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The escalating trade war between the U.S. and China could cause interest rate hikes, the very opposite of what President Donald Trump wants, some analysts have told CNBC.

Recent market consensus has suggested that the U.S. Federal Reserve is unlikely to raise interest rates, with Fed funds futures indicating a 76% chance the central bank will instead cut rates by 25 basis points before September. As of Wednesday, futures had also priced in a one-in-three chance that the Fed will cut twice by the end of the year.

Trump has regularly expressed his disapproval of high interest rates and called for the Fed to cut, tweeting Tuesday that the U.S. would win the trade war if the central bank followed his advice

But some analysts are striking a contrarian tone. Mark Phelps, CIO of concentrated global equities at AllianceBernstein, told CNBC Wednesday that if prices are pushed up because of Trump’s tariffs on Chinese goods, the Fed may respond to the inflationary impact by hiking interest rates.

Central banks will generally raise rates when inflation is predicted to rise above their inflation target, and higher rates tend toward moderate economic growth. This increases the cost of borrowing and can therefore limit the growth in consumer spending.

“Tariffs go up, you’ll see some hit to margin for companies, and that probably reduces their investment — that’s not great for growth,” Phelps said.

He added that higher prices will reduce consumer purchases of goods, also reducing growth.

“There will be an inflationary impact so the Fed is going to have potentially growth slowing and inflation going up — not an ideal set of circumstances, but certainly not something where they’re going to rush out and just cut rates for the sake of it,” Phelps said.

This view was echoed by Giles Keating, senior advisor at Torchwood Capital, who told CNBC “Squawk Box Europe” that the bond markets were “gambling that when inflation does go up, the Fed will look through that and say ‘it’s just higher tariffs,’ that it’s a one-off and it will go away.”

Meanwhile Jinny Yan, chief China economist at ICBC Standard Bank, also told CNBC that while Trump would love to cut interest rates, “probably the opposite direction would be justified because inflationary pressures will hit the United States, therefore hiking the rates might be the thing to do.”

Consensus view

The Fed has indicated that it is not ready to move rates in either direction at this point, but market sentiment remains expectant of a cut by the end of the year.

Yardeni Research President Ed Yardeni said in a note Wednesday that it was “unlikely that the Fed would raise interest rates in response to what would be a one-shot boost to the inflation rate from higher-priced Chinese goods.”

Yardeni also doubted that higher prices would reduce the purchasing power of American consumers, since importers might absorb some of the increased cost of doing business with China, which would squeeze their profit margins instead of passing costs to consumers.

In response, Yardeni argued, some businesses might move their supply chain away from China to avoid the tariff burden, which may mean the Chinese yuan continues to fall and offsets some of the tariff cost.

Pigeons fly past the US Federal Reserve in Washington.

Nicholas Kamm | AFP | Getty Images

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Deutsche Bank buys stake in fintech startup Deposit Solutions

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A cyclist rides outside the Deutsche Bank headquarters in Frankfurt, Germany.

Peter Juelich | Bloomberg | Getty Images

Deutsche Bank bought a 5% stake in German financial technology start-up Deposit Solutions, valuing the firm at north of 1 billion euros ($1.1. billion).

The deal makes Deposit Solutions Germany’s second-largest fintech unicorn — a private business that’s worth $1 billion or more — according to publicly available data. Deutsche did not disclose how much money it had invested into the firm.

It comes just months after the bank announced a huge restructuring program that would see 18,000 people laid off, as it scales back on its investment banking operations and looks to improve profitability. It also follows the collapse of the lender’s merger talks with domestic rival Commerzbank.

Deposit Solutions’ software lets third-party lenders that offer savings products plug into retail banks’ platforms, part of a broader trend in the financial services industry known as open banking. The firm says the benefit of this is that it lets retail banks that don’t sell savings products offer them to customers, often at higher interest rates.

Apart from Deutsche, the firm counts Peter Thiel’s venture fund Valar Ventures and private equity firm Vitruvian Partners as investors. Deposit Solutions said Deutsche has been one of the company’s customers since 2017, while other clients include Germany’s MunchenerHyp, British bank Close Brothers and the fintech firm Atom.

The deal signals growing interest from banking giants in the fintech space, with other lenders like HSBC and Goldman Sachs also ploughing cash into similar providers. It could also be seen as taking advantage of open banking rules from the EU, which authorize third parties to access bank customers’ data and initiate payments on their behalf.

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France’s Macron and Finland’s Rinne deliver Brexit ultimatum

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PARIS, FRANCE – SEPTEMBER 18: French President Emmanuel Macron (R) welcomes Finland’s Prime Minister Antti Rinne prior their meeting at the Elysee Presidential Palace on September 18, 2019 in Paris, France.

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The U.K. has until September 30 to make written proposals to replace the controversial Irish backstop or its relationship with the EU is over, the leaders of France and Finland agreed Wednesday.

The ultimatum comes as frustration grows in EU circles ahead of the October 31 departure date. Several European officials and leaders have argued that they had reached a deal with the previous U.K. government, called the Withdrawal Agreement, and if the current British leadership does not want to leave the bloc under those terms, then it’s up to the U.K. to make new proposals – something that the new Prime Minister, Boris Johnson, has not yet done.

“If the U.K. wants to discuss alternatives to the existing Brexit agreement then these must be presented before the end of the month,” the Finnish Prime Minister, Antti Rinne, told reporters on Wednesday, according to Sky News.

