Trump Escalates Global Trade War, Sparking Tit-for-Tat Tariffs

The US new tariffs — 25% duties on most Canadian and Mexican imports and raising the charge on China to 20% — impact roughly $1.5 trillion in annual imports, an expansive move signaling to markets that the Republican president is committed to wielding import duties to obtain fresh revenue and create domestic manufacturing jobs.

Canada hit back with phased levies on $107 billion worth of US goods while China imposed tariffs of as high as 15%, mainly on American agricultural shipments. Mexican President Claudia Sheinbaum on Monday said her government would await Trump’s decision before reacting with any retaliatory measures and is expected to address reporters on Tuesday morning local time. (…)

The tariffs bring American import levies to their highest average level seen since 1943, according to the Budget Lab at Yale. That would lead to as much as $2,000 in additional costs for US households. It also will mean significantly slower economic growth in the US, especially if other countries retaliate, according to a report published Monday.

And Trump has indicated more tariffs are to come, including in April reciprocal tariffs on all US trading partners that have their own levies or other barriers on American products, as well as sectoral taxes of 25% on cars, semiconductors and pharmaceuticals. Those tariffs are also poised to be cumulative — in addition to any across-the-board tariff on a particular nation.

Trump has also said a 25% tariff is in the works for the European Union and is investigating levies on copper and lumber imports. Steel and aluminum tariffs are also set to take effect on March 12, further impacting Canada and Mexico. (…)

The Canadian government late Monday announced it will proceed with a sweeping package of counter-tariffs against US-made products. The first stage is 25% tariffs on about C$30 billion ($20.6 billion) worth of goods from US exporters to go into effect at the same time as the US levies. A second round of tariffs at the same rate will be placed on C$125 billion of products in three weeks — a list that will include big-ticket items like cars, trucks, steel and aluminum. (…)

China imposed tariffs as high as 15% on US goods and banned exports to some defense companies in retaliation to the Trump administration’s new levy. Soybeans, beef and fruits are among products facing a 10% tariff, according to an announcement from the Ministry of Finance. (…)

Trump Takes the Dumbest Tariff Plunge

The WSJ Editorial Board:

(…) We’ve courted Mr. Trump’s ire by calling the Mexico and Canada levies the “dumbest” in history, and we may have understated the point. Mr. Trump is whacking friends, not adversaries. His taxes will hit every cross-border transaction, and the North American vehicle market is so interconnected that some cars cross a border as many as eight times as they’re assembled. (…)

Mr. Trump is volatile, and who knows how long he’ll keep the tariffs in place. Retaliation that hits certain states and businesses may also cause him to reconsider sooner than he imagines. Investors are trying to read this uncertainty as they also watch growing evidence of a slowing U.S. economy. Unbridled Tariff Man was always going to be a big economic risk in a second term, and here we are.

FYI:

