February 7, 2025
US Tariffs: Here Today, Gone Tomorrow
A review of the week’s top global economic and capital markets news.
AUTHOR
Jamie Coleman
Strategist, Strategy and Insights Group
As of midday Friday, global equities were modestly higher on the week after reversing early week losses after the US imposed, than postponed, tariffs on Mexico and Canada while leaving them in place against China. The yield on the US 10-year note was little changed at 4.50% despite a slowdown in the US services sector and softer-than-expected nonfarm payrolls. The price of a barrel of West Texas Intermediate crude fell about a dollar to $71.10 after the immediate threat of tariffs on Canadian oil dissipated. Volatility, as measured by futures contracts on the Cboe Volatility Index (VIX), rose to 16.5 from 15.35 a week ago amid a volatility policymaking environment.
MACRO NEWS
US postpones tariffs on Mexico and Canada but not China
Markets reacted negatively on Monday morning to the signing of an executive order by US President Donald Trump last week imposing 25% tariffs on Mexico and Canada and 10% levies on imports from China. By midmorning on Monday, after discussions with Mexican President Claudia Sheinbaum, Trump postponed the duties on that country for 30 days and did the same Monday afternoon after speaking with Canadian Prime Minister Justin Trudeau. Both leaders pledged to devote more resources to stemming the flow of immigrants and fentanyl to the US. However, China was not spared, and Trump has yet to speak with President Xi Jinping. Markets took the tariffs on China in relative stride given that Trump had threatened levies as high as 60% while on the campaign trail. China retaliated with 15% tariffs on less than $40 billion in imports from the US, set to come into effect on 10 February, while launching antitrust investigations against several US technology companies and expanding export controls on key minerals. While no tariffs have yet been levied on the European Union, Trump said Sunday night they would “definitely happen.”
Trump outlines tax priorities
President Trump met with Republican lawmakers on Thursday to outline the priorities he wants to see in the upcoming budget reconciliation bill. Trump wants to end taxes on tips, Social Security benefits and overtime pay, raise the federal deduction for state and local taxes and lower corporate taxes on products made in America. To offset some of the costs of these priorities, Trump wants to end both the carried interest tax break on private equity and venture capital and a tax break for the owners of sports teams.
French PM forces through budget
French Prime Minister François Bayrou forced through the country’s 2025 budget using a tool known as article 49.3, which allows a minority government to pass legislation without a parliamentary vote, after which he survived a vote of no confidence. French bonds rallied after the vote, narrowing their yield gap with German bunds. The budget passed with the backing of French Socialists after Bayrou trimmed deficit cuts to €52 billion from an initial €60 billion. The budget projects a deficit of 5.4% of GDP.
Bessent says Trump not pressuring Fed
US Treasury Secretary Scott Bessent said this week that the Trump administration is focused on the US 10-year Treasury yield, not the funds rate and that the president is not pressuring the US Federal Reserve to lower interest rates. The administration is working on lowering energy prices, spurring noninflationary growth and cutting the size of government, he said. Bessent reiterated his goal of cutting the deficit to GDP ratio to 3%, increasing US oil production by 3 million barrels a day and increasing economic the economic growth rate to 3%. Tariffs are focused on returning manufacturing to the US, the secretary said.
January US employment data send mixed signals
While nonfarm payrolls rose only 143,000 in January, average hourly earnings jumped 0.5%, the unemployment rate dropped to 4% from 4.1% and the prior two months payrolls were revised higher by 100,000. After annual benchmark revisions, the US economy added an average of 166,000 jobs a month, down from the originally reported 186,000. The data reinforced expectations that the Fed will remain sidelined in the near term.
QUICK HITS
The US manufacturing sector expanded in January for the first time since October 2022, but services slowed. Activity in China decelerated.
By a 7–2 vote, the Bank of England cut its base lending rate 0.25% to 4.5%. The two votes were for a more aggressive half-point cut. BOE Governor Andrew Bailey said he expects the bank will be able to cut rates further. Inflation will rise temporarily to 3.7% this year, the bank forecast, while cutting its 2025 economic growth outlook in half, from 1.5% to 0.75%. UK equities welcomed the rate cut, with the FTSE 100 ending at a record high.
The Bank of Mexico cut its overnight lending rate to 9.5% from 10% and said it will consider additional 0.50% cuts ahead as Mexico’s growth risks are tilted to the downside.
The Reserve Bank of India cut its policy rate for the first time in nearly five years on Friday, to 6.25% from 6.5% amid easing inflation.
Year-ahead inflation expectations, as measured by the University of Michigan survey, jumped to 4.3% from 3.3%.
A Gallup poll found that 53% of Americans expect the economy to grow over the next six months, the highest level since 2005. 61% expect stocks to rise over the same period, the most since Gallup began asking the question in 2001.
Trump signed an executive order this week establishing a US sovereign wealth fund. Treasury Secretary Bessent and Commerce Secretary nominee Howard Lutnick are tasked with developing a strategy within 90 days on how the fund will operate.
Under pressure from the US, Panama said this week it will not renew its participation in China’s Belt and Road Initiative and may terminate it early. The Central American country is also considering canceling the contract of a Hong Kong-based company that operates ports at both ends of the Panama Canal.
Trump has asked Ukraine to guarantee the US access to rare earth minerals in exchange for continued military and economic aid.
US job openings fell to 7.6 million in December from an upwardly revised 8.16 million in November, the lowest level since September. The hire, layoff and quits rates were all steady, suggesting a less-dynamic US labor market backdrop.
The US Treasury said it expects to keep its coupon and floating rate note auction sizes stable for the next few quarters. Markets were prepared for larger note issuance since prior to his swearing in, Treasury Secretary Bessent was a critic of the department’s issuance of large quantities of Treasury bills.
The Kremlin confirmed on Wednesday it had established contact with the Trump administration as discussions begin about the possibility of holding peace talks to end the war in Ukraine.
Eurozone retail sales fell 0.2% in December from the month before but rose 1.9% year over year.
EARNINGS NEWS
With about 62% of the constituents of the S&P 500 Index having reported for Q4 2024, blended earnings per share (which combines reported data with estimates for those that have yet to report) show that earnings rose around 16.4% compared with the same quarter a year ago, according to data from FactSet. Blended sales rose 5.3% year over year.
THE WEEK AHEAD
Monday: New York Fed inflation expectations
Tuesday: National Federation of Independent Business Optimism index, Fed Chair Powell semiannual Senate testimony
Wednesday: US CPI, Powell semiannual House testimony
Thursday: UK industrial production, GDP, US PPI
Friday: Eurozone GDP, unemployment, US retail sales, industrial production
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Sources: MFS research, Wall Street Journal, Financial Times, Reuters, Bloomberg News, FactSet Research, CNBC.com.
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