Welcome back to The Weekly Echo

Trade disputes flare, markets lose their compass, and the debt bill comes due.

This week, the global economy is struggling to find its footing. The European Union is reigniting trade tensions with China, targeting medical devices in a move likely to provoke retaliation. Meanwhile, in the U.S., the once-reliable relationship between the dollar and bond yields is beginning to unravel, and not for good reasons.

The U.S. Treasury paid over $1.2 trillion in interest in 2024, the largest amount ever recorded, raising serious questions about fiscal sustainability. Across the Atlantic, UK house prices have defied expectations with a stronger-than-forecast rise in May, just as Donald Trump threatens to slap a 50% tariff on British steel.

From bond markets to Brexit aftershocks, let’s unpack what’s moving markets and why it matters.

1. Dollar and Treasury Yields Decouple: What’s Going On?

Markets are behaving unusually. U.S. Treasury yields are climbing, typically a sign that investors expect stronger returns and economic momentum, but the dollar isn’t rising with them. In fact, the two are moving more independently than usual, raising questions about what’s really driving investor behaviour.

The Traditional Relationship: Yields Up, Dollar Up

Usually, when Treasury yields go up, the dollar follows. That’s because higher yields attract foreign capital into U.S. assets, which increases demand for the dollar. But recently, even as 10-year Treasury yields rose above 4.5%, the dollar has remained mostly flat, or even softened at times. This divergence suggests a shift in what investors are prioritising and where they’re putting their money.

What’s Behind the Disconnect?

1. Strong Equity Markets Are Pulling Focus

Rather than flocking to U.S. government bonds, investors are chasing better returns in equities. With the S&P 500 hitting record highs and optimism around AI and tech earnings, capital is flowing into stocks instead of Treasuries. That helps explain why bond yields are rising, prices are falling as demand drops but the dollar isn’t getting the usual lift.

2. Fiscal Concerns Are Starting to Show

Investors are becoming more cautious about the U.S. government’s fiscal path. A proposed tax cut package could add $3 trillion to the federal deficit over the next decade, fuelling concerns about long-term debt sustainability. Instead of seeing Treasuries as a safe haven, investors are beginning to demand higher yields to offset growing fiscal risks—without necessarily buying more dollars.

3. Gold Is Back in Favour

In this environment of rising debt, geopolitical uncertainty, and doubts about fiat currencies, investors are increasingly turning to gold. Central banks have continued to build their gold reserves, and demand from private investors has remained strong. Gold offers a hedge against both inflation and instability, making it more attractive when confidence in government debt or currencies wavers. That demand for gold may be siphoning capital away from both the dollar and Treasuries.

4. Global Diversification Is Accelerating

Investors are also spreading their bets. European and Asian markets are seeing renewed interest, particularly as valuations look more attractive and rate-cut expectations rise abroad. This shift is reducing automatic demand for dollar-denominated assets, even when yields are appealing.

What This Means for the Global Economy

Currency Market Volatility

As traditional patterns break down, it becomes harder for businesses, investors, and policymakers to predict currency moves. That makes hedging more complicated and can lead to sharper market swings.

Relief for Emerging Markets

A softer dollar can ease the pressure on emerging economies with dollar-denominated debt. But it may also be a signal that the world is growing more cautious about U.S. economic management—and looking elsewhere for stability.

Bottom Line

The divergence between Treasury yields and the dollar points to deeper shifts in investor sentiment. While U.S. equities remain attractive, rising fiscal concerns are pushing some investors toward gold and other non-dollar assets. As market dynamics evolve, traditional relationships are weakening, leaving investors with a more complex and uncertain landscape to navigate.

2.  AI Adoption Accelerates: What It Means for the U.S. Economy

Artificial intelligence (AI) is no longer a futuristic concept, it's rapidly becoming a cornerstone of the U.S. economy. Businesses across various sectors are integrating AI into their operations, signalling a transformative shift that could bolster economic growth and reshape the labour market.

Why Is AI Adoption Gaining Momentum?

1. Enhanced Productivity and Efficiency
   Companies are leveraging AI to automate routine tasks, leading to increased productivity and cost savings. For instance, financial institutions are deploying AI-driven virtual analysts to provide real-time insights, streamlining decision-making processes.

2. Competitive Advantage
   Early adopters of AI technologies are gaining a competitive edge by offering innovative products and services. This not only attracts customers but also sets new industry standards, compelling other businesses to follow suit.

