Services PMIs

Once again, two surveys, two readings.

S&P Global: Output growth continues to slow in February as demand falters

The seasonally adjusted S&P Global US Services PMI Business Activity Index recorded 51.0 in February. Although above the critical 50.0 no-change to signal further growth of the sector, the rate of expansion was modest and the slowest since November 2023. Growth has softened noticeably in 2025 so far compared to the robust rates seen during the second half of last year.

Panelists widely linked the weaker rise in business activity to a concurrent slowdown in new business growth. Although still rising, extending the current run of expansion to 10 months, the rate of expansion was modest and the slowest in this sequence. Uncertainty related to federal government policies around trade tariffs were reported to have weighed on demand growth both at home and abroad. Concerning the latter, new export business declined for a second successive month in February and to the greatest degree since May 2024.

The weaker trend in new business, and broader economic uncertainty, weighed heavily on service sector business confidence. The latest data showed a steep deterioration in sentiment to its lowest since September, dropping well below its long-run trend in February. That said, firms still expect on average activity to rise from present levels in 12 months’ time. Some panelists noted hopes that President Trump’s new administration would generate an improvement in the business environment in the coming months.

Subdued trends in activity and new work meant firms were broadly unwilling to replace leavers in February and this was key in explaining a first modest drop in overall employment for three months.

Despite the reduction in headcounts, service providers were able to comfortably keep on top of their workloads. Outstanding business declined in February for the first time since last August and to the greatest degree since December 2023.

A broad range of goods and services were reported to have risen in price during February, with suppliers in some cases increasing their charges due to tariffs. Labor expenses were also reported to have increased. Overall, input cost inflation picked up in February to its highest level for four months and further above its long-term trend.

However, efforts to pass on higher input costs to clients were somewhat limited by competitive pressures, weak market demand and market oversupply. This meant that prices charged rose only modestly overall in February.

Chris Williamson, Chief Business Economist at S&P Global Market Intelligence

(…) “Current output growth has downshifted markedly so far this year from a booming rate of expansion in December to a disappointingly sluggish pace in February.

“Expectations for output growth have also been revised sharply lower as service providers have become increasingly worried over signs of slower demand growth and uncertainty over the impact of new government policies, ranging from tariffs and trade policy to federal budget cutting.

“The strong private sector hiring seen late last year has consequently gone into reverse, with a steep fall in backlogs of work hinting at further job losses to come.

“Adding to the gloomier picture in February was a sharp rise in costs, which companies were often unable to pass on to customers due to weak demand. While this reduced pricing power is good news for inflation, it’s potentially bad news for profitability.”

The ISM: Service Sector Pushes Through Policy Uncertainty in February

The ISM Services Index improved to 53.5 last month. Current activity was little changed over the month with the business activity index down a tick and still comfortably in expansion territory at 54.4. Rather, the improvement stemmed from the employment index, which rose 1.6 points to an 18-month high, and an increase in new orders (+0.9 points).

Some of this improvement in new orders may reflect a pull-forward of activity as the prospect of a higher tariff environment came to the fore at the start of last month with only an eleventh-hour reprieve on tariffs on Canada and Mexico, which have subsequently gone into effect.

As in the manufacturing sector, the scramble to secure product led to a rise in the services supplier deliveries index in February (+0.4 points). Businesses also appeared to be stocking up on product ahead of potentially higher prices, with the inventory index rising just over three points last month.

Source: Institute for Supply Management and Wells Fargo Economics

While the looming threat of tariffs left a limited mark on activity in February, the anticipation may nonetheless already be seeping into prices. It is worth remembering that many industries within the Services Index are goods or goods-adjacent industries, such as construction, transportation, wholesaling and retailing.

Perhaps it is no surprise then with additional tariffs on China put in place at the start of February and the threat of tariffs on Canada and Mexico lingering that the prices paid component rose 2.2 points to remain above 60. Over the past three months, the prices paid component has averaged 62.5, which, as seen in the nearby chart, is a level only recently rivaled during the pandemic’s aftermath and the increased use of tariffs in the first Trump administration. Concerns about tariffs were widespread across respondents in industries including food services & accommodation; agriculture; construction; information; management and wholesale trade.

For the better part of the past two years, the ISM surveys have displayed the uneven fortunes of the manufacturing and services industries under tight monetary policy. The tail end of last year suggested that the unusually persistent gap between the two sectors was starting to close through the favorable route of stronger factory activity. The latest surveys highlight the more immediate threat of trade policy changes to the manufacturing sector, but we would not be surprised to see more universal signs of suffering under tariffs and policy uncertainty in the ISM Services Index in the months ahead.

One constant in the two surveys is that prices are rising and in both goods and services as Ed Yardeni illustrates

• Fed’s Beige Book

Information collected on or before February 24, 2025.

Overall economic activity rose slightly since mid-January. Six Districts reported no change, four reported modest or moderate growth, and two noted slight contractions.

Consumer spending was lower on balance, with reports of solid demand for essential goods mixed with increased price sensitivity for discretionary items, particularly among lower-income shoppers.

Unusual weather conditions in some regions over recent weeks weakened demand for leisure and hospitality services. Vehicle sales were modestly lower on balance.

Manufacturing activity exhibited slight to modest increases across a majority of Districts. Contacts in manufacturing, ranging from petrochemical products to office equipment, expressed concerns over the potential impact of looming trade policy changes.(…)

Residential real estate markets were mixed, and reports pointed to ongoing inventory constraints. Construction activity declined modestly for both residential and nonresidential units.

