US Government Shutdown Looms as Senate Vote Fails

Source: Bloomberg

Global banks are entering a new era of strength, with market valuations hitting historic highs as they navigate a more favorable regulatory and earnings environment. After years of building resilience against low interest rates, the industry is showing renewed confidence.

According to the Boston Consulting Group, 53% of banks worldwide now have a price-to-book ratio (PBR) above one. This is a significant jump from four years ago when only 35% of banks cleared that same threshold.

"Over the past decade or so, the financial industry has taken a more cautious, inward-looking stance, focusing on productivity improvements and compliance," noted Saurabh Tripathi, global leader of financial institutions practice at Boston Consulting Group.

Following discussions at the World Economic Forum in Davos, Switzerland, Tripathi observed a clear shift in sentiment. "Leaders in the banking sector feel confident they can sustain high profitability over the medium term, supported by stable net interest margins and regulatory easing," he said.

Navigating a Shifting Rate Environment

For years, the banking sector has contended with the headwinds of low interest rates, a reality that set in after the 2008 financial crisis. The easy-money policies adopted during the COVID-19 pandemic were later reversed by central banks in the U.S. and Europe to combat inflation.

Now, a new phase is beginning. "Policy rates are now entering a downward phase," Tripathi explained, pointing to a trend that started around mid-2024. However, he anticipates that the resulting decline in banks' net interest income "is likely to be gradual," allowing banks to maintain strong profitability.

Deregulation Creates New Opportunities

A major tailwind for the sector is the push for financial deregulation, particularly from the Trump administration. In November, the U.S. Federal Deposit Insurance Corporation (FDIC) approved a final rule that eases capital standards for banks.

This rule aims to reduce the regulatory burden on major financial institutions compared to directives issued under the Biden administration, bringing U.S. standards more in line with international capital requirements.

Case Studies in Global Banking Success

The positive industry trend is reflected in the performance of individual banking giants in both the U.S. and Japan.

Wells Fargo's Remarkable Turnaround

Wells Fargo stands out as a prime example of a global bank improving its valuation. Around 2020, the group's PBR fell below 1, but it has since rebounded to approximately 2.

A key factor was the lifting of an enforcement action in June of last year, which had previously restricted the bank's asset growth due to past misconduct. With that restriction removed, Wells Fargo is free to pursue a growth-oriented strategy.

In a recent demonstration of its renewed capacity, Wells Fargo committed to a $29.5 billion loan as part of Netflix's $72 billion bid for Warner Bros. Discovery. This commitment represents the largest bridge facility of its kind for a single bank.

Japan's Banking Sector Rises

In Japan, leading institutions like Mitsubishi UFJ Financial Group have also seen their PBRs climb past the 1.0 mark, driven by the normalization of interest rates. The country's top banks are now on track to report record-breaking consolidated profits for the fiscal year ending in March.

This growth is further supported by policy changes. Japan's Financial Services Agency plans to ease rules that cap bank lending as a percentage of their capital. This move will empower banks to provide substantial, temporary funding for major corporate activities like acquisitions.

President Donald Trump issued a direct warning to Iran on Wednesday via social media, signaling that military strikes are on the table unless the nation's leaders agree to a comprehensive political settlement. The message comes as the United States military concentrates a formidable force for a potential operation against Iran.

Dozens of warships, including a nuclear-powered aircraft carrier, alongside hundreds of combat aircraft, are now positioned to attack if ordered.

A Breakdown of the US Military Buildup

The U.S. has assembled a powerful air and naval armada to back up its diplomatic pressure on Iran. All information regarding this deployment is based on open-source intelligence from outlets including the Pentagon and the White House.

Naval Power in the Region

The centerpiece of the naval deployment is the USS Abraham Lincoln aircraft carrier strike group, which is moving into the area from the Indo-Pacific. The deployment includes a massive concentration of firepower:

• Aircraft Carrier: The nuclear-powered USS Abraham Lincoln carries nine air squadrons, including F-35C Lightning II stealth fighters, F/A-18E/F Super Hornet jets, and EA-18G Electronic Warfare aircraft.

• Escort Fleet: The carrier is escorted by three Arleigh Burke-class guided-missile destroyers, each capable of launching dozens of Tomahawk land-attack cruise missiles.

