The Truth About Trump’s Steel Tariffs His first-term levies hurt consumers and U.S. manufacturers.

President Trump gave the economy another jolt of uncertainty on Monday when he signed executive orders imposing 25% tariffs on all steel and aluminum imports. His advisers say these tariffs are economically “strategic” rather than a bargaining chip for some other goal. Is the strategy to harm U.S. manufacturers and workers?

That’s what his first-term tariffs did, and it’s worth revisiting the damage of that blunder as he threatens to repeat it. In March 2018, Mr. Trump announced 25% tariffs on steel and 10% on aluminum under the pretext of protecting national security. Then, as now, most U.S. metal imports came from allies including Canada, Mexico, Europe, South Korea and Japan.

Mr. Trump said tariffs were needed to boost domestic steel and aluminum production. But U.S. production was already increasing amid a surge in capital investment unleashed by his deregulation and 2017 tax reform. U.S. steel capacity utilization climbed to 78.5% in March 2018 from 72.4% in December 2016.

The real goal of U.S. steel and aluminum companies that wanted the tariffs was to boost their bottom lines. Raising prices on foreign imports allowed them to charge more. The price was paid by U.S. secondary metal producers and downstream manufacturers.

Consider Mid-Continent Steel and Wire, which produced roughly half of the nails made in the U.S. After the steel tariffs took effect, its sales plunged by more than half, causing it to lay off 80 workers. Another 120 quit because they worried its Missouri factory might close. After this damage, the Commerce Department granted the company a tariff exemption.

Auto makers were another casualty. Ford Motor said tariffs subtracted $750 million from its bottom line in 2018, which reduced profit-sharing bonuses for each of its workers by $750. GM said the tariffs dented its profits by some $1 billion, equal to the pay of more than 10,000 employees.

The tariffs also made U.S. manufacturers less globally competitive and prompted retaliation that hurt American businesses. Canada imposed tariffs on $12.8 billion in U.S. products, including 25% on steel and 10% on aluminum. Harley-Davidson shifted some production to Thailand to avoid Europe’s retaliatory tariffs on U.S. motorbikes.

Retaliation caused Mr. Trump to exempt Canada and Mexico as part of the renegotiated Nafta deal. His Administration also struck deals with some countries that exempted a certain amount of their steel and aluminum exports.

Even so, the tariffs created uncertainty for U.S. manufacturers and boomeranged on steel and aluminum companies. Employment in durable goods manufacturing began to decline in early 2019, which reduced demand for steel and aluminum. Employment in fabricated metals manufacturing that used steel and aluminum plunged and is still some 35,000 lower than when the tariffs took effect. (…)

Domestic steel-making capacity utilization has fallen back to 70%, about the same as in 2016.

Which is why U.S. steel and aluminum producers now want tariffs with no exemptions. They blame imports for reducing prices. But steel prices are about 50% higher than pre-pandemic levels and aluminum prices a third higher. Cleveland-Cliffs shares rose 17.9% Monday, and other steel makers by 5% or so in expectation of windfall tariff profits.

This is political rent-seeking at its most brazen, and it benefits the few at the expense of the many. None of this matters to Mr. Trump, whose dogmatic views on tariffs can’t be turned by evidence. But we thought our readers would like to know the rest of the story.

• Why Trump Wants Higher Tariffs on Steel and Aluminum

(…) The president said the tariffs would apply to “everybody” — meaning all nations. The levies will also cover finished metal products, a significant move that will have broad-reaching price impacts on US consumers.

Tariffs imposed during Trump’s first presidential term focused mostly on basic steel and aluminum products, whereas the latest tariffs will include things like metal shapes and processed goods that are needed to build automobiles, window frames and skyscrapers among other things. (…)

When Trump’s first administration unveiled tariffs on steel and aluminum, the goal was to make the US more self-sufficient in these metals. But in 2024, the output of the US steel industry was 1% lower than it had been in 2017, before the first round of Trump tariffs, and the aluminum industry produced almost 10% less.

Rising costs — especially for labor and energy — have been a major driver in the long-term decline of these industries. Canada plays a vital role in supplying aluminum to the US because its plants often draw on cheap hydropower.

Economists warn that Trump’s tariffs risk raising household expenses such as groceries and gasoline — potentially stoking the very inflationary pressures the president campaigned on quelling. Administration officials counter that the levies are part of a broader economic strategy — including extended tax cuts and expanded domestic energy production — that will help lower costs overall.