Some contacts in the sector also expressed nervousness around the impact of potential tariffs on the price of lumber and other materials.

Agricultural conditions deteriorated some among reporting Districts.

Overall expectations for economic activity over the coming months were slightly optimistic.

Employment nudged slightly higher on balance, with four Districts reporting a slight increase, seven reporting no change, and one reporting a slight decline.(…)

Labor availability improved for many sectors and Districts, though there were occasional reports of a tight labor market in targeted sectors or occupations. Contacts in multiple Districts said rising uncertainty over immigration and other matters was influencing current and future labor demand.

Wages grew at a modest-to-moderate pace, which was slightly slower than the previous report, with several Districts noting that wage pressures were easing.

Prices increased moderately in most Districts, but several Districts reported an uptick in the pace of increase relative to the previous reporting period.

Input price pressures were generally greater than sales price pressures, particularly in manufacturing and construction. (…)

Firms in multiple Districts noted difficulty passing input costs on to customers. However, contacts in most Districts expected potential tariffs on inputs would lead them to raise prices, with isolated reports of firms raising prices preemptively.

Tomorrow we get the important employment report.

S&P Global sees employment as weakening, the ISM as still strong and the Beige Book as softish.

The ADP report, not the best indicator, was quite weak in February with private sector employment up only 77k, following a slightly upwardly revised January increase (+3k to +186k). Employment in the services sector rose 36k (vs. 121k per month on average in 2024). Employment in goods-producing industries increased by 42k, reflecting a 26k increase in construction employment.

Median annual pay for job stayers increased 4.7% year-over-year in February, unchanged from the January pace.

• Smallest US Firms Slashed Payrolls Last Month, Intuit Study Says

Payrolls at firms that employ fewer than 10 people fell by some 124,900 from the previous month, a drop of 1%.

The declines were broad-based, showing up in all 12 employment sectors included in the survey. Leisure and hospitality posted the steepest drop in payrolls, at 1.3%, followed by the information industry. (…)

Indeed job postings have turned down since early January:

Americans are worried:

Consensus sees payroll growth at +170k. Hmmm…

Changing plans, not for the better. “If policy uncertainty persists, consumers and firms may begin to hold back spending decisions. Combined with DOGE-driven layoffs, this will put upward pressure on the unemployment rate. That is why a trade war, by definition, is a stagflation shock: Higher prices and lower sales. The biggest downside risk is that policy uncertainty could create a sudden stop in the economy where consumers stop buying cars, stop going to restaurants, and stop going on vacation, and companies stop hiring and stop doing capex. ” (Apollo)

Canada: Tariff concerns lead to accelerated contraction of servicesector in February

Canada’s service sector suffered its steepest fall in activity for nearly a year during February amid reports of a drop in market demand due to tariff concerns. New business received declined markedly, whilst confidence in the outlook slumped to its lowest level in over two-and-a-half years. Job losses were the steepest recorded by the survey since June 2020 as firms responded to weak current demand and an increasingly uncertain outlook.

On the price front, input costs showed the largest monthly increase in operating expenses since last October whilst output charges were also raised to a stronger degree.

We should worry about these sharply declining demand indicators:

 

Some people are worried as Axios observes. “On February 11, the market put just a 1% probability on the Fed cutting rates four times this year, assuming each cut is 25 basis points. Today, the probability of at least four cuts has risen to 30%, while the probability of three or more rate cuts has ballooned to 62%.”

Data: Polymarket. Chart: Axios Visuals

Euro area economic growth remains marginal

The HCOB Eurozone Services PMI Business Activity Index signalled a third successive monthly expansion in output. However, at 50.6 in February, the measure was down from 51.3 in January to a three-month low, indicating a loss of growth momentum.

Weighing on the strength of the upturn was a renewed drop in new business. For the first time since last November, new orders decreased. Demand for euro area services from non-domestic customers weakened, but to the softest extent in seven months.

A pick-up in activity alongside lower new order intakes facilitated yet another drop in backlogged work in February. Stronger inroads to incomplete business were made, with the pace of depletion at its quickest for just over a year. Eurozone service providers still lifted employment levels, albeit to an extent that was only marginal overall and softer than in January.

Cost pressures remained elevated, with input costs increasing at a rate unchanged from January’s nine-month high. In turn, the latest survey data pointed to another historically sharp rise in output prices that was the most substantial for ten months.

Commenting on the PMI data, Dr. Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank, said:
“The Eurozone economy has barely grown for two months in a row now, as the mild growth in the services sector is almost fully eaten up by the recession in the manufacturing sector. The good news is that the downturn in the manufacturing sector is softening, which could pave the way for a recovery of the whole economy.

“Ahead of the next ECB meeting, all eyes are on the wage-driven input cost increases given the central bank’s emphasis on services inflation. With no sign of input cost inflation abating, it is understandable that there are some voices in the ECB who would like to discuss a pause in rate cuts at the next meeting.

“Service provider’s optimism about future activity is falling short of the long-term average, as the environment is strongly marked by political uncertainty in France and Germany as well as a flow of international news which does not encourage consumer spending. At the same time, outstanding business shrank again, which fits into this picture. However, service providers retain some pricing power as selling price inflation has increased compared to January. Overall, the picture is not bleak, but fragile.