“If not by then, then it’s over,” Rinne added about the U.K.’s relationship with the other European countries.

His remarks came after a meeting with the French President, Emmanuel Macron – a hard-liner during the Brexit process.

The U.K. government has reportedly sent proposals to the European Commission on Thursday, according to Reuters. A spokesperson for the European Commission, however, said Thursday that the institution received “documents” from the U.K., which will be analyzed Thursday and Friday. The European Commission did not specify what these documents were.

Earlier on Wednesday, the EU’s Brexit negotiator, Michel Barnier, said: “It is not good enough to explain why the (Irish) backstop needs to be removed. We need legally operational solutions in the Withdrawal Agreement to reply precisely to each of these problems.”

The U.K. government, under the leadership of Boris Johnson, is against the Withdrawal Agreement due to one sticking point: the Irish backstop. This is an insurance policy that would essentially prevent a hard border in the area splitting Northern Ireland (part of the U.K.) and the Republic of Ireland (an EU member state). Boris Johnson, and other Brexit supporters, believe this so-called backstop could break up the United Kingdom, given that there would be different sets of rules in Northern Ireland compared to Scotland or England.

The EU keeps arguing that their intention is not to trigger the Irish backstop; rather its aim is to reach a trade deal as soon as possible, but it needs the Irish backstop in the exit deal to protect its single market in the event a deal is not reached.

The U.K. Prime Minister, Boris Johnson, has said that a deal is possible at an upcoming European summit on October 17. However, European leaders want to discuss the U.K.’s proposals ahead of that summit and, have hence asked the U.K. to submit these proposals by the end of September.

In an exclusive interview with CNBC Friday, Finland’s Antti Rinne said a no-deal Brexit is likely.

This chance of a no-deal Brexit increases if there are no proposals by the end of the month. Despite the EU’s willingness to reach an agreement on the U.K.’s departure, as well as legislation from the U.K. Parliament against a no-deal Brexit, the lack of an agreement means a no-deal Brexit is likely.

The only ways to prevent a no-deal Brexit on October 31 are: if there is an agreement between the U.K. government and the EU that is then approved by the U.K. parliament; or if the U.K. requests another extension and the other 27 European countries approve that request.

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OECD cuts growth outlook to post-crisis low

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The trade war between the United States and China has plunged global growth to its lowest levels in a decade, the OECD said on Thursday as it slashed its forecasts.

The Organisation for Economic Cooperation and Development said that the global economy risked entering a new, lasting low-growth phase if governments continued to dither over how to respond.

The global economy will see its weakest growth since the 2008-2009 financial crisis this year, slowing from 3.6% last year to 2.9% this year before a predicted 3.0% in 2020, the OECD said.

The Paris-based policy forum said the outlook had taken a turn for the worse since it last updated its forecasts in May, when it estimated the global economy would grow 3.2% this year and 3.4% in 2020.

“What looked like temporary trade tensions are turning into a long-lasting new state of trade relationships,” OECD chief economist Laurence Boone told Reuters.

“The global order that regulated trade is gone and we are in a new era of less certain, more bilateral and sometimes assertive trade relations,” she added.

Trade growth, which had been the motor of the global recovery after the financial crisis had fallen from 5% in 2017 into negative territory now, Boone said.

Meanwhile, trade tensions have weighed on business confidence, knocking investment growth down from 4% two years ago to only 1%.

Boone said that there was evidence that the trade standoff was taking its toll on the U.S. economy, hitting some manufactured products and triggering farm bankruptcies.

The world’s biggest economy would grow 2.4% this year and 2.0% next year instead of the 2.8% and 2.3% respectively that the OECD had forecast in May.

Global Economy Screen with world map and man

Stephen Morton | Bloomberg | Getty Images

Brexit Britain

China would also feel the pain with the second-biggest economy growing 6.1% in 2019 and 5.7% in 2020, outlooks the OECD cut from 6.2% and 6.0% previously.

The OECD estimated that a sustained decline in Chinese domestic demand of about 2 percentage points annually could trigger a significant knock-on effect on the global economy.

If accompanied with a deterioration in financial conditions and more uncertainty, such a scenario would mean global growth would be cut by 0.7 percentage points per year in the first two years of the shock.

Meanwhile, uncertainty over government policies was also hitting the outlook for Britain as it lurches towards leaving the European Union.

The OECD forecast British growth of 1% in 2019 and 0.9% in 2020, but only if it left the EU smoothly with a transition period, a far from certain conclusion at this stage. The OECD had forecast in May growth of 1.2% and 1.0%.

If Britain leaves without a deal, its economy will be 2% lower than otherwise in 2020-2021 even if its exit is relatively smooth with fully operational infrastructure in place, the OECD said.

The euro area would not be spared from negative spillovers under such a scenario and would see its gross domestic product cut by half a percentage point over 2020-2021.

The OECD trimmed its forecast for the shared currency block, largely due to the slowdown in its biggest economy, Germany, which was estimated to be in a technical recession.

Euro zone growth was seen at 1.0% – down from 1.2% in May – this year and 1.0% in 2020 – down from 1.4% in May.

Boone said Germany’s economy had probably shrunk in the second and third quarters with a slump in car manufacturing, which accounts for 4.7% of German GDP, knocking three-fourths of a percentage point off German growth.

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