Economic Implications of AI Integration

• Boost to GDP Growth
  The widespread implementation of AI is expected to contribute significantly to the U.S. GDP. By enhancing productivity and creating new market opportunities, AI could drive sustained economic expansion.

• Labor Market Transformation
  While AI may displace certain jobs, it also creates new roles that require advanced skills. This shift necessitates a focus on reskilling and upskilling the workforce to meet the demands of an AI-driven economy.

Challenges and Considerations

• Regulatory Framework
  As AI technologies evolve, establishing a robust regulatory framework is crucial to address ethical concerns, data privacy, and security issues.

• Equity and Access
  Ensuring equitable access to AI advancements is essential to prevent widening socioeconomic disparities. Policies aimed at inclusive growth can help mitigate potential negative impacts.

Bottom Line

The rapid adoption of AI in the U.S. signifies a pivotal moment in economic development. While the benefits are substantial, addressing the accompanying challenges is vital to harness AI's full potential for inclusive and sustainable growth.

3. UK House Prices Are Rising, But What’s Behind the Surge?

UK house prices are climbing once again, surprising analysts and defying expectations amid a still-tough macro environment. According to Nationwide, average house prices rose by 0.7% in May, marking the third consecutive monthly gain and the strongest since late 2022. Year-on-year, prices are now up 1.3%, pointing to a slow but noticeable recovery in the housing market.

So what’s driving this unexpected strength in house prices? Let’s break it down.

Why Are House Prices Rising?

Though the economic backdrop remains uncertain, with high mortgage rates, sluggish growth, and political uncertainty, several forces are giving the housing market just enough oxygen to stay buoyant.

1. Optimism Over Rate Cuts

Market expectations are shifting in favour of a Bank of England rate cut, possibly as early as August. With inflation finally cooling, buyers are becoming more confident that mortgage rates will soon fall, encouraging some to enter the market before financing becomes cheaper and competition heats up.

Even a small drop in rates can make a big difference for affordability, especially after two years of intense rate hikes that have stretched mortgage costs to multi-decade highs.

2. A Tight Market With Few Sellers

Despite buyer hesitancy, supply remains at historically low levels. Many homeowners have been reluctant to list their properties, as they have locked in lower mortgage rates from previous years. This lack of inventory is helping support prices, even as transaction volumes remain muted.

In short, fewer homes on the market means more price support, even without surging demand.

3. Labour Market Stability

The job market is doing some quite heavy lifting. With unemployment still near record lows and wage growth beginning to outpace inflation, households are starting to feel stable enough to make long-term financial commitments. That added confidence is key in a high-cost mortgage environment.

But Is It Sustainable?

While recent price gains are promising, analysts warn that the market may be bumping up against its affordability ceiling, especially in areas like London and the South East where price-to-income ratios remain stretched.

And with a general election expected later this year, policy risk looms large. Any shift in housing policy, from planning reform to tax incentives, could have ripple effects across the market.

Why Do Rising House Prices Matter?

The housing market is a key barometer for the broader UK economy. Rising prices can lift consumer confidence and boost spending, as homeowners feel wealthier. However, they can also exacerbate inequality and exclude first-time buyers, particularly younger individuals and lower-income households.

Moreover, a fragile recovery in housing doesn’t necessarily signal broad-based economic strength. If price growth is being driven by low supply and speculative demand, rather than real wage growth and productivity, it may not be sustainable.

Bottom Line

The UK housing market isn’t booming, but it is bending expectations. A mix of rate cut hopes, tight supply, and labour market resilience is keeping prices afloat. The big question now is whether this marks the start of a broader recovery or just another temporary lift before economic gravity takes hold again.

4. Trump Floats 50% Tariff on UK Steel. What’s Going On?

A new round of trade tensions is brewing. Former President Donald Trump has proposed a 50% tariff on UK steel exports if re-elected, raising fears of a sharp deterioration in U.S.–UK trade relations. The comments, made during a private campaign fundraising event, came just days after the UK imposed new tariffs on Chinese steel, a move reportedly made at Washington’s request.

Now, Trump’s threat has left officials in Westminster scrambling for clarity, and the UK steel industry bracing for potential disruption.

What Triggered the Threat?

At the centre of this is China’s global steel surplus, which has flooded international markets with cheap product, undercutting domestic producers in both the U.S. and Europe. In response, the UK government introduced new anti-dumping measures on Chinese steel, aimed at protecting domestic output and aligning more closely with U.S. trade policy.

