Tariff turbulence

As promised during the campaign, President Trump announced tariffs on Canada, China and Mexico.¹ The move was meant to pressure the countries to help with the border (in the case of Mexico and Canada) and stop the flow of fentanyl into the U.S. (all three).

The move was announced on Friday, Jan. 31, and was set to take effect on Saturday, Feb. 1. Predictably, the markets tanked, wiping out gains on the last day of the month but still notching a pretty solid start to the year despite all the frothiness.

Then Monday started off ugly with futures plunging 800 on the Dow.² That same day, Trump agreed to put Mexico’s tariffs on hold for a month after a “very friendly conversation” with the Mexican president, then did the same with Canada after they agreed to concessions as well.³ Markets wiped out earlier losses after the announcement of the delay, and by Tuesday the markets were close to the same levels they were at before all the tariff turbulence began.

As for China, there was much talk about whether Trump and Chinese President Xi Jinping will be talking soon.⁴ Trump’s approach to China does not seem as blunt as he was with our two neighbors; it even appears a bit nuanced, as he exempted small packages from China which are a large part of the shipments made to the U.S. from companies like Temu and Shein.⁵ However, a lot of the tariffs imposed on China during the first Trump administration were never removed, so it’s a little more complicated.

Markets were nearly back to record levels by the end of Thursday — but the January jobs numbers, consumer sentiment and more tariff talk made for a tough end to the week.

Last week’s data was all about jobs. The Job Openings and Labor Turnover Survey (JOLTS) report was released on Tuesday, with openings dropping from 8.16 million in November to 7.6 million in December.⁶ Then on Wednesday, the ADP employment report surprised to the upside, with +183,000 private sector jobs reported versus the forecast of +153,000.⁷ The prior month’s reading was also revised upward significantly from +122,000 to +176,000. The report showed jobs were still growing but openings were slowing — not a bad place to be.

The Bureau of Labor Statistics (BLS) employment situation (aka non-farms payroll) for January came in at +143,000, under the consensus of +168,000. The report for December was revised upward from +256,000 to +307,000. However, the report also showed 598,000 fewer jobs were created in the last 12 months than previously estimated. Meanwhile, the unemployment rate dipped from 4.1% to 4.0%.⁸

Markets didn’t care for the “meh” jobs number, which wasn’t bad enough to convince anyone that the Fed may accelerate rate cuts. The dip in consumer sentiment to a seven-month low also soured markets.⁹ Finally, President Trump said there will be more tariffs on other countries that he plans to announce this week — and that was enough to sink the markets on Friday.

All that activity and bluster led to a down week across the board for markets, but the levels were about in line with where we finished the week prior. Let’s hope there is a master plan here, because the week we just had in the markets is exhausting.

• The first part of the week will be fairly quiet, although some Federal Reserve officials will be making the speaking rounds. Chairman Jerome Powell will be testifying before both chambers of Congress this week in what was known back in the day as the semi-annual Humphrey Hawkins testimony.
• We’ll see the latest Consumer Price Index (CPI) numbers on Wednesday, which was previously at 2.9%.¹⁰ (Core CPI excluding food and energy was at 3.2%.) Core has been moving downward very slowly but is still well above the Fed’s target 2%. Regular ol’ CPI has actually been trending up since its recent bottom of 2.4% last September, which is also above the Fed’s desired level. We’ll also see MBA mortgage applications on Wednesday.
• On Thursday, we’ll see the Producer Price Index (PPI) and Core PPI. Both came in at 3.3% in December.¹¹ Remember, these numbers are what producers pay for their input costs to make the products and services consumers buy. Logic would dictate that producers make things to make money, so if their costs rise at a higher rate than consumer prices, they will have to eventually raise prices to keep up and consumer inflation will increase. This isn’t a linear relationship because producers can absorb some of the increased costs for a while, but eventually they will be forced to pass on the cost. If consumers balk at the increases, producers will simply make less, which would also increase prices. It is imperative that PPI be lower than CPI if we want to see inflation head lower.
• We’ll finish out the week with retail sales, import prices, inventories and industrial production on Friday.
• Earnings roll on this week. So far, 77% of reporting companies have shown positive earnings while 63% have reported positive revenues. Fourth-quarter earnings growth for the S&P 500 is 16.4%.¹²