“There is a big contrast in service sector performance between Germany and France. Germany’s services sector is growing at a moderate pace while in France, activity is shrinking rapidly and much faster than during the months before. This may be the result of an unsolved political crisis in France, while in Germany the elections may raise hope for a stable government to be formed soon.”

China: Modest growth of service sector sustained in February

The headline Caixin China General Services Business Activity Index recorded 51.4 in February. That was an improvement on January’s reading of 51.0 and represented a modest expansion of the service sector. (…)

Panellists reported that February’s expansion of activity was driven by a combination of higher sales, the start-up of new projects and promotional work. Increased new business volumes were indeed recorded during the month, although growth was also modest and – as was the case with activity – still below its historical trend level. Still, firms reported an improvement in general market demand and heightened success in converting this into actual new contract wins. Foreign sales also rose since January, with growth of new export business solid and its highest in three months.

The more positive market environment meant that employment levels rose fractionally in February with some firms directly linking growth to higher new work volumes. The broad stabilisation of staffing levels followed two months of falling employment and helped firms to largely keep on top of their overall workloads. Latest data showed that outstanding business was down for a second month running in February.

A heightened confidence in the outlook also helped to support some recruitment activity in the latest survey period. Optimism improved to its highest level since last November. Firms are hopeful of stronger market demand and better economic conditions. (…)

On the price front, February’s survey data signalled little change in input costs, though the fractional decline was significant in being the first time that prices had failed to rise since June 2020. Panellists reported that lower market demand, plus a general reduction in the price of some raw materials, had weighed on operating expenses. A marginal decline in output charges was also registered in February as firms sought to pass on reduced input costs and offer promotional discounts in a competitive market environment.

The Trump Tariff Roller Coaster He gives a month reprieve to car makers but everyone else loses.

Welcome to the Trump tariff thrill ride, where you never know what’s going to happen next. (…)

White House press secretary Karoline Leavitt said the one-month exemption is to ensure U.S. auto makers are “not at an economic disadvantage” before the President’s tariffs on auto imports from other countries take effect on April 2.

The exemption may also be less than meets the eye. According to the White House statement, the exemption will apply to cars imported from Mexico and Canada. That means manufacturers could still get whacked with tariffs on parts and materials that cross the border, which could add thousands of dollars to the cost of each vehicle.

Manufacturers that assemble cars in North America would still be at a competitive disadvantage. Mr. Trump said in his speech to Congress Tuesday that his policies would allow “our auto industry to absolutely boom.” Executives, investors and dealers beg to differ. General Motors stock is down 11.9% since Mr. Trump’s election while Ford Motor’s is 13.5% lower. (…)

Mr. Trump originally justified the tariffs under an emergency law to combat the alleged threat of fentanyl. But he claimed Tuesday the tariffs are needed because “we pay subsidies to Canada and to Mexico of hundreds of billions of dollars” and have “very large deficits with both of them.”

That sounds like White House protectionist in chief Peter Navarro. He and his boss love tariffs for their own sake. Meanwhile, the tariff barrage is causing economic uncertainty and slowing investment—a real thrill a minute. (WSJ Editorial Board)

• Walmart Asks Chinese Suppliers for Major Price Cuts on Trump Tariffs

Some suppliers, including producers of kitchenware and clothing, have been asked to lower their prices by as much as 10% per round of tariffs, essentially shouldering the full cost of Trump’s duties, according to the people, who asked not to be identified as the information is private. Negotiations are held with individual manufacturers and the price cuts differ by firm, they said.

So far, few have acquiesced. Suppliers’ margins are already razor thin due to Walmart’s strategy of procuring goods cheaply in order to maintain its competitive advantage, according to the people.

For some, any reduction greater than 2% would see them make a loss, the people said. Others have had their own upstream vendors refuse requests to cut prices more than 3%, forcing manufacturers to consider purchasing some parts from Vietnam, according to one of the people. That move has raised concerns that the lower prices will come at the expense of product quality, the person said. (…)

The retailer has historically had strong bargaining power over its Chinese suppliers and requests for lower prices have mostly been met, according to people familiar with the matter. But the scope of the recent requests are unusual and leaves manufacturers weighing whether to absorb the costs to maintain a longer-term business relationship. (…)

Walmart has said about two-thirds of its products are sourced in the US after the retailer sought to diversify its supply chain.

TECHNICALS WATCH

Ed Yardeni:

• “Will S&P 500 indexes find support at their 200-day moving averages? We think so. Sentiment is quite bearish and the next batch of economic indicators should confirm the economy is growing.”

• “Will the Nasdaq remain in its bullish channel? We expect to see some dip-buying following the rapid selloff.”

Interactive Brokers notes that

“the inverted yield curve is back! Three-month Treasury bills are now yielding more than 10-year notes, though the 2-10 portion of the curve remains normally upward sloping”:

Yield Spreads Since 1985, 2-10 (white), 3mo-10-year (blue); with NBER Recession Starts (red) and Ends (green)

• “Fed Funds futures are now pricing in 3 rate cuts for 2025, which is up from the expectations for only 1 cut that prevailed just a few weeks ago.  Economic expectations have retreated sharply, exacerbated by yesterday’s tariff implementation.  That’s a nasty combination for bankers.  Their net cost of funding has remained stable even as the yields on potential loans have declined, while at the same time, weaker economic prospects do nothing positive for their customers’ creditworthiness.  No wonder why those stocks suffered.”