John Authers:

(…) Are there valid concerns that Trump’s proposed retaliatory measures would include China? A Bloomberg Economics analysis points out that China’s effective tax rate on US goods is still lower than Washington’s levies on Chinese products. Taking at face value Trump’s plan for “reciprocal” tariffs that affect “everyone,” the threat to China is more bark than bite, Bloomberg’s Chang Shu and David Qu argue. There’s no room for US duties on China to rise under a strictly applied “reciprocal” approach. True reciprocity would require him to cut tariff rates:

Our analysis suggests the US would have to reduce tariff rates on China, reflecting China’s low tariffs. Does this mean China is off the hook? No. Our view is that Trump is holding his biggest punch for China. We still expect US tariffs on Chinese goods to rise further, though it’s not clear if they will hit the 60% level Trump has threatened. Tariffs staying at current levels could mean the impact on China would be contained, especially if the US raises tariffs on other trading partners.

A further important point is that this is not like some cliff edge. The two countries have been adapting their trade relationship since at least 2018, and China’s realignment is on course. The share of US imports from China has steadily declined while Beijing has sold more and more to the rest of the world:

(…) It looks like markets are taking this threat more seriously. Even before the announcement, commodity prices were shifting in the US as traders rushed to stockpile before tariffs take effect. This trans-Atlantic price disparity between copper on New York’s Comex and the London Metal Exchange is unmissable:

(…) As shown by Apollo Global Management in this chart, Chinese exports to the US these days are dominated by electronics and computer products: (…)

Goldman Sachs:

• This policy impacts the cost of importing aluminum into the US, but has no direct impact on the LME price in London.

• We believe that the 25% increase in the price of the marginal imported tonne will need to flow through to domestic prices in order to (1) increase domestic utilisation rates (to the extent that they can) and (2) keep the required imports flowing. This implies that we see upside to 2025H2 US HRC futures. Even after Monday’s (10 February) rally, the December US contract ($862/st at time of writing) is priced 18% above the last week’s CRU spot index ($728/st), with further to run.
• We expect most of the tariff to transfer to the US domestic steel price, as was the case after June 2018 when imports from the EU, Mexico and Canada came under the S232 duty (following an initial exemption). In the short run, high inventories at US service centres (>2.2Mt) following a restocking in December and low shipments could slow the rally in spot prices. However, ultimately, we do not believe that US steel imports can be fully replaced by domestic production, despite the relatively low import dependence. First, while there is spare US steelmaking capacity, there are limitations in bringing all idled US capacity back online. Second, there are mismatches between domestic spare/new capacity and demand in terms of types of steel products. Even when US domestic steel prices soared to almost triple today’s prices in 2021, the US capacity utilisation rate did not exceed 85%.
• We see no direct impact on supply, and limited substitution risk. Duties have not been an effective way to lift primary aluminium production. US primary aluminium production is now lower than when tariffs were initially imposed and not much above the lows seen in 2016, when the LME price averaged $1,610/t. At present, there are two idle aluminium smelters in the US with a combined capacity of 0.3 million tonnes pa, neither of which we think will restart (for reference, global primary aluminium production is 73 million tonnes). The main barriers to restart is difficultly securing long-term competitive power contracts, as well as trade policy uncertainty.
• While we do not think that the tariffs would result in imports being fully replaced by domestic production (due to aforementioned reasons), we do expect some increase in US steel production as new capacity comes online. This would likely lead to a fall in imports (to an extent), as occurred when the S232 tariffs were imposed in 2018 (although domestic production also declined over the same period). Much of this new capacity is the result of investments following the 2021 steel price rally, including more than 4Mt from US steel (Big River 2), Nucor and CMC. It is also likely that the capacity utilisation of existing capacity gradually increases (as it did in 2018). This increase is most likely to come from capacity recently idled (over the past year) in response to low demand and prices. For example, in Q4 2024 Cleveland Cliffs idled 1.5Mt capacity No. 6 blast furnace at its Cleveland Works, Ohio (already announced to be coming back online). While this should help US imports to decline to an extent over the coming years (if the new tariffs remain in place without exemptions), this would require higher domestic prices (vs. today).
• (…) not including copper today increases the chance that copper will go through a S232 type investigation, possibly delaying tariffs by 9-12 months. We believe the US copper price is overestimating the probability of tariffs in the short-term.