• If the tariffs remain in place, they have the potential to profoundly reshape relations between the U.S. and two of its biggest trading partners, abruptly reversing America’s decadeslong project of expanding free trade with its allies. The three countries had been operating under a revised free-trade agreement Trump brokered during his first term. (WSJ)
• BTW, here’s what Trump said after signing the new USMCA on January 29, 2020:
• “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”.
• On Ford Motor’s earnings call last month, Chief Executive Jim Farley warned that protracted 25% tariffs against Canada and Mexico “would have a huge impact on our industry, with billions of dollars of industry profits wiped out.”
• “Tariffs are an act of war, to some degree …  the Tooth Fairy doesn’t pay them” (Warren Buffett)
• “A 25% tariff on Canada and Mexico would add an estimated $144 billion a year to the cost of manufacturing in the U.S.,” the National Association of Manufacturers said in a handout.
• “A 25% tariff on Canada and Mexico threatens to upend the very supply chains that have made U.S. manufacturing more competitive globally. The ripple effects will be severe, particularly for small and medium-sized manufacturers that lack the flexibility and capital to rapidly find alternative suppliers or absorb skyrocketing energy costs. These businesses—employing millions of American workers—will face significant disruptions. Ultimately, manufacturers will bear the brunt of these tariffs, undermining our ability to sell our products at a competitive price and putting American jobs at risk.”
• “Canada and Mexico are our industry’s largest trading partners. The American chemical industry imports materials, many of which are unavailable in the United States, adding value and supporting other manufacturing supply chains domestically and abroad, through our exports. The U.S. chemical industry is a net exporter, both in the aggregate and individually with Canada and Mexico, contributing positively to the nation’s trade balance. In particular, the U.S. chemical industry continues to support the USMCA Agreement between the United States, Canada and Mexico.”
• “Tariffs on all imported goods from Mexico and Canada – especially on ingredients and inputs that aren’t available in the U.S. – could lead to higher consumer prices and retaliation against U.S. exporters. Despite sourcing the vast majority of ingredients and inputs from U.S. farms and domestic suppliers, CPG companies depend on global supply chains for certain imports due to unique growing conditions and other limiting factors around the world.”
• “Decades-long trade agreements enabled robust civil aviation and defense trade that resulted in a sky-rocketing positive trade balance over the last 40 years, making aerospace and defense the largest American exporting industry. Tariffs on Canada and Mexico could change that positive trajectory.”
• “PLASTICS is concerned about the new tariffs and their impact on U.S. plastics manufacturing and jobs. While we understand President Trump’s rationale, a blanket tariff policy could have significant economic consequences, disrupting the movement of essential machines, products, and materials that keep American manufacturers running.”
• “During his first term, President Trump was early to recognize the genuine threat that non-market actors pose to U.S. manufacturing industries like ours. This led to more than $10 billion in industry investment since 2016. This investment requires an enormous amount of metal, much of which the U.S. industry must import from within North America.”
• Massachusetts Governor Healey is predicting energy bills and gas prices for Massachusetts consumers will “skyrocket”. “8 out of 10 gallons of gasoline and diesel fuel sold at the pump every day going into tanks of cars of every American here in New England come from Canada. … Gulliver said 90 percent of the jet fuel at Logan Airport also comes from Canada. … According to the President of the New England-Canada Business Council, last year, 0.2% of fentanyl entering the U.S. came from Canada, and only 1.5% of the illegal immigrants came across the northern border.”
• Ford CEO Jim Farley said that if Trump’s 25% tariffs on Mexico and Canada are implemented and remain in effect for the long term, it would “blow a hole” in the U.S. auto industry, with rivals from Asia and Europe poised to benefit. “Frankly, it gives free rein to South Korean, Japanese and European companies that are bringing 1.5 million to 2 million vehicles into the U.S. that wouldn’t be subject to those Mexican and Canadian tariffs. It would be one of the biggest windfalls for those companies ever. Meanwhile, we’re USMCA-compliant with almost all of our content, finished vehicles and components going across the borders. To have the kind of a size of tariff would be devastating,” Farley said.
• The 25% tariffs on goods from Canada and Mexico, as well as an additional 10% tariff on imports from China, could drive up car costs by as much as $12,200 for some models, according to a report from Anderson Economic Group (AEG), a Michigan-based economic consultancy.
• “The trouble with tariffs, to be succinct, is that they raise prices, slow economic growth, cut profits, increase unemployment, worsen inequality, diminish productivity and increase global tensions. Other than that, they’re fine.” (JPM David Kelly)
• If tariffs remain in effect, they might push up inflation in March, April and May as firms raise prices to make up for higher import costs, said Michael Feroli, chief U.S. economist at JPMorgan Chase. The tariffs also might hurt U.S. exporters if Canada’s and Mexico’s economies take a hit and if they retaliate with tariffs of their own. “If those countries go into recession, that alone is a reason to expect U.S. exports to those countries to slow,” he said.

BTW, yesterday “the president said TSMC was “way ahead of the game” by agreeing to produce more chips in the US, which he said meant the Taiwanese company could avoid tariffs that he mused could be as high as 50 per cent.” (FT)

The Problem With Car Tariffs: What’s an Import? Supply chains extend across U.S. borders with Mexico and Canada, making it hard to say what’s American-made.

Over the last three decades, since the North American free trade zone was created in 1994, automakers have built supply chains that cross the borders.

Manufacturers achieve economies of scale by building engine and transmission plants that are large enough to supply a number of vehicle factories in North America. Similar thinking works for other parts, too — seats, instrument panels, electronics, axles.

“That harnesses the strength of each country, to the betterment of the companies and to the consumer,” said Sam Fiorani, a vice president at AutoForecast Solutions, a research firm. “Vehicles would be less affordable if all the parts had to be made in one country.” (…)

The 2024 Chevrolet Blazer, a popular sport utility vehicle made by General Motors, is assembled in a plant in Mexico using engines and transmissions that are produced in the United States.

Nissan makes its Altima sedan in Tennessee and Mississippi; the turbocharged version of the car has a two-liter engine that comes from Japan, and a transmission made in a factory in Canada.