Trump Administration Disbands Two Committees Advising on Economic Stats

Members of one group, the Federal Economic Statistics Advisory Committee, were told Tuesday that Commerce Secretary Howard Lutnick disbanded the committee last week because its mission “has been fulfilled,” in an email seen by The Wall Street Journal.

The Commerce Department also terminated a second expert group, the Bureau of Economic Analysis Advisory Committee, which consulted on a separate group of economic stats. (…)

A Fesac committee member, economist Erica Groshen, said the group played a critical role in guiding the offices that track U.S. inflation, employment and economic growth.

“Its work goes to the essential transparency of these statistical agencies,” Groshen said of Fesac. “When you remove that transparency, then that diminishes trust.”

Fesac guided government statistics for 25 years. (…)

The committees’ dismantling comes at a challenging moment for the government statistics agencies, which have faced tight budgets and falling response rates to surveys that are essential gauges of the health of the economy.

The move also follows a suggestion from Lutnick over the weekend that the government could change how it calculates the size of the economy by separating government spending, which would be a sharp departure from academic theory and international norms.

Fesac met twice a year to advise government statisticians and economists on how to improve and refine their surveys and calculations. Members weren’t paid for their work. (…)

Groshen, who was previously head of the Bureau of Labor Statistics, said Fesac had an especially important role advising on statistics that combine the work of multiple government agencies. That includes the Federal Reserve’s preferred inflation metric, the personal-consumption expenditures price index, which melds analysis from both the Labor Department and the Commerce Department.

“These advisory committees are really essential to maintaining the quality of the data going forward,” she said.

Trump’s Tariffs Whack Trump Voters Whatever happened to GOP concern for the working class?

The WSJ Editorial Board, who is often sympathetic to Trump:

President Trump won the Presidency a second time by promising working-class voters he’d lift their real incomes. Which makes it all the more puzzling that he’s so intent on imposing tariffs that will punish those same Americans.

Tariffs are taxes, and Mr. Trump’s latest tariffs are estimated to be about an annual $150 billion tax increase. Taxes are antigrowth. That’s the message investors are sending this week since Mr. Trump let his 25% tariffs on Canada and Mexico take effect. The President also raised his 10% tariff on China by another 10%. Canada and China retaliated, while Mexico is holding off until Sunday. (…)

Brace for higher prices on berries, bell peppers, and, gulp, beer. Target CEO Brian Cornell told CNBC Tuesday that tariffs on Mexico may force the company to raise prices on fruits and vegetables. About 30% of vegetables and fresh fruit sold in the U.S. come from Mexico. Modelo’s Mexican-produced Especial is the best-selling beer in the U.S.

Best Buy CEO Corie Barry said Tuesday that Mr. Trump’s tariffs “make price increases for American consumers highly likely.” Nafta, which was supplanted by the USMCA, encouraged electronics manufacturers to set up shop in Mexico instead of China. Hope you don’t plan to buy a smart TV since it could be 25% more expensive.

Energy prices will rise too. Mr. Trump implicitly conceded this by reducing his tariffs to 10% on Canadian energy imports. Despite the U.S. shale fracking boom, constraints on pipeline capacity mean the Midwest and Northeast depend heavily on Canada for natural gas. That means heating bills will rise in Trump country. So will electricity prices.

The U.S. imports about 3,315 gigawatt hours of electricity on average from Canada each month—enough to power about 3.7 million homes. These flows help stabilize the grid and lower prices in the Northeast and Midwest. New England’s grid operator estimates the tariffs could cost the region between $66 million and $165 million a year. Energy makes up 40% of primary aluminum producers’ costs. Several Midwest foundries have closed in recent years amid rising energy prices. The Trump tariffs will harm the very workers he claims to be trying to help.

They will also cause pain at the pump. The U.S. is a net oil exporter, but it still imports about 6.5 million barrels a day of crude, mostly from Canada and Mexico. That’s because refineries in the Gulf Coast and Midwest process heavy grades. It would cost billions of dollars to retrofit them to process light blends from U.S. shale. Drivers of pickup trucks in the Midwest (where refineries depend on Canadian crude) are likely to suffer the most pain.

Speaking of which, we recently told you about an Anderson Economic Group analysis that estimated the 25% tariffs would raise the cost of a pickup assembled in North America by $8,000. Heavy-duty truck prices may also surge as they rely on parts from Canada and Mexico. (…)

The President also professes to love American farmers, but he apparently loves tariffs more. U.S. farmers are already being squeezed by low crop prices and inflation. The American Farm Bureau Federation (AFBF) says farmers are losing money on almost every major crop planted for the third straight year.

Tariffs will increase their pain. About 85% of the U.S. potash supply for fertilizer is imported from Canada. China is hitting U.S. farm exports with a 15% tariff, which will let farmers in Brazil and Australia grab market share. “Even more costs and reducing markets for American agricultural goods could create an economic burden some farmers may not be able to bear,” AFBF President Zippy Duvall said Tuesday.

Mr. Trump’s tariff spree is the triumph of ideology over, well, common sense. Let’s hope the President soon comes to his senses.

Larry Summers Thinks Trump’s Tariffs Are a Disaster ‘I have never seen as irrational a consequential policy put in place by an American administration.’