• Additional Forces: Beyond the Lincoln's immediate group, another six Arleigh Burke-class destroyers are operating in the Arabian Sea, Red Sea, and Mediterranean Sea. It is also highly probable that U.S. Navy guided-missile submarines, armed with Tomahawks, are in the region.

Air Force Assets on High Alert

Significant U.S. Air Force assets are also stationed at bases across the Middle East and Europe, ready to support any potential action.

• European Bases: RAF Lakenheath in the United Kingdom houses approximately 54 F-35A Lightning II stealth fighters and 35 F-15E Strike Eagles. At least one squadron of F-16 Fighting Falcons is based in Italy.

• Middle Eastern Bases: In Jordan, the Muwaffaq Salti Air Base hosts 37 F-15E Strike Eagles and two squadrons of A-10 Thunderbolt attack jets.

• Strategic Bombers: The Air Force has dozens of B-1 Lancer, B-2 Spirit, and B-52 Stratofortress strategic bombers on standby in the continental U.S. for long-range precision strikes. Transport aircraft have also been observed making regular flights to the Middle East.

Trump's Ultimatum: Negotiate or Face Consequences

In a post on his Truth Social platform, President Trump detailed the military presence with a direct message to Tehran.

"A massive Armada is heading to Iran. It is moving quickly, with great power, enthusiasm, and purpose," Trump stated, noting it was a larger force than the one sent to Venezuela. He emphasized that the U.S. military is "ready, willing, and able to rapidly fulfill [their] mission, with speed and violence, if necessary."

However, Trump framed the deployment as leverage for diplomacy. He urged Iran to "quickly come to the table" and negotiate a resolution to longstanding issues with the West, specifically its nuclear weapons program. The president’s message suggests the military buildup aims to force a permanent solution, whether through negotiation or direct action.

To underscore his point, Trump reminded the Iranian regime of a past military operation, noting their previous failure to make a deal led to Operation Midnight Hammer. During that operation, the U.S. military used B-2 Spirit stealth bombers and Tomahawk missiles to conduct precision strikes against several of Iran's nuclear facilities.

"Time is running out, it is truly of the essence!" Trump concluded. "The next attack will be far worse! Don't make that happen again."

Beneath the public clash over interest rates, a surprising consensus is forming between the Trump administration and the U.S. Federal Reserve on the near-term economic outlook.

While President Donald Trump has loudly called for deep rate cuts, both his economics team and officials at the central bank now largely agree on several key points: a potential productivity boom could boost the economy without fanning inflation, tariffs are unlikely to cause persistent price pressures, and overall economic growth remains solid.

The alignment isn't perfect. The crucial divide lies in how to manage risk. The administration wants an aggressive bet on productivity to justify immediate rate cuts. The Fed, on the other hand, is demanding more proof, particularly as inflation has remained above its 2% target for the past year.

A Hidden Consensus on the U.S. Economy

Fed Chair Jerome Powell, speaking after the central bank held its benchmark interest rate steady in the 3.50% to 3.75% range, sketched an optimistic view of the economy. This marks a significant shift from a year ago when concerns about slowing growth and trade wars dominated the policy debate.

While Powell’s tone was measured, his outlook shared key themes with top administration officials, even as the Fed resists calls for rapid rate reductions.

The decision to hold rates was not unanimous. Two policymakers, Governor Christopher Waller and Governor Stephen Miran, both Trump appointees, dissented in favor of a rate cut at the January meeting. However, Powell described the sentiment to hold rates steady for now as "broad" among the Federal Open Market Committee’s 19 members.

The current pause on rates is less about a fundamental disagreement on the economy's direction and more about how to weigh the forces shaping it.

Productivity and Tariffs: The Core of the Outlook

Both sides are closely watching productivity and the impact of tariffs, seeing them as central to the economic forecast.

Tariffs as a One-Time Price Shock

On tariffs, the Fed’s view is that while they have pushed up some prices, the effect is temporary.

"Ultimately, we think those will not result in inflation as opposed to a one-time price increase," Powell said, adding that there's an "expectation that sometime in the middle quarters of the year we'll see tariff inflation topping out." Administration officials also believe any price impact from tariffs will be temporary and that inflation is set to decline.

The Productivity Puzzle

On the topic of productivity, the administration, led by chief economic adviser Kevin Hassett, argues that an emerging surge warrants looser monetary policy, much like the approach then-Chair Alan Greenspan took during the 1990s tech boom.