Then there’s the Toyota RAV4. Most RAV4s sold in the United States are made in Canada. The Canadian-made models use engines and transmissions that are built in the United States and shipped north — before the completed vehicles are transported into the United States for sale. (…)

While the RAV4 is technically imported from Canada, about 70 percent of the vehicle’s components — as measured by their value — come from the United States, according to the National Highway Traffic Safety Administration, which tracks the place or origin of parts that go into vehicles sold here.

The Nissan Rogue S.U.V. goes the other way. It qualifies as a domestically produced vehicle because it is assembled at Nissan’s plant in Smyrna, Tenn. But only 25 percent of its content originates in the United States. The 2024 version’s engine comes from Japan and its transmission from Mexico, according to data from the traffic safety agency.

In Face of Trump’s Tariffs, Mexico Embraces Its President and Nationalism Before the tariffs went into effect, approval ratings for President Claudia Sheinbaum rose and companies began marketing “Made in Mexico” products.

(…) The Mexican government and businesses have rekindled a “Made in Mexico” campaign. Some Mexicans have called for boycotts of U.S. companies and products, while others have put together lists of Mexican stores and brands to support instead of American ones. (…)

Private companies have taken out nationalistic advertisements, one featuring the president leading the masses and carrying a banner saying, “Mexico united, never defeated!” (…)

Last week, Walmart Mexico, the largest private employer in the country with 200,000 workers, unveiled its efforts to put the “Made in Mexico” seal — with the added word “proudly” — in the aisles of its 3,000 stores throughout the country. Although Walmart is an American brand, Javier Treviño, Walmart Mexico’s senior vice president of corporate affairs, said the company wanted to show customers that it is a Mexican entity and that most of the products it sells are made within the nation. (…)

Supreme Court to Consider Mexico’s Lawsuit Against U.S. Gun Makers The justices will hear arguments in a $10 billion suit by the Mexican government that claims the companies are complicit in supplying drug cartels.

Mexico sued U.S. gun makers and one distributor in 2021, arguing that the companies fueled violence across the border by sending an “iron river” of military-style weapons to cartels.

A majority of the justices may view the case skeptically — the 6-to-3 conservative supermajority has worked to expand gun rights in recent years. But the case has allowed the Mexican government an avenue to make its argument that U.S. companies share in the blame for violence by drug cartels.

Access to guns is tightly controlled in Mexico, and it is nearly impossible for civilians to legally obtain the kinds of military-style weapons favored by the cartels. In their legal filings, lawyers for Mexico cited statistics showing that a majority of guns from Mexican crime scenes — between 70 and 90 percent — come from the United States. They also contend that gun dealers in the states that border Mexico sell twice as many weapons as dealers in other parts of the United States. (…)

Lawyers for Mexico argue that the lawsuit should be allowed to proceed, claiming that they have met the basic threshold to show that gun makers have aided and abetted the cartels.

They claim that some manufacturers have made firearms that appear to directly target Mexican buyers, including a special edition .38 pistol engraved with the face of the Mexican revolutionary hero Emiliano Zapata with a quote that has been attributed to him: “It is better to die standing than to live on your knees.”

U.S. plans to nearly triple anti-dumping duty rates against Canadian softwood lumber

In the looming trade war, Canada’s forestry sector is worried that Tuesday’s 25-per-cent tariffs will be layered on top of existing softwood duties, and a fresh tariff from the new investigation will be stacked on top of higher lumber duties later this year.

In its announcement on Monday for preliminary rate revisions, the Commerce Department said it expects to raise anti-dumping duties for most Canadian lumber producers to 20.07 per cent, compared with the current 7.66 per cent. (…)

The Commerce Department’s decision will be subject to further revisions before a final anti-dumping rate is determined, with an effective date in August.

“B.C. has long maintained that any and all duties on softwood lumber are unjustified, and these anti-dumping duties are based on a biased calculation,” B.C. Premier David Eby said in a statement on Monday. (…)

Canadian softwood recently accounted for 24 per cent of total U.S. lumber consumption, compared with nearly 33 per cent in 2016. (…)

“To suggest our lumber and byproducts are a threat to American security is ludicrous but Trump is going back to his playbook to twist regulations to continue sustained attacks on the Canadian softwood industry and the jobs that depend on it,” Unifor national president Lana Payne said in a statement. (…)

If threatened new tariffs are applied, that would mean a rate of tariffs and softwood duties eventually totalling as much as 80 per cent on Canadian lumber. (…)

Meanwhile, the February Manufacturing PMIs just came out:

S&P Global: US manufacturing sector growth accelerates noticeably in February

The seasonally adjusted S&P Global US Manufacturing Purchasing Managers’ Index™ (PMI^®) recorded 52.7 in February, up from 51.2 in January. It was the second successive month that the index has pointed to an improvement in the health of the manufacturing sector, with the rate of growth the best since June 2022.