Here and there:

• Fed officials thought they might have engineered a soft landing over the past 18 months. A few are publicly warning of a stagflationary scenario. “A deterioration of the labor market alongside higher inflation could present difficult choices,” said St. Louis Fed President Alberto Musalem at an economics conference in Washington on Monday. New York Fed President John Williams said Tuesday at an event hosted by Bloomberg that he expected tariffs would lead to higher inflation this year than he had anticipated. Tariffs on consumer goods, he said, “filter into prices that consumers pay. That happens relatively soon.” Tariffs on intermediate goods, meanwhile, take longer to show up but last longer, he said.
• Since the Berlin wall fell, we’ve lived through almost half a century of preferring butter to guns. With the rise of China, and with the U.S. no longer seen as a reliable ally, guns will again take priority. (…) Coming when global alliances are fluid, this shift could also move us toward a multipolar world for the first time since the World War II. Some friends of America are trying to convince themselves that Trump’s term is only for four years, and the next president will be more willing to stick to promises the country has made. But even some committed Atlanticists, such as incoming German Chancellor Friedrich Merz, recognize that once broken such trust can’t be quickly rebuilt. And this week that trust broke. America’s allies need to be able to stand on their own, even if the U.S.—under Trump or his successor—were to turn friendly again.
• Tariffs imposed at the whim of the White House increase the power of the government over business. Companies have to lobby for exemptions for their essential parts and can no longer rely on trade pacts when deciding on factory locations or suppliers—even when the trade deal was struck by the very same president, as with the 2018 U.S.-Mexico-Canada agreement. The uncertainty on its own is bad for business, even without the actual tariffs.
• Roth’s company in Grand Rapids, RoMan Manufacturing, makes components for the giant robots that weld together car panels in vehicle-assembly plants. Some of his biggest customers are in Canada, and Roth worries that they could switch to suppliers in Europe or Japan to avoid paying the tariff. “These are great customers that have been with us for almost 50 years, but they’d be foolish not to look to the Europeans,” he said. “Because I guarantee you there will not be tariffs between the EU and Canada.”
• “Before lunch we were talking to customers on the basis of a 10% tariff, and after lunch it was 20%,” said Nils Haupt, a spokesman for the German containership operator Hapag-Lloyd, referring to the levies on China. He added that customers are exasperated by the unpredictability.
• Most generics and biosimilars in the US contain ingredients made elsewhere or are produced entirely abroad, which will hit consumers immediately, Richard Saynor, the chief executive officer of Sandoz Group AG, said in an interview with Bloomberg TV.
• Joe LaVorgna, chief economist at SMBC Nikko Securities and a former special assistant to President Trump, said tariffs will ultimately benefit the economy despite some short-term pain by incentivizing manufacturing to move to the U.S., especially when combined with corporate tax cuts and deregulation.
• Many manufacturers are trying to diversify away from China to factories in India, Indonesia, Vietnam and Turkey, said Soren Toft, chief executive of Mediterranean Shipping. “What we are not hearing is, ‘I brought my production back to Kentucky.’”
• Brian Horowitz, chief executive of Creative Wagons, an outdoor-goods company, posted a “No Tariff” sign outside his booth. Some 90% of his company’s products are made in Vietnam after he shifted production from China four years ago. “Vietnam has been the best thing I’ve ever done,” said Horowitz (…). The sign, he added, was helping land new customers.
• Vietnam’s industry and trade minister is scheduled to travel to the US to meet US Trade Representative Jamieson Greer next week to discuss the “very good relationship” between the two, as the Southeast Asian nation seeks to avert the threat of tariffs. Vietnam’s trade surplus with the US widened to $123.5 billion last year. It was the third-highest trade gap that any country has with the US, behind China and Mexico, making the manufacturing powerhouse a potential prime tariff target for US President Donald Trump.
• Irwin said the new tariffs are one of the biggest trade shake-ups since 1807, when Congress implemented a virtually universal embargo on foreign trade in response to interceptions of U.S. ships by British forces during the Napoleonic Wars. “It was enormously destructive to the U.S. economy,” he said.
• Lutnick told reporters overnight the Trump administration would probably announce a deal to reduce levies on Canada and Mexico on Wednesday. “It will not eliminate the tariffs, but it might modify the tariffs somewhat,” Lutnick said.     

Trump yesterday: “There will be little disturbance,” he said. “We’re OK with that.”

US Copper Prices Surge as Trump Signals 25% Tariff on Imports

Copper prices surged by more than 5% in New York — leaping further above other global benchmarks — as US President Donald Trump suggested imports of the metal could be subject to a 25% tariff.

Trump’s comments — made in a speech to Congress Tuesday — sparked a frenetic rally in Comex copper prices in Asian hours, as traders reacted to the possibility that tariffs on the metal could be larger than expected, and come much sooner. (…)

“I have also imposed a 25% tariff on foreign aluminum, copper and steel,” he said in his address to Congress. (…)

The surge on the Comex also triggered a smaller rally on the London Metal Exchange, with three-month prices jumping as much as 2.4%. For months, New York futures have been trading at a hefty premium to the LME as investors have priced in the growing likelihood of tariffs, and the additional surge on Wednesday left Comex copper trading about 11.5% higher than the LME, nearing a peak of about 13% seen last month.

The huge differential has already triggered a worldwide hunt for copper that can be shipped to the US before any tariffs are imposed, and traders are likely to redouble those efforts following Wednesday’s fresh surge. (…)

Trump Calls for End to $52 Billion Chips Act Subsidy Program

President Donald Trump called for ending a bipartisan $52 billion semiconductor subsidy program that’s spurred more than $400 billion in investments from companies like Taiwan Semiconductor Manufacturing Co. and Intel Corp.