Powell acknowledged the Fed is watching this closely. "We're all over that," he stated. "No one's sitting here unaware of the possibility of higher productivity... We are well aware that higher productivity means higher potential output, and it changes the way you think about, potentially, inflation, growth, labor market."

However, he added a note of caution that defines the Fed’s current stance: "We're very clear-eyed about the possibility that this higher productivity may persist, and also that it may not." This uncertainty makes the central bank hesitant to move policy too quickly.

Powell Signals Strength, Holds Rates Steady

After a year dominated by uncertainty, Powell noted that "the economy has once again surprised us with its strength." The Fed's latest policy statement upgraded its assessment of growth, a view that contrasts with Trump's more boisterous descriptions of the U.S. as the "hottest" economy in the world but still points to a positive trajectory.

Powell said that strong consumption and business investment mean "this year starts off on a solid footing for growth." He also pointed to a curious trend: consumers are expressing negative views in surveys but continuing to spend, suggesting a disconnect between sentiment and behavior.

What Could Trigger a Fed Rate Cut?

Despite the shared economic views, tension over interest rates is unlikely to disappear. While the long-term expectation is for rates to eventually move lower, a cut in the near future would likely signal that something has gone wrong.

"If they are easing before June, something bad has happened in the economy," said Neil Dutta, head of economics at Renaissance Macro Research.

Powell noted that the current 4.4% unemployment rate appears to be "stabilizing," with risks to the job market diminishing compared to last year. According to Dutta, a few main scenarios are in play for the Fed's next moves:

• No Cuts This Year: If growth and the job market outperform expectations while inflation remains stuck, the Fed might not cut rates at all.

• Gradual Cuts: If inflation slows as policymakers anticipate, the Fed could begin a series of gradual rate cuts.

• Quicker Cuts: If growth falters and the unemployment rate rises, the Fed would likely respond with faster rate reductions.

The next major data point will be the January jobs report. "Corporate labor market news does not feel great at the moment," Dutta cautioned, noting a recent slide in consumer confidence about the job market. "When consumers say labor market conditions are worsening, it usually pays to believe them."

SHFE has been taking steps to cool the rally by raising margin requirements in several contracts and placing trading restrictions on certain clients in the tin and silver markets. On Thursday, it said that an unnamed client had violated rules governing abnormal trading in one of its contracts, and urged investors to “further enhance their risk awareness, invest rationally, and jointly maintain the stable operation of the market”.

Fed Chair Powell talked up a “clear improvement” in the US economic outlook as the bank kept borrowing costs on hold on Wednesday. His tenure ends in June, after which Trump may be better positioned to step up his campaign for lower rates.

Source: Bloomberg

U.S. President Donald Trump has consistently defended his use of tariffs as a key tool in his administration's economic and national security strategy.

U.S. President Donald Trump issued a warning on Thursday that tariffs on trading partners could become "much steeper," even as he claimed his administration has been "very nice" in its implementation of the policy so far.

The remarks were made during a White House Cabinet meeting, highlighting the administration's firm stance on trade amid a high-stakes legal review.

"The tariffs are very ... you know ... steep. They could be much steeper," Trump said. "We've been actually very nice about it, but even being nice about it, we've taken in hundreds of billions of dollars."

Tariffs as a National Security Tool

The president reiterated his long-held argument that tariffs have generated "tremendous" national security and strength for the United States.

He also directed criticism at those challenging the policy, labeling them "China-centric."

"These are people that are China (centric), but they are also outside of the United States," Trump stated. "These are countries that have ripped us off for years and years, charging us tariffs."

Supreme Court Scrutiny Puts Policy to the Test

Trump's defense of his tariff strategy comes as the U.S. Supreme Court deliberates the legality of specific tariffs imposed under the 1977 International Emergency Economic Powers Act (IEEPA). The court is expected to issue a ruling on these country-specific measures in the coming months.

A ruling against the administration could trigger calls for significant tariff refunds. However, the administration is widely expected to seek legal workarounds or alternative measures to maintain its tariff framework.

It is important to note that the court's review does not affect all of Trump's tariffs, such as the sector-wide duties imposed on autos and other items.

The Economic Goals Behind the Tariff Agenda

The administration has consistently framed its use of tariffs as a strategic tool to reshape the U.S. economy. The primary stated objectives include:

• Reducing the U.S. trade deficit.

• Increasing federal revenue.

• Boosting foreign investment and domestic manufacturing.