The strengthening of the headline PMI in February stemmed principally from accelerated gains in both output and new orders.

New work rose to the greatest degree in a year, with firms pointing to stronger market demand for their goods in February. Growth was partially driven by client restocking, with customers reportedly keen to get ahead of higher prices and possible supply challenges should a wider range of goods be subject to tariffs. International demand remained a noticeable drag however on overall order books, with new export sales dropping in February for a ninth month in a row and to the greatest degree since last November.

Production growth was the fastest since May 2022. Growth was driven by a combination of increased sales, plus the clearance of work outstanding. Latest data showed that backlogs declined for a twenty-ninth successive month and to a slightly faster degree than at the start of the year.

Backlog clearance was in part enabled by an expansion of labor capacity. February’s survey data indicated a fourth successive monthly rise in employment, although growth was modest, especially in relation to recent output and order book gains, and down since January.

Job creation was also linked to positive projections for growth in the year ahead. Whilst lower than January’s near three-year high, confidence overall remained comfortably above its long-run trend. Panellists are looking to improvements in the economic and geopolitical climates in the year ahead, which are seen as key in supporting growth in sales and production.

Anticipating further output growth meant manufacturers were suitably encouraged to increase their purchasing activity during February. Marginal growth ended an eight-month sequence of declining input buying, with some firms noting the pre-purchasing of inputs ahead of forecasted price rises related to tariffs. This meant inventories of inputs rose slightly for the first time in 12 months, a considerable turnaround from the steepest cut in stocks for over a year-and-a-half during January.

Cost pressures intensified in February as vendors were reportedly adjusting their price lists ahead of a wider range of trade tariffs being imposed on goods and services. Overall, input price inflation was the steepest since November 2022. Increased supply-side challenges were also evident in February, with average lead times for the delivery of inputs worsening for a fifth month running – and to the greatest degree for nearly two-and-a-half years. Stock and labor shortages at vendors were widely noted.

Faced with increased input costs, average output charges also increased in February to a greater degree. Overall, prices charged inflation accelerated for a fourth successive month to its highest level for two years.

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

“A rise in the PMI to a 32-month high signals an improvement in the health of the manufacturing sector which may only be skin deep.

“Although manufacturing production grew at the strongest rates since May 2022 and new orders increased at the best pace in a year, there’s much to suggest that this improvement could be short lived. Production and purchasing were often buoyed by companies and their customers building inventory to beat price hikes and supply issues caused by tariffs. Exports have meanwhile slumped and supplier delivery delays were the most common since October 2022 amid disruptions to trade caused by tariff worries.

“Business optimism about the year ahead has consequently fallen compared to the buoyant mood evident in January, with February seeing an increase in the number of companies citing concerns over tariffs and other policies introduced by the new Trump administration.

“Worries have noticeably swelled in relation to the inflationary impact of tariffs, which were widely reported as having caused factory input costs to spike higher in February. These higher costs are being passed on to customers, resulting in the strongest factory gate price inflation recorded for two years, which manufacturers fear may in turn not only damage sales in the coming months but also encourage the Fed to take a more hawkish view of inflation.”

ISM Stays Above 50, Thanks to Lift from Long Wait Times

The ISM manufacturing index was in expansion if only barely so at 50.3, although a careful reading of the underlying components suggests this is hardly in an expansionary mood in the factory sector.

New orders fell 6.5 points to 48.6, inventories remain in contraction at 49.9 and employment fell 2.7 points to return to contraction territory at 47.6 in February. These three components all feed into the headline index which was only able to boast a reading north of 50 by virtue of two other components.

The production index fell 1.8 points, but was still expansionary at 50.7, but the real lift came from supplier deliveries which shot up to 54.5. This was the broadest indication of wait-times since the supply chain disruption year of 2022. Longer wait times for supplier deliveries are additive because in normal times such a development is associated with a factory sector that cannot keep up with demand. Since that is not an accurate characterization of what is contributing to wait times today, the “expansionary” signal from the ISM should, for this month at least, be taken with a massive grain of salt.

The prices paid component jumped to its highest reading also since 2022 as the drumbeat of tariff developments continues to dominate the news cycle. (…)

Trump’s tariffs impacted roughly 16% of imports according to our estimates. Effective tomorrow, an additional 42% of imports will be subject to tariffs, meaning more than half the total goods entering the United States will be subject to tariffs.