“Your Chips Act is a horrible, horrible thing,” the president said in a prime-time address to Congress on Tuesday. Trump implored US House Speaker Mike Johnson to get rid of the legislation and use “whatever is left over” to “reduce debt or any other reason.”

His remarks were met with applause in a chamber that passed the Chips and Science Act less than three years ago. Vice President JD Vance, whose home state of Ohio won a massive Intel project thanks to the law, stood up to show his support for its revocation.

The Chips Act is among the most significant US forays into industrial policy in more than a generation. It set aside $39 billion in grants — plus loans and 25% tax breaks — to revitalize American semiconductor manufacturing, as well as $11 billion for chip research and development. The aim was to reduce reliance on Asia for electronic components that power everything from smartphones to massive data centers.

Trump, however, has consistently derided a program he regards as a waste of government funds, arguing tariffs would achieve the same outcome while filling coffers. (…)

Officials on both sides of the aisle have touted the Chips Act as crucial to US national and economic security, and Trump could have a hard time getting congressional support to repeal it. Dozens of GOP lawmakers voted for the measure, and many red districts have won factories or other projects supported by the law.

That includes South Korea’s Samsung Electronics Co. and SK Hynix Inc., which have committed to multibillion-dollar projects in Texas and Indiana that were contingent on funding and support from the US government. (…)

Trump, favoring tariffs over incentives, has signaled that import levies on chips could come as soon as next month. Companies can avoid those duties, he has said, by building factories on American soil. (…)

Trump did not specify whether he would attempt to claw back money that’s already been disbursed, renege on remaining incentives to which the government has already committed, or simply not provide additional support for the chipmaker’s latest investment. Commerce Secretary Howard Lutnick said Monday that the newly announced projects — three additional chip plants, plus R&D and advanced packaging sites — won’t win federal funds. (…)

Lutnick has said he cannot commit to honoring existing contracts without reviewing them first. (…)

So far, his questions to program staff have focused on the rationale behind award decisions and the government’s legal authority to claw money back, Bloomberg has reported. (…)

Meanwhile:

Beijing Ramps Up Efforts For Tech Independence The country aims to develop a system of open-source models

In a speech on Wednesday to the country’s lawmakers, Chinese Premier Li Qiang said AI would be key to boosting China’s digital economy.

Li pledged that China would boost support for applications of large-scale AI models and AI hardware, such as smartphones, robots, and smart cars. (…)

China also said it would foster emerging technologies, including open-source architectures for chip designing.

China has for years attempted to build a semiconductor ecosystem around RISC-V, a major open-source architecture, to reduce reliance on technologies controlled by Intel and Arm.

China Targets Record Deficit to Buffer Economy Against Tariffs

The government set this year’s fiscal deficit target to 5.66 trillion yuan ($780 billion), or around 4% of gross domestic product, according to an annual work report Premier Li Qiang delivered to the national parliament on Wednesday.

That’s the highest level since a major tax overhaul in 1994 revamped the government budget, and roughly in line with an estimate of 4% by economists in a Bloomberg survey. Li also set a growth goal of about 5%, an ambitious target that would require more stimulus than last year to achieve. (…)

China has for decades tried to keep the official deficit at no more than 3% of GDP to demonstrate fiscal discipline. Crossing that implicit red line signals President Xi Jinping is willing to take unconventional steps to boost domestic demand as a trade war with Donald Trump threatens exports, which made up nearly a third of the economy’s expansion last year. (…)

Some 300 billion yuan will fund a trade-in program that subsidizes consumer purchases of cars and home goods, doubling last year’s amount. That increase signaled an emphasis on boosting consumer spending, which the work report named as the top priority for the first time since 2012. (…)

Merz Rips Up Merkel’s Legacy to Unleash Germany Spending Power

Chancellor-in-waiting Friedrich Merz plans to free Germany from the fiscal straitjacket that former leader Angela Merkel had locked her country into for more than a decade, a move that will revolutionize public finances and pave the way for Europe’s most powerful economy to bulk up the region’s defense. (…)

“Events at the Munich Security Conference and in the Oval Office have clearly had a huge impact on the thinking of CDU leader Friedrich Merz,” Greg Fuzesi, an economist at JPMorgan Chase & Co., wrote in a note to clients. “Germany is heading not only for a massive U-turn on fiscal policy but also for a very strong response to the new defense and security challenges.”

(…) the prospective chancellor can’t yet be sure of success, requiring backing from the Greens, who are indignant at being shut out of his negotiations. Any win would then be just the prelude to hard-fought coalition negotiations where his CDU party must now try to achieve concessions from its SPD opponents. (…)

Merz will argue that he has history on his side, given the alarming shift in the geopolitical backdrop augured by the Trump administration.

The prospect of an injection of adrenaline to Europe’s biggest economy, which has languished in stagnation in the wake of the pandemic, is another strong case to make in the ensuing debate. Successive shocks of the energy crisis, Chinese electric vehicle rivalry and weak export demand have left Germany standing out in the region for its weakness. (…)

EU’s €800 Billion for Defense Is Bond Tantrum in the Making The brunt of the EU’s plan to rearm will fall on the shoulders of bond markets. That means sharply higher borrowing costs.