But instead of viewing this as a sign of solidarity, Trump reportedly accused the UK of "taking advantage" of the U.S., suggesting the UK benefits from access to American markets while contributing little in return.

While not an official policy, the threat of a 50% steel tariff - a significant hike from current rates - is now hanging over an already strained transatlantic relationship.

What’s at Stake for the UK?

1. Industry Impact:
UK steel exports to the U.S. are worth over £300 million per year. A sudden tariff spike would make British steel significantly more expensive and less competitive, risking job losses in key industrial regions such as South Wales and Yorkshire.

2. Trade Agreement Fallout:
The UK has long hoped for a post-Brexit free trade agreement with the U.S., but this latest development underscores how fragile that hope remains. A tariff war would not only delay negotiations but could also poison broader economic cooperation.

3. Diplomatic Tensions:
The UK government, led by Rishi Sunak, now faces a tricky balancing act: maintaining alignment with U.S. security and trade interests while avoiding becoming collateral damage in America’s shifting political winds.

Is This Just Campaign Talk?

Possibly - but it still matters.

Trump’s remarks were made in a private campaign setting, and his team has not released a formal trade policy document. However, markets, investors, and foreign governments are taking his comments seriously, given his record of aggressive tariff policies during his first term, including the steel and aluminium tariffs imposed in 2018 under Section 232.

This isn’t the first time Trump has aimed at allies over trade. What’s new is that the UK, once touted as a "special relationship" partner, is now being framed as a trade rival.

What to Watch

• Official Policy Response: Will Trump formalise this threat into campaign policy — or was it off-the-cuff bluster? Either way, UK officials are already seeking clarification.
  

• Market Reaction: Steel companies, especially those reliant on U.S. exports, are watching closely. A tariff of this scale could shift export flows and pricing structures.
  

• Political Fallout: With elections looming in both the U.S. and the UK, this could become a flashpoint for broader debates around sovereignty, Brexit, and national industrial policy.

Bottom Line

Trump’s 50% steel tariff threat might be political theatre, or it might be a preview of post-2024 reality. Either way, it’s a reminder that trade alliances are no longer guaranteed, and that even old friends can find themselves in the crosshairs of campaign rhetoric.

5. EU Bars Chinese Medical Device Firms from Big Public Contracts 

In a significant escalation of trade tensions, the European Union has voted to exclude Chinese medical device manufacturers from public procurement contracts exceeding €5 million for the next five years. This move, marking the first use of the EU’s International Procurement Instrument (IPI), aims to address what Brussels describes as systematic discrimination against European firms in China’s medical device market.

Why Is the EU Taking This Step?

The decision follows a comprehensive EU investigation initiated in April 2024, which concluded that Chinese policies, particularly under the "Made in China 2025" strategy, have created significant barriers for foreign medical device manufacturers. The investigation found that 87% of Chinese hospital procurement contracts contained direct or indirect discrimination against foreign suppliers, effectively favouring domestic products.

Despite consultations, China did not implement changes to address these concerns, prompting the EU to act under the IPI framework.

What Are the Implications?

For Chinese Companies:

• Restricted access to lucrative EU public procurement markets, potentially impacting revenues and global market share.

For EU-China Relations:

• Increased trade tensions, with potential for retaliatory measures from Beijing, further complicate diplomatic and economic ties.

For the Global Medical Device Market:

• Potential shifts in supply chains and market dynamics as companies adjust to new procurement landscapes.

What Is the International Procurement Instrument?

The IPI, adopted by the EU in 2022, is designed to promote reciprocity in international public procurement markets. It allows the EU to impose measures on countries that do not provide fair access to their procurement markets, aiming to level the playing field for European companies.

What’s Next?

EU Trade Commissioner Maroš Šefčovič is scheduled to meet with China’s Commerce Minister Wang Wentao at the OECD summit in Paris to discuss the issue. While the EU emphasises its preference for dialogue, it remains firm on enforcing measures to ensure fair competition.

This development adds to a series of trade disputes between the EU and China, including tariffs on electric vehicles and investigations into various sectors. The outcome of upcoming negotiations will be critical in determining the future trajectory of EU-China trade relations.

As always, we’d love to hear your thoughts. Got feedback, questions, or a story you’d like us to cover? Just hit reply, we read every message.

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Thanks for reading, we’ll be back next week with more stories from the front lines of global markets, policy, and macroeconomics.

Best,
Harry & Reika
Co-Founders, Echonomics

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