The manufacturing sector has struggled for the past few years with a higher interest rate environment. Policymakers at the Federal Reserve may opt to look through price increases caused by tariffs, but manufacturers do not have the luxury of looking through their own costs when they try to calculate their profit margin.

Eight out of ten selected industry comments made specific reference to tariffs and their negative impact on their business. Examples include: “customers are still very hesitant to commit” – primary metals, “outlook on the durables side growing more pessimistic” -plastics and rubber. Perhaps none put the issue more succinctly than a respondent in the machinery space who put it bluntly, “The incoming tariffs are causing our products to increase in price.”

Carl Weinberg, chief economist at High Frequency Economics, said:

If they are imposed as threatened, US industrial activity will fold at once, and we will not have to wait until the next ISM survey to know about it. Critical sectors of the economy face existential threats from the Trump tariffs and likely retaliation. Autos, energy, and aerospace are three that come to mind very quickly. Appliances, electronics goods, furniture, and clothing come to mind next.

Uncertain about the economy, 83% of Canadians plan to change money habits

(…) The vast majority of Canadians plan to alter their financial habits in light of the current economic climate, according to a new Leger survey released Tuesday and commissioned by CPA Canada and BDO Debt Solutions. A whopping 83 per cent of those surveyed are changing their financial plans. Two-thirds are cutting back on spending, while about one-quarter of respondents said they’re prioritizing paying off debt.

Oil prices fall after Opec+ confirms crude production increase

Traders had been expecting cartel to postpone plan to boost output. Opec+ said on Monday it had agreed to proceed with the “gradual and flexible return” of 2.2mn barrels a day of oil production over the next 18 months. (FT)

US suspends military aid to Ukraine Russia applauds Donald Trump’s move as EU announces new defence loan facility to ship ‘immediate’ weapons to Kyiv

Consumer Retrenchment in Goods Spending, Inflation Mild

January’s personal income and spending report was full of surprises. Income came in hot growing 0.9% which was more than double the expected gain of 0.4%. Spending fell on both a real and nominal basis. The decline is the first in 22 months though it does come on the heels of upward revisions to December data.

We have been cautioning about some potential pull-forward in goods spending as consumers try to squeeze in big-ticket purchases before tariffs go into effect. At some point we feared there would be payback. January is sooner than we would have expected to see it. Yet, how else to explain the fact that among the categories posting a decline in January seven out of the top eight decliners were goods categories.

The bottom dropped out beneath motor vehicles & parts spending with a $41.1 billion dollar decline. For most households, this is the definition of a major outlay and the category had seen decent strength rising 3 out of the past 5 months. Recreational goods and RVs made up the second largest decliner in January spending followed by other non-durable goods. Other goods categories in the red included clothing & footwear as well as food & beverages. In fact, the only goods category to post a gain was gasoline and other energy goods, a mostly price-related development.

Source: U.S. Department of Commerce and Wells Fargo Economics

The pop in overall income is partially attributable to one-off factors that typically impact the start of the year. The first is the annual cost of living adjustment (COLA) to social security, which drove this portion of income up 2.8% in January, and accounted for two-tenths of the overall gain in income. Strength can also be traced to receipts on assets and proprietors income.

Yet all of the strength can’t be talked away. Wages & salaries, which comprises a bulk of households income and thereby spending power were also up a strong 0.4%, adding to a string of solid gains the past three months consistent with a sturdy labor market. All told, in adjusting for inflation and taxes, real disposable personal income rose 0.6% in January, or at the fastest pace in a year.

Inflation is still a challenge not just for the Fed but for consumers looking to spend on discretionary items. Earlier this month we learned the CPI surprised to the upside and this morning’s data show the Fed’s preferred measure of inflation, the PCE deflator, rose 0.3%, which was enough to drive the year-over-year rate lower to 2.5%. Goods inflation (+0.5%) outpaced services inflation (+0.2%) for the first time in at least six months.

The core measure (excluding food and energy) was up a similar amount in January, which drove the annual rate down to 2.6% from an upwardly revised 2.9% in December. On a three-month average annualized basis, core inflation sits at 2.4% today.

While risks today look skewed to the upside around inflation, the pricing environment remains highly uncertain. Consumers are price fatigued, and major retailers have acknowledged this. Tariffs are the most obvious threat to the pricing environment and the last few tenths to the Fed’s 2% target remain in the crosshair.