The crumbling transatlantic alliance is undermining the assumptions that have underpinned European financial markets since the creation of the common currency. The result will be a sustained and permanent rise in euro borrowing costs, along with the surge in debt.

As the privilege of super-low German yields cedes to the new order, every other euro nation’s borrowing costs will be pulled higher, along with the European Union’s itself. The mighty German bund has been losing its benchmark shine as its yields surge under speculation of heavy borrowing that took on new meaning as Germany proposed scrapping constitutional fiscal limits to help Europe rearm itself. (…)

The knock-on effect for money managers will be profound. If investors turn against longer-dated debt, it would curtail the ability of euro-zone governments to extend their maturities further into the future. At the same time, doubts over the “risk-free” status of sovereign debt could tempt fund managers into higher-yielding corporate or bank debt alternatives. (…)

What is clear is that swift and smart action is needed to create a permanent structure that can benefit Europe as a more coherent and attractive bond issuer attractive to foreign investors on a much larger scale. (…)

An uplift of 10% extra borrowing across the euro nations wouldn’t be unusual. Much more than that with no parallel rise in euro area growth is going to weaken the euro currency and create a potential doom loop. (…)

Leading European think tanks, such as the Kiel Institute and the Centre for European Reform, are pretty clear that borrowing is the best way forward, not raising taxes. If comparative advantage is used in procurement, shifting the balance of 80% of European armaments being made outside the bloc and prompting economies of scale — such as rationalizing the current 17 European tank manufacturers — then a big defense ramp-up can be growth positive, with knock-on innovation benefits to productivity too.

The economic costs of Trump’s assault on the global order America is trying to undo the very system of open trade that it created

Some excerpts from Martin Wolf’s long piece:

(…) They [Trump’s decisions] represent the end of liberal, predictable and rules-governed trading relationships with the world’s most powerful country and also the one that created the system itself. They also represent the abandonment by the US of core alliances and commitments in favour of a closer relationship with an erstwhile enemy. Trump clearly thinks Russia more important than Europe. (…)

As Maurice Obstfeld, former chief economist of the IMF, has noted, the US’s trade deficits are not due to cheating by trading partners, but to the excess of its spending over income: the biggest determinant of America’s trade deficits is its huge federal fiscal deficit, currently at around 6 per cent of GDP. (…)

Moreover, as the Danish economist, Jesper Rangvid notes in his blog, Trump looks only at bilateral trade in goods, ignoring trade in services and earnings from capital and labour. It so happens that the income the US derives from its exports of services at least to the Eurozone and the returns on capital and the wages of labour it has exported there offset its bilateral deficits in goods. The overall Eurozone bilateral current account balance with the US is close to zero, not that even this matters. (…)

For Mexico and Canada, the economic costs of these tariffs will be high, since their exports of goods to the US were 27 per cent and 21 per cent of GDP respectively, in 2023. EU exports of goods to the US were only 2.9 per cent of its GDP in 2023. For it, therefore, the impact of the 25 per cent tariff would not be that great. Yet it would still be an act of unjustifiable, indeed economically illiterate, economic warfare. The EU would have to retaliate. Transatlantic relations would be permanently damaged. (…)

Trump is waging economic and political war on US allies and dependants. But the resulting collapse in trust of the countries that used to share its values will end up very costly for the US, too.

Business leaders say trade ties with U.S. deeply scarred

Tariffs have permanently tainted Canada-U.S. relations, according to several prominent Canadian business leaders, who say the country needs a new game plan for a changed world.

Regardless of how long the continental trade war launched by Donald Trump on Tuesday lasts, business leaders warn Canada’s economic ties to its southern neighbour will never look the same.

Executives are confident the country will eventually be able to diversify exports away from the U.S. and Ottawa can take steps to improve Canada’s global competitiveness, but that in the meantime Canadians are likely to suffer substantial economic pain. (…)

“Our pain threshold is way higher than America’s because we know what we’re fighting for and we’re united on that,” said Mr. McKenna, deputy chair of TD Securities and a former Canadian ambassador to the U.S. as well as premier of New Brunswick and a member of the Brookfield Corp. board of directors.

“In America, I think the pain threshold is extremely low, because the country is deeply divided and they have no idea why they’re in this mess.” (…)

“We are not going back to where we were. Our friends are no longer the friends we thought they were.” (…)

“I think our freedom is worth a recession,” Mr. Vachon said. “Long-term, well, clearly we cannot rely to the same extent that we did before on the U.S. for security and our economic prosperity. That’s it. So we need a game plan.” (…)

Key to Canada’s trade war strategy will be diversifying Canadian exports. And there, Mr. McKenna said, even changes on the margins will make a major difference.

“If we could move, I don’t know, 20 per cent of our oil to Asia, those marginal barrels set the price, then all of a sudden we create deal tension,” he said. “If we start moving more potash to external markets, or more uranium, that puts a lot of pressure on the Americans.” (…)

“The band of billionaires that support him and other business leaders are going to realize that this is truly mad – by that I mean mutually assured destruction – and will start to pull him back from the ledge,” he said. (…)

Canada should also refuse to renegotiate the U.S.-Mexico-Canada Agreement (USMCA), which Mr. Trump struck in his first term, until the tariff threat is neutralized, said John Manley, former CEO of the Business Council of Canada who previously served as a federal cabinet minister and deputy prime minister. (…)

He said the United States “is no longer a reliable partner, not in security and not in business or trade.”