Trump’s Early Tariff Wins Mask Future Risks The president’s trade policies may have unintended hazards, ranging from stagflation to the erosion of US influence on the global stage.

(…) Given recent developments, the Trump administration’s tariff plan can be thought of as evolving to focus on three major components: tariffs on a range of countries where the main goal would be revenue generation and better trade reciprocity; a much narrower overlay of additional duties aimed at protecting certain segments (such as steel and aluminum); and the periodic threat of much higher levies on individual countries to meet political objectives.

This multi-pronged approach promises to deliver immediate gains. Indeed, as evidenced by the spat with Colombia just over a week ago, America’s many structural advantages and its bigger and cyclically stronger economy give it the upper hand in most negotiations. The prospect of more quick victories means we can expect tariff threats to continue in the period ahead. This will not be a linear or predictable process. Indeed, as Annmarie Hordern noted on Bloomberg Television on Monday, “uncertainty is a feature rather than a bug” of the current approach.

The short-term gains for the US will come with risks. Depending on the response from US households, targeted countries and companies on both sides, tariffs can be stagflationary, contributing to cost increases while slowing growth. This impulse could be stronger now than during Trump’s first term, given the fragility of low-income consumers and the extent to which companies were hurt by the unanticipated surge in inflation that followed the pandemic. (…)

If used repeatedly, both the threat and the reality of tariffs can inflict collateral damage and have unintended consequences. Making America a less reliable partner could result in fewer bilateral interactions and the gradual erosion of the US’s role at the core of the international system.

Viewed through the lens of game theory, trade is an intrinsically cooperative game. Playing it uncooperatively can benefit the more powerful party in the short term. This is where the US is today, able to use a multi-pronged tariff policy to pursue multiple economic, financial and political objectives with immediate success. But the longer that international trade is played as an uncooperative game, the bigger the welfare losses to everyone participating, including the US.

NY Fed Survey Sees Inflation Expectations Edge Up Before Tariffs

Expected inflation five years ahead rose to 3% last month, the highest since May 2024, according to results of the New York Fed’s Survey of Consumer Expectations published Monday. Expected inflation rates over the next year and three years ahead were both unchanged from December at 3%. (…)

Preliminary results of a monthly University of Michigan consumer survey published Friday also showed expectations ticking up. In that poll, expected inflation over the next year jumped to 4.3%, while anticipated inflation five to 10 years ahead rose to 3.3%.

The New York Fed survey showed a rise in inflation expectations for various items over the next year, including gas, food, medical care, college tuition and rent. It also revealed a growing divergence among respondents over estimated inflation in the year ahead, with the gap between the 25th- and 75th-percentile respondents widening to the largest since mid-2023. (…)

Expectations for growth in household spending fell in January to a four-year low and respondents reported more pessimism about their financial situations. Even so, the perceived probability that the unemployment rate would be higher a year from now also fell, to the lowest level since July 2021.

Results of a separate survey published Monday by the Cleveland Fed indicated chief executives and other business leaders polled in January said they expect the consumer price index to rise 3.2% over the next 12 months, down from 3.8% in October.

Donald Trump to halt enforcement of law banning bribery of foreign officials President says move will ‘mean a lot more business for America’

Donald Trump has ordered the Department of Justice to halt the enforcement of a US anti-corruption law that bars Americans from bribing foreign government officials to win business.

“It’s going to mean a lot more business for America,” the president said in the Oval Office after signing an executive order on Monday directing Pam Bondi, the US attorney-general, to pause enforcement of the 1977 Foreign Corrupt Practices Act. (…)

Trump’s Next Round of Tariffs—25% on Steel and Aluminum—Won’t Be So Easily Averted Reciprocal tariffs on trading partners are also in the mix as officials say ‘punitive’ tariffs on Mexico and Canada were only a small slice of trade agenda

The reciprocal tariffs plan will be applied to all trading partners, Trump said, but some countries that already charge similar tariffs on American goods that the U.S. charges on their products may not see much change. Steel and aluminum tariffs will apply to every nation exporting the metals to the U.S.