Source: U.S. Department of Commerce and Wells Fargo Economics

Consumer spending has been a stalwart driver of economic growth throughout the current expansion. Yesterday’s Q4 GDP revisions lifted the annualized rate of consumer spending to a blistering 4.2%, the second fastest quarterly expansion in consumer spending in the past three years. Today’s report does not fundamentally alter our thinking on the sustainability of consumer spending though it does offer a look at what consumer life might look like in a world where goods spending is put on ice.

Americans were actually not retrenching in January other than in their homes.

The sharp declines in goods, particularly in motor vehicles and RV sales, are mostly weather related. Wards’ estimates that February light vehicle sales were +1.9% MoM, +1.5% YoY.

In fact, their spending power improved. Wages and Salaries rose 0.4% MoM and +5.5% annualized in the last 4 months. Aggregate weekly payrolls are up 4.9% during the same period.

Total expenditures were up 5.5% YoY in January, +5.6% on average in the previous 4 months.

Core PCE inflation came in at +0.28% MoM, +3.5% annualized, thankfully nowhere close to the 5.5% a.r. spike in core CPI.

Averaging both measures, inflation seems stuck around 3.0% for now. With income rising 5.0-5.5%, real expenditures should grow 2.0-2.5% unless tariffs or fear interferes…

Fed Paper Finds Tariffs May Raise US Consumers’ Everyday Costs

President Donald Trump’s proposed tariffs on imports from China, Mexico and Canada could lead US consumers to face higher prices on everyday purchases, according to new research published Friday.

The final cost to consumers will depend on how much of the tariffs are passed on to end consumers by companies. Prices on a portion of consumer expenses could rise by 0.81% if businesses pass through half of the tariff costs, or by 1.63% if they fully transfer the expenses, according to new research from the Federal Reserve Bank of Atlanta. (…)

A look at the tariffs enacted against China in 2018 and 2019 by the first Trump administration shows the levies were fully passed through to import prices. (…)

Actually, the Atlanta Fed research says that the new tariffs would directly hit “about a quarter of the total consumption basket” by between 0.81% and 1.63%, importantly adding that “the aggregate effect on the overall Consumer Price Index (CPI) further hinges on the price sensitivity of the remainder of the excluded consumption categories, particularly transportation, services, energy, and housing.”

So +0.8-1.6% is the minimum cost increase on everyday purchases, hitting almost immediately, with no account for categories beyond the scope of the research that will be hit gradually as importers pass their cost increases through the supply chains.

The paper adds:

In terms of the timing of the price effects, recent studies indicate that tariff effects are both immediate and persistent. Collectively, these findings imply that future tariffs are likely to be transmitted swiftly to retail prices and have lasting impacts. (…)

Moreover, for two key reasons, our estimates in this paper should be viewed as a lower bound. First, tariffs can affect prices indirectly through input-output linkages, amplifying their impact beyond the direct pass-through captured in our analysis. Second, for Canada and Mexico, we rely on aggregate import shares and do not account for firm-level heterogeneity in expenditure shares and import dependence. If firm-level expenditure shares positively correlate with import dependence, our aggregate estimates for Canada and Mexico likely underestimate the true price effects.

For example, as the WSJ explains,

Tariffs on Mexican-made cars would likely mean not just higher prices for vehicles shipped across the border, but on all cars as other manufacturers and dealers see a chance to eke out more profit while gaining market share. (…)

Washing machines were hit with tariffs in 2018, which researchers found led to an increase in the price not just of washing machines but dryers also. The two are typically bought together, and retailers saw an opportunity to earn more.

The study also found that prices of domestically made, not just imported, washers rose, as manufacturers raised prices owing to higher labor costs and tariffs on imported parts, and to match price hikes on imported machines.

Keep in mind that categories excluded from the research, covering 75% of the consumption basket, include autos and parts (18% come from Canada and Mexico), lumber (24%), crude oil (26%), natural gas (8%) and electricity (1%) (tariffs on energy are 10%).

The BLS will release the March and April CPI data on April 10 and May 13 respectively.

As to the actual release of tariffs on Canada-Mexico, due tomorrow,

he’s sort of thinking about right now how exactly he wants to play with Mexico and Canada and that is a fluid situation,” [Commerce Secretary Howard] Lutnick said on Fox News’ Sunday Morning Futures, speaking of Trump. “There are going to be tariffs on Tuesday on Mexico and Canada, exactly what they are, we’re going to leave that for the president and his team to negotiate.”

“Play”!!!

Investor focus needs to shift from core inflation to headline (total) inflation because spending power must now be closely monitored as tariff inflation hits many essential goods and services, threatening economic growth.

