Guy Foster, Chief Strategist, discusses developments to President Trump’s trade tariff policy and how these may impact the U.S. and Canada. Plus, Janet Mui, Head of Market Analysis, analyses fresh U.S. jobs data.
It seems investors may have to get used tovweekend bombshells. The week before last, it wasvthe announcement that the U.S. would impose an additional 10% tariff on imports from China, while imports from Mexico and Canada would be subject to 25% tariffs, taking effect within days. The additional curbs on China are unwelcome, but as a large internal market, it’s not overly sensitive to individual country restrictions. For Canada and Mexico, on the other hand, these additional costs would risk pushing the countries into recession.
However, these tariffs would also result in increased costs for the U.S. Tariffs would cause prices to rise, discouraging consumption and weighing on growth. They’d bring in revenue, but whether that revenue would be reinjected into the economy would depend on tax policy negotiations in Congress. Higher prices would mean a higher rate of inflation, although it would likely be a one-time increase rather than a steeper inflationary trajectory.
Will tariffs be universal?
After much anxiety swept through the financial and corporate communities, U.S. President Donald Trump delayed the imposition of these tariffs following telephone calls with their respective leaders. Nominally, he extracted concessions, although most offerings had already been pledged.
Last weekend, the goal posts seemed to move again. President Trump revealed he would be imposing a 25% tariff on all steel and all aluminium imports. Back in 2018, he imposed 25% tariffs on steel imports and 10% tariffs on aluminium imports before exempting certain countries (Canada and Mexico) as part of the renegotiation of NAFTA (the North American Free Trade Agreement). Some of these tariffs were also commuted to quotas. The new tariffs will apply universally, and
the aluminium tariff rate has risen. Although Trump announced there will be no exceptions, he is reportedly considering making one for Australia.
The moves reflected an environment where leaders seem compelled to take bold action. This is a contrast to the Washington consensus era, in which policymakers
attempted to get out of the way of the economy wherever possible.
While in the UK…
The Bank of England (BoE) cut interest rates, which was expected. However, the big surprise was the fact that Monetary Policy Committee (MPC) member Catherine Mann (who was once regarded as the most hawkish member of the Committee) joined Swati Dhingra in voting for a sharper rate cut of 0.5%. New MPC members are always something of an unknown quantity. When Catherine Mann joined, she was expected to be quite dovish but turned out to be a hawk. This evidence shows that rather than having a particular tilt, she is pragmatic but decisive with her actions.
In justifying their decision, the MPC had a number of complex issues to juggle, tariffs being one of these. There are a few ways in which tariffs could impact growth and inflation. Growth would clearly be weaker if the U.S. imposed tariffs, however the MPC saw as many reasons to expect weaker inflation as it did strong inflation.
Another quandary was the impact of last year’s increase in employer’s National Insurance contributions. Logically, these taxes will need to be paid through a mixture of companies charging more, paying staff less or earning less profit. The BoE surveyed businesses on this and found that the most popular response was lower wage growth and reduced employment. This suggesting, tentatively, that the tax increase could be disinflationary.
Overall, the MPC acknowledged that the neutral rate of interest seems to have risen over recent years. The main empirical evidence for this would be the softening labour market.
U.S. labour market remains strong
The U.S. released its employment report on Friday, which suggested its labour market remains strong. Substantial positive upward revisions to previous months made up for a slight disappointment in terms of the first estimate for January. Wage growth picked up more than expected, so overall, the U.S. labour market justifies a pause in rate cuts from the Federal Reserve (the Fed).
DeepSeek and the Magnificent Seven
Most of the Magnificent Seven have reported earnings now. Nvidia, to build the drama, doesn’t report until 26 February.
Amazon and Google (Alphabet) reported this week. They both saw strong growth in cloud services but were held back by capacity constraints, which echoed Microsoft’s results from the week before. Microsoft emphasised shortages of space and power over central processing units and graphics processing units. Amazon said most of the $26bn on capital expenditure in Q4 was to build artificial intelligence (AI) capability at Amazon Web Services. Google is anticipating spending $75bn over the coming year.
The companies seem unphased by the release of the DeepSeek model, believing, as we discussed last week, that more efficient models will increase adoption of AI rather than reducing demand for AI infrastructure. Amazon’s CEO described AI adoption as a once-in-a lifetime business opportunity, which the company is
expanding its capacity to fill.
What’s next?
This week, the focus will be on Fed Chairman Powell, who will be delivering testimony to the U.S. Congress on Tuesday. This isn’t normally a market-moving development, however the Chairman being in the spotlight may prompt President Trump to make one of his unorthodox comments on the appropriateness of
monetary policy or policymakers.
There will be a host of earnings numbers due, but with two thirds of companies having now reported, shocks seem less likely.
