepen. Pride explained that Warsh has been "a strong advocate against the overuse of the Federal Reserve's balance sheet." At the same time, his view on short-term rates "is very much in line with the Federal Reserve's policy up until now, and maybe even a little bit dovish relative to it."

Bond Market Responds to Uncertainty

The mixed signals are being reflected in Treasury prices:

• The 2-year Treasury note yield, sensitive to Fed rate expectations, edged down 0.2 basis points to 3.568%.

• The benchmark 10-year Treasury note yield fell 1 basis point to 4.268%.

The spread between the two-year and 10-year yields, a key gauge of the yield curve, narrowed slightly by half a basis point to 69.5 basis points. This followed a move to 72.7 basis points on Monday, its steepest level since April. Adding to the downward pressure on yields was a sharp selloff in stocks on Tuesday, which likely boosted safe-haven demand for government debt.

Data Delays and Market Crosscurrents

Compounding the uncertainty is a lack of clear economic signals. Thomas Simons, chief U.S. economist at Jefferies, pointed out that some traditional market correlations have broken down recently, making it difficult to determine what is driving asset prices.

"It feels like the market's having a hard time assessing whether or not there is a kind of broad risk-off or risk-on tone at any given time because of all the crosscurrents," Simons said.

The partial government shutdown has exacerbated this issue by delaying the release of January's crucial employment report, originally scheduled for Friday. While the U.S. House of Representatives narrowly approved a deal on Tuesday to end the shutdown, the data blackout has left investors flying blind.

The Outlook for Inflation and Rates

Recent economic data had pushed market expectations for the next Fed rate cut to June. However, a significant slowdown in the labor market, once the data is released, could accelerate that timeline.

Looking further ahead, Pride projects the U.S. economy could see above-average growth in 2026 as tariff headwinds fade and fiscal stimulus takes effect. He warned this could raise inflation risks, keeping it a primary focus for the Fed.

The debate within the central bank continues. On Tuesday, Richmond Fed President Tom Barkin noted that while rising productivity is helping to ease cost pressures, its persistence is hard to predict, making future monetary policy decisions difficult. In contrast, Fed Governor Stephen Miran, speaking on Fox Business Network, continued to argue for aggressive interest-rate cuts this year.