• The labor market has shifted from steady to volatile and increasingly dependent on wages (vs jobs and hours) to sustain labor income growth.

• Since 2021, labor income easily outpaced PCE inflation …

• … but more erratically in 2024 and negatively in December 2024 and January 2025 when 3-5-4.0% inflation outpaced 2.5-3.0% labor income growth.

PCE inflation in the 4-5% range would squeeze (and anger) Americans.

In my Feb. 10 Daily Edge I showed that consumer expenditures have become increasingly dependent on wage growth to compensate for slowing gains in jobs.

Important? Not if employment does not slow down more and not if inflation remains well contained. But the seemingly solid American consumer is on somewhat shakier grounds as buffers against potential troubles in the labor market (jobs/wages) or higher inflation (tariffs) have weakened in recent months.

I also noted that 88% of the new jobs created in 2023 and 2024 were in only 3 sectors (Education and Health Services, Governments and Leisure and Hospitality). That leaves only 12% of jobs creation from all other activities which together account for some 50% of all jobs.

• The first 2 sectors are targets of the DOGE boys.
• We don’t know what the damage will be but recent trends in unemployment claims are bad:

For consumers and the overall economy, slowing employment and broadly higher tariffs may prove unsettling.

Meanwhile:

Euro-Zone Inflation Cools as ECB Enters Final Phase of Cuts Consumer prices rose 2.4% from year ago in February

(…) While still elevated, services inflation — which policymakers have been paying particular attention to — dipped to 3.7%. That’s the first major retreat from 4% since April 2024. (…)

Durables Pop May Say More About Tariffs than Underlying Demand

In what may be a bid to get ahead of tariffs, new durable goods orders exceeded expectations with outperformance particularly evident in core capital goods orders.

New orders for durable goods jumped 3.1% in January, which came with upwardly revised data that show a less-bad drop at the end of last year (-1.8% versus -2.2% previously reported). Much of this month-to-month volatility can be traced to aircraft orders specifically reflecting a turbulent net orders trend at Boeing as strike-related challenges work their way through activity.

The aircraft noise is not the only factor. When is comes to business investment, it is difficult to get a clean read on what is happening in the U.S. economy at present. In GDP revisions separately released [last week] we learned that equipment spending cratered in the fourth quarter, falling at a 9% annualized rate (down from the previously reported 7.8% drop). How do we square that with this apparent resurgence in durable goods orders?

Core cuts of the orders data suggest a more stable trend in underlying activity. Excluding the broader transportation sector, durable goods orders were flat in January. If we look at nondefense capital goods orders excluding aircraft specifically, orders were up 0.8%, building on a prior month increase and showing a decent pickup off of a stalled two-year trend. This cut of core capital goods orders has now advanced at the fastest pace on average in three months since mid-2022.

Part of the advance in underlying orders may reflect a pull-forward in demand ahead of potential tariff threats, as purchasing managers stockpile not just imported but domestic goods as manufacturers source a lot of their inputs from abroad. To the extent this pickup in core capital goods orders does reflect a pull forward in demand, we should brace for some payback as that intention subsides mid-to-late in the year.

The recent improvement should manifest in near term growth, but it’s hard to see conditions overly supportive of a broad and sustained recovery in capex spending amid elevated uncertainty and still-high rates. The durable goods shipments data give us the early read on how equipment investment is faring for Q1 and to say these data have been volatile is an understatement.

Despite the Q4 drop in real equipment spending, which was due largely to weakness in aircraft shipments, core capital goods shipments including aircraft jumped in December, up 3.8% after four consecutive monthly declines. Shipments were strong again in January, with this measure up 3.2%, which suggests we’re set up to see a rebound in first quarter equipment investment.

China Factory Activity Returns to Expansion But Trade Risks Grow

The official manufacturing purchasing managers’ index was 50.2, versus 49.1 in January, the National Bureau of Statistics said Saturday. The median forecast of economists surveyed by Bloomberg was 49.9. A number above 50 points signals growth.

The non-manufacturing measure of activity in construction and services rose to 50.4 from 50.2 last month, the statistics office said. That’s in line with the forecast of 50.4.

Also, the production subindex rose to 52.5 in February, compared with 49.8 in January. The subindex for total new orders rose to 51.1 in February, compared with 49.2 in January, while the gauge for new export orders remained in contractionary territory for the tenth straight month, but rose to 48.6, compared with 46.4 in January.