Previously, the president has also pledged that the U.S. would impose tariffs on computer chips, pharmaceuticals, copper, oil and gas imports as soon as mid-February. (…)

There are “punitive tariffs” like the ones recently threatened with Canada, Mexico, China and Colombia over immigration and drug-smuggling issues, said Sen. Bernie Moreno (R., Ohio), a Trump ally in the Senate. Additionally, there will be “structural, long-term tariffs,” he said.

That category includes the tariffs Trump plans to levy on steel and aluminum imports on Monday. (…)

There is also a third and perhaps less-known use of tariffs potentially on the way, senior officials say. Trump has floated across-the-board tariffs of 10% to 20% on virtually all imports as a tool to raise revenue, in theory helping offset the tax cuts that Republicans are hoping to push through Congress as soon as this month.

Trump on Friday hinted to reporters he is leaning toward using a “reciprocal” tariff action, instead of his across-the-board proposal. (…)

Congressional Republicans are largely on board with the use of tariffs to address structural trade issues, such as subsidies and discrimination. But they raised some questions about Trump’s plans to use duties to raise revenue. (…)

In addition to tariffs on products that Trump previewed last week, such as semiconductors, Trump’s aides and allies warn that the European Union and South Korea also are in the firing line because of taxes, regulations and penalties they have imposed on U.S. tech companies such as Alphabet’s Google.

“I think Europe is in for a massive trade war,” said Robert O’Brien, Trump’s first-term national security adviser. “I do not believe the president is going to put up with this type of action against America’s biggest companies.”

Trump has long complained that the U.S. buys more from the bloc than it sells to it, and said last week tariffs on the EU “will definitely happen.” (…)

• Trump’s Man of Steel Posturing Makes America Weaker

(…) Trying to protect the steel and aluminum industries as a path to nation-building is a doomed project that will make America weaker, not stronger.

Tariffs of 25% on imported metal that Trump has promised to unveil on Monday will be as ineffective in fostering domestic production as the previous round of restrictions he kicked off in 2018. Since those actions, US production capacity for aluminum has fallen by 32%, while steel is down 3.6%. Only a mad king would expect a different result from trying the same thing again.

If the latest round of levies is actually introduced — anyone’s guess, given the frantic policy to-and-fro of the past few weeks in Washington — they’ll serve only to damage producers and consumers in both the US and its allies. The knock-on outcome will diminish those countries’ abilities to manufacture their own metal. Russia and China must be rubbing their hands with glee.

 

The two metals are also some of America’s most extensively protected sectors: On top of the 2018 Trump administration tariffs, they are the subject of just under half of the 736 anti-dumping and countervailing duty orders and agreements currently in force. (…)

The US and Canadian aluminum sectors, in particular, operate as a more or less integrated single industry: Canada uses its cheap and clean hydro power to smelt new metal and become the world’s biggest exporter of freshly-smelted blocks, while the US employs its vast consumer market to be the biggest exporter of scrap for making recycled aluminum. That shouldn’t be dismissed as just “waste:” Such recycled aluminum supplies about a third of global demand. Producers in each country are able to use trade as a safety value to maintain their own profits, without wasting capital on rolling mills and smelters where allies already have spare capacity. (…)

Importantly, imports account for 82% of the U.S. aluminum needs and Canada supplies almost 60% of these imports with its lower costs hydroelectric aluminum plants principally owned by Rio Tinto and Alcoa.

January Employment: Labor Market Looking Good After Revisions Look Back

Nonfarm payrolls increased by 143K in January, coming in below consensus expectations for a 175K monthly gain. The miss in January was more than offset by upward revisions to job growth in the prior two months. Employment growth in November and December was upwardly revised by a combined 100K.

Health care, social assistance and government once again led the charge on employment growth, with those three sectors accounting for 98K of the net new jobs added in January. Amid a slew of headlines about employment reductions by the federal government, it is important to remember that the bulk of government employment is at the state and local level. State and local government employment, which accounts for just shy of 21 million jobs, rose by 23K in January. Federal government employment, which totals just 3 million jobs, rose by 9K in the month. (…)

Today’s release also included annual revisions to the establishment survey’s employment figures. The annual benchmarking revised down the level of payroll employment in March 2024 by 598K, or -0.4%. Although smaller than the preliminary estimate, this marked the largest downward adjustment since 2009. Payrolls in the 12 months through March 2024 are now reported to have increased by an average of 197K per month compared to the previously reported pace of 242K.