“There is no point in having a negotiation with somebody like that because you can’t expect them to live up to their commitments,” he said. (…)

“We do need to leave the porch light on,” Mr. McKenna said. “When this is all over, America is not moving geographically. It’s still our neighbour, still our best friend. We are going to resume that relationship.”

Let me remind you what Trump proudly said on January 29, 2020 after signing the new USMCA that he negotiated and signed:

• “The most important deal we’ve ever made by far.”
• “NAFTA was perhaps the worst trade deal ever made.”
• “We have renegotiated this new agreement based on fairness and reciprocity … a very, very good deal for all three [countries], it puts us in a position we have never been before.”
• “It’s a fair deal for everybody…we’ll be working with Canada and Mexico…the region has things that nobody else has…we’ll be doing very well together”.
• “It will transform North America back into a manufacturing powerhouse.”
• “This is a truly extraordinary agreement for the United States, Canada and Mexico …. a partnership with Mexico and Canada and ourselves against the world”.

Warren Buffett said last Sunday that “tariffs are an act of war, to some degree.” Trump has effectively declared an economic war on Canada and Mexico on no reasonable ground. Millions of Canadians and Mexicans will feel economic and financial pain as a result. Canada and Mexico can reasonably invoke national security in their response.

Winston Churchill said that WWII was “the unnecessary war” because it could have been avoided several times. This is another one.

Speaking of Churchill, whose bust was placed near Trump in the Oval Office last week for the Zelinsky meeting, in his book “The Second World War”, he quoted Franklin D. Roosevelt’s fireside chat of December 30, 1940:

There is danger ahead, danger against which we must prepare. But we well know that we cannot escape danger by crawling into bed and pulling the covers on our heads. If Britain should go down, all of us in all the Americas would be living at the point of a gun, a gun loaded with explosive bullets, economic as well as military. We must produce arms and ships with every energy and resources we can command. We must be the great arsenal of Democracy.”

Statesmanship!

Yes, Mark Twain, history rhymes, but sometimes not as well as it should.

To face tariffs, Canada should declare pipeline projects in the national interest: Enbridge CEO

Canada should declare pipeline projects in the national interest if it is serious about widening its energy-market access in the face of U.S. tariffs, says the chief executive of oil and gas transport giant Enbridge Inc. (…)

“If this is the significant crisis that I know many Canadians feel that it is, then you would think you’d want your lawmakers actually making laws to address that.” (…)

Mr. Wilkinson [Canadian Natural Resources Minister] said Tuesday that slapping retaliatory export tariffs on Canadian energy and resources remains an option, though Ottawa first wants to apply pressure on the Trump administration to reconsider its decisions. He added that the government is also “looking for unanimity” with provincial and territorial leaders on its next steps. (…)

Canada is by far the largest foreign energy supplier to the U.S., and numerous refineries, especially in the Midwestern states, are designed to process the gooier crude grades from Alberta’s oil sands.

“It would be very difficult for them [refiners] to find other sources of supply and, equally so, very difficult for the producers in Canada to be able to find other sources of demand.” (…)

Canada must “act with urgency” to secure greater global market reach, given that the relationship with its closest friend, ally and trading partner has “fundamentally changed.” (…)

• Quebec considering stopping U.S. electricity exports to northeast spot market

The province’s Coalition Avenir Québec government is considering stopping shipments of electricity that it currently sells on the U.S. spot market. And it’s also looking at its options for new multibillion-dollar power contracts signed with Massachusetts and New York for transmission projects slated to come online over the next 15 months.

“It’s the start of the commercial war,” Quebec Premier François Legault told reporters Tuesday. “We must not rule out anything.” (…)

He said Quebec is also looking at the legal “feasibility” of breaking supply contracts for future power deliveries signed with the two U.S. states.

The comments echo those of Hydro-Québec chief executive Michael Sabia, who said in a speech last week that Canada cannot let itself get walked over by U.S. President Donald Trump and has to counterattack in a smart but forceful way. The U.S. President wants to break Canada’s confidence, Mr. Sabia said, and this country cannot let that happen. (…)

He said Quebec has important relationships with New York and the New England states and “wants to be a good partner” with them. But he suggested the broader context between Canada and the United States dictates that Quebec needs to review its power-supply agreements.

“Knowing that if America is going to take care of itself, we need to take care of ourselves,” Mr. Sabia said. “Once we’ve taken care of ourselves, if there are other things that we can do on a co-operative basis with the United States, great. … In the circumstances, we are looking at those contracts and we are trying to assess the situation better.” (…)

Recall that Trump said “we don’t need their cars, we don’t need their energy, we don’t need their lumber.” Looks like Canada intends to find somebody who needs them…

Trump Threatens to Pull Funding From Universities Over Protests

President Trump threatened to take away federal funds from universities that allow what he called “illegal protests,” a move legal experts say would violate the First Amendment.

Trump didn’t explain which demonstrations he considered illegal in his social-media post Tuesday morning. (…)

“Agitators will be imprisoned/or permanently sent back to the country from which they came. American students will be permanently expelled or, depending on on the crime, arrested,” he wrote. (…)

Trump’s post Tuesday wasn’t the first time he has issued threats to protesters. He said in an executive order in January that he would deport college students from outside the U.S. who join in protests related to the Israel-Hamas war. (…)

GOP Leaders Tell Lawmakers: No More In-Person Town Halls After several contentious meetings, party chiefs say Republican lawmakers should avoid giving Democrats sound bites