The private Caixin Manufacturing PMI

improved to a hree-month high of 50.8 in February. That was up from January’s 50.1 and, although indicative of only a marginal improvement in operating conditions, represented the best outcome for the headline index since last November. (…)

Growth rates for both output and new orders were their best since last November. Panellists reported that a general improvement in economic conditions and the introduction of new products had supported the fifth successive monthly increase in total new orders.

Demand strengthened from foreign clients, according to panellists, with new export business rising modestly for the first time since last November.

(…) output charges declining slightly in February for a third month in a row.

 

Japan Manufacturing PMI:

Operating conditions deteriorate for eighth monthin a row

Japanese manufacturing production fell further at the midpoint of the first quarter of 2025, though both output and new order inflows decreased at softer rates. The pace of reduction was only modest, but often attributed to weak sales and confidence in domestic and overseas markets. The subdued manufacturing performance was also reflected in a broad stagnation in employment levels and solid falls in purchasing activity and backlogs of work.

On the price front, input costs continued to rise at a robust rate that was the joint-strongest since last August (with December 2024). In response, manufacturers raised their selling prices at a faster rate.

EARNINGS WATCH

From LSEG IBES:

482 companies in the S&P 500 Index have reported revenue for Q4 2024. Of these companies, 63.5% reported revenue above analyst expectations and 36.5% reported revenue below analyst expectations. In a typical quarter (since 2002), 62% of companies beat estimates and 38% miss estimates. Over the past four quarters, 62% of companies beat the estimates and 38% missed estimates.

In aggregate, companies are reporting revenues that are 1.2% above estimates, which compares to a long-term (since 2002) average surprise factor of 1.3% and the average surprise factor over the prior four quarters of 1.2%.

The estimated earnings growth rate for the S&P 500 for 24Q4 is 16.9%. If the energy sector is excluded, the growth rate improves to 20.4%.

The estimated revenue growth rate for the S&P 500 for 24Q4 is 5.2%. If the energy sector is excluded, the growth rate improves to 5.8%.

The estimated earnings growth rate for the S&P 500 for 25Q1 is 8.1%. If the energy sector is excluded, the growth rate improves to 9.6%.

Trailing EPS are now $245.28. Full year 2025: $270.46e. Forward EPS: $270.29e.

Revisions are still downward…

…mainly on consumer-centric and financial companies:

• “We trim our 2025 EPS growth forecast from 11% to 9% and maintain our 2026 forecast of 7%. Our revision reflects the fact that EPS growth in 2024 was stronger than expected but economic data in 2025 have been softer than expected…..economic data in 2025 have been slightly weaker and the tariff outlook slightly more hawkish than we expected.” (GS)

Cash or no cash?

• Professional investors? “Look Ma, No Hands!

• Berkshire:

Is this why all that Buffett cash?

Where’s the Risk Premium?  On the other hand, the current level of policy uncertainty (and it is very real, we are in very unusual territory here with tariff risk, government reforms and fiscal contraction, geopolitical shifts, and a frenzied pace of activity and announcements by the new admin… there is a real uplift in uncertainty and greater volatility) — Normally the way these two lines travel you’d want to see an Equity Risk Premium at least twice that of the current. You can get that by either dropping the 10-year yield to about 2% or by chopping stockmarket valuations in half… or some combination thereof (neither good!)

Oh and for completeness, since that ERP has long-term inflation in it too, you could also get there via a 20% increase in CPI [also not good, and also likely to do bad things to bond yields and stocks!]
(Callum Thomas)

Source:  Topdown Charts Professional

Speaking of cash or no cash: “America’s net interest payments on our debt are the highest among OECD nations, nine times higher than Japan’s (which has both greater debt as a share of GDP and a smaller economy!) China spent 0.96% of their GDP on interest payments last year, 1/4th America’s burden.” (Callum Thomas)

A reverse trade deficit that, maybe, better not be reversed! Foreign purchases of US equities has far exceeded domestic buying:

Source:  Simon White

Here is a sample of resolutions proposed by Republican lawmakers in the past few weeks: Florida’s Ann Paulina Luna wants Congress to pass a law adding Trump’s likeness to Mount Rushmore alongside presidents such as George Washington and Abraham Lincoln to reflect his “towering legacy”; New York’s Claudia Tenney proposes to make Trump’s June 14 birthday a federal holiday alongside Washington’s; a bill from Tennessee’s Andy Ogles would amend the US constitution to allow Trump to run for a third term so he has time to restore “America to greatness”. North Carolina’s Addison McDowell would rename Washington’s Dulles airport the Donald J Trump International Airport to thank him for the new “golden age of America”.

Who’s MIA?