Revisions to employment growth after March 2024 left the level of employment broadly unchanged, with slower growth in the middle of the year offset by faster employment growth toward the end of 2024. The three-month moving average on nonfarm payroll growth was just 82K in the June to August period, much weaker than the 237K average registered over the most recent three months.

(…) the unemployment rate fell to an eight-month low of 4.0% in January from 4.1% in December. Absent the population control effects, the BLS reports the unemployment rate would have fallen a little more (-0.2 percentage points) than the actual data reported. After a foreboding march higher through the first half of last year that was a major factor in the FOMC cutting rates, the unemployment rate is now back near the bottom end of the range most Committee members think is needed to achieve its inflation target over the long run.

 

(…) the recent data point to a strong pace of job growth in recent months, as evidenced by a three-month moving average of 237K on nonfarm payrolls. Admittedly, this may be overstating the underlying strength due to the weak strike- and hurricane-related October number falling out of the average, but even adding it back in, the four-month moving average is a solid 189K. The household survey further reinforces this recent strength. The 4.0% unemployment rate registered in January is the lowest it has been since May 2024.

Aggregate weekly payrolls (employment x hours x wages) rose 0.25% MoM in January after +0.20% in December, a marked slowdown from +0.54% on average in the previous 4 months.

Payrolls (black) were still up 5.0% YoY on a soft year ago month but weaker monthly growth of the past 2 months points to below 3% gains in the spring. If so, consumer expenditures could slow meaningfully from their 5.5% pace since march 2024.

This next chart illustrates how the contribution of actual labor (employment x hours) to total labor income has diminished every six months as wage growth took more and more importance (84% of total payrolls in July-December 2024 vs 72% in 2023 and 55% in 2022).

Here’s the YoY trends in wages (black), fairly stable at +4.0% since April 2024, and in actual labor (jobs x hours) with the dotted line showing the 3-month m.a., now +0.87%. This means that consumer expenditures are 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.

Wages rose 0.48% MoM in January after +0.37% in November and +0.25% in December, continuing their erratic monthly pattern since June 2023, although the 3-m. m.a. has been steadily rising since and is now +4.5% annualized, providing some cushion should inflation accelerate in coming months.

Inflation has been accelerating since September 2024: headline PCE rose from +2.1% to +2.6% while headline CPI rose from +2.4% to +2.9%. Both measures remain more than a full percentage point above their pre-pandemic level of 1.5% (PCE).

Matt Klein shows how difficult is that last mile: “Across a range of measures, prices are rising about 1% a year faster than in 2017-2019.”

All this to say that 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.

The January PMIs were mixed on these various fronts:

• Service providers looked to expand capacity at the start of
  2025 and ramped up hiring accordingly. Employment rose for the second month running, with the rate of job creation accelerating to the fastest since June 2022.
• Higher labor costs was the main factor behind a further sharp increase in input prices in January. The rate of inflation reached a three-month high and was broadly in line with the series average.
• In line with the picture for input costs, the pace of output price inflation also quickened in January as companies passed through higher cost burdens to customers. The solid increase in charges was the fastest since last September.

A resilient labor market and solid wage gains could keep the consumer healthy through spring but the “fastest increase in selling charges since last September” means inflation is not settled just yet.

Consumers are feeling it. Wells Fargo on Friday’s weak U. of Michigan survey:

Nowhere was this shaky feeling more evident than in the full percentage point spike in short term inflation expectations. Median year-ahead inflation expectations rose to 4.3% from 3.3% a month prior. This makes for two consecutive months of uncharacteristically high jumps in short-term inflation expectations.

Just two months ago, consumers reported expecting only a 2.8% rate of inflation over the next year. A two-month gain of 1.5 percentage points in the measure has not been observed since early 2021, when the U.S. was still in the throes of the pandemic-fueled bout of elevated inflation.

At 4.3%, the measure is no longer in a range that policymakers would likely feel comfortable citing as “well-anchored”. Long term inflation expectations rose a touch to 3.3% from 3.2% in January. Though not nearly as dramatic of a one-month increase, this still represents an elevated rate relative to the range that prevailed pre-pandemic.

So what has changed over the past two months to drive such an increase? The survey period ran from January 21st through February 3rd, with the end of this period coinciding with the day that tariff policy took center stage amid the current administration’s implementation of 25% tariffs on Canadian and Mexican goods imports, as well as a tariff of 10% on Chinese goods. Given the 30-day stay-of-execution granted on Monday for Mexico and Canada, perhaps this preliminary read will get revised down as more surveys come back later in the month. (…)

The prices paid component of the ISM manufacturing survey rose to 54.9, an eight-month-high. Meanwhile, despite a slowing in service sector activity reported in the services ISM, the prices paid component in that survey came in above 60 for the second month in a row, a sign that pricing pressure remains widespread among service providers as well.

BTW: inflation expectations are not uniform, far from it: the average Republican thinks inflation will be zero over the next 12 months, while the average Democrat is braced for price rises of more than 5%.

January’s CPI report is out Wednesday.

But there is a lot more from the BLS annual revision: there were 598k fewer jobs (-0.4%) in March 2024 then originally reported (the absolute average
benchmark revision over the past 10 years is +0.1%). ING:

Once again we come to the issue of the quality of the jobs being added. Originally we had 78% of all jobs created in the US since December 2022 were in the three sectors of government, leisure & hospitality and private education & healthcare services. The revisions show it is now 88%! We believe those three sectors tend to be lower paid, less secure and more part-time. This also helps to explain the drop in the average working week to just 34.1 hours. Note that previously 5.2mn jobs had been added between December 2022 and December 2024. Now it is 4.7mn between December 2022 and January 2023.

Contribution to cumulative jobs gains since December 2022 (000s)

Source: Macrobond, ING

Not only were there nearly 600k fewer jobs created (-50k/month), but 88% of the new jobs, rather than an already high 78%, were in the 3 sectors highlighted by ING. That leaves only 12% of jobs creation from all other activities which together account for some 50% of all jobs.

This chart plots aggregate hours worked and real GDP indexed at 2010 = 100. GDP growth is a bit above trend (in spite of the “restrictive” monetary policy) but hours worked are almost 5% below trend and flattening (unchanged since March 2024, that’s 10 months).

The only job creators since the pandemic are Education and Health Services (17% of total) and Governments (15%). Leisure and Hospitality (11%) just made it back to its 2019 level thanks to a bounce in Q4’24, but all other sectors, half of the total and all in private sectors, are actually down during the last 2 years and showing no positive momentum. This contributor to “American exceptionalism” is not very dynamic, is it?

Now this:

• IT Unemployment Rises to 5.7% as AI Hits Tech Jobs Artificial intelligence continues to impact the technology labor market

The number of unemployed IT workers rose from 98,000 in December to 152,000 last month, according to a report from consulting firm Janco Associates based on data from the U.S. Department of Labor. (…)

Job losses in tech can be attributed in part to the influence of AI, according to Victor Janulaitis, chief executive of Janco Associates. The emergence of generative AI has produced massive amounts of spending by tech giants on AI infrastructure, but not necessarily new jobs in IT.

“Jobs are being eliminated within the IT function which are routine and mundane, such as reporting, clerical administration,” Janulaitis said. “As they start looking at AI, they’re also looking at reducing the number of programmers, systems designers, hoping that AI is going to be able to provide them some value and have a good rate of return.”

Increased corporate investment in AI has shown early signs of leading to future cuts in hiring, a concept some tech leaders are starting to call “cost avoidance.” Rather than hiring new workers for tasks that can be more easily automated, some businesses are letting AI take on that work—and reaping potential savings. (…)

“What we’ve really seen, especially in the last year or so, is a bifurcation in opportunities, where white-collar knowledge worker type jobs have had far less employer demand than jobs that are more in-person, skilled labor jobs,” Stahle said.

New Indeed job postings in software development, for instance, declined 8.5% in January from a year earlier, but they are showing signs of stabilizing after drastic job cuts in the tech sector in 2023, Stahle added. (…)

Layoffs have also continued at some large tech companies. Last month, Meta Platforms said it would cut 5% of its workforce in performance-based job cuts in the U.S., and on Wednesday enterprise software giant Workday said it would cut about 8.5% of its workforce.

FYI: Google claims that more than 25% of its internal source code is now AI-generated. Salesforce has announced a hiring freeze for software engineers. Facebook hopes to automate “midlevel” software engineers. There will soon be a proliferation of startups stocked with more high-level software architects vs. coders. (WSJ)

OPEC Heavyweights Boost Oil Prices as Sanctions Hit Russian Flow

Tough US sanctions on Russian oil are allowing the biggest Middle Eastern producers to raise prices for their main market by the most in years, and may help bring in additional petrodollars to meet crucial funding needs.

Iraq, the second-biggest supplier in the Organization of the Petroleum Exporting Countries, boosted the selling price of its main grade to Asia to the highest level since September 2022. Saudi Arabia had its own big increase last week while prices in the United Arab Emirates rose to the highest since September.

Russia is facing an impending oil tanker shortage and Iran is under renewed threat of tighter sanctions, forcing buyers to look for replacement supplies of comparable Middle Eastern crude and pushing up in the region. Dubai swaps, the benchmark for the Gulf, have continued to surge, according to PVM Oil Associates data. The discount to Brent crude futures hit the narrowest since June on Friday, illustrating thirst for the region’s oil. (…)

China Consumer Inflation Picks Up as Holiday Boosts Spending China CPI accelerates for first time since August last year

The consumer price index rose 0.5% in January from a year earlier, the National Bureau of Statistics said Sunday, compared with a 0.1% gain in the previous month. The median forecast of economists surveyed by Bloomberg was a 0.4% increase.

A temporary spending boom during the eight-day break briefly masked the extent of the deflationary challenge facing the world’s second-biggest economy. The price of services increased 0.9%, accounting for more than 50% of the total rise in CPI, according to the statistics bureau.

The CPI jump was “mainly due to higher food prices and tourism-related services prices on an earlier-than-usual Lunar New Year holiday,” Goldman Sachs Group Inc. analysts wrote in a note. “But the boost is likely to become a drag in February as seasonal demand fades.”

China’s factory deflation extended into a 28th month with a 2.3% decline, flat with the index’s contraction in December. (…)

EARNINGS WATCH (+18.2%!)

From LSEG/IBES:

308 companies in the S&P 500 Index have reported earnings for Q4 2024. Of these companies, 76.3% reported earnings above analyst expectations and 16.6% reported earnings below analyst expectations. In a typical quarter (since 1994), 67% of companies beat estimates and 20% miss estimates. Over the past four quarters, 78% of companies beat the estimates and 17% missed estimates.

In aggregate, companies are reporting earnings that are 6.4% above estimates, which compares to a long-term (since 1994) average surprise factor of 4.2% and the average surprise factor over the prior four quarters of 6.6%.

Of these companies, 62.5% reported revenue above analyst expectations and 37.5% 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 1.1% 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 14.8%. If the energy sector is excluded, the growth rate improves to 18.2%.

The estimated revenue growth rate for the S&P 500 for 24Q4 is 4.8%. If the energy sector is excluded, the growth rate improves to 5.4%.

The estimated earnings growth rate for the S&P 500 for 25Q1 is 9.1%. If the energy sector is excluded, the growth rate improves to 10.7%.

Yet

Trailing EPA are now $244.89. Full year 2024e: $246.05. Forward EPS: $271.24e. Full year 2025e: $272.71.

Goldman Sachs:

S&P 500 companies demonstrated healthy corporate fundamentals during 4Q2024. Aggregate EPS grew 12% year/year, beating the consensus expectation of 8% growth at the beginning of reporting season. The median stock grew earnings by a more modest 7%.

Real US GDP growth in 4Q equaled 2.3% quarter/quarter annualized and supported a 5% increase in revenues. Price inflation outpaced input and labor cost inflation and contributed to a 49 bp expansion in profit margins to 11.6%.

Earnings revisions appear to have inflected lower over recent weeks and earnings revision sentiment has fallen into negative territory.

Tariffs are a key downside risk to our 2025 EPS forecast. Tariffs are a key downside risk to our 2025 S&P 500 EPS forecast. Our economists expect another 10 pp increase in tariffs on China imports in addition to the 10 pp increase already implemented, a 10 pp increase on global critical imports, and a 25 pp increase on EU autos. These new tariffs would raise the effective tariff rate by 4.7 pp.

We estimate that every 5 pp increase in the US tariff rate would reduce our 2025 S&P 500 EPS estimate by roughly 1-2% and lower our estimated EPS growth rate by approximately 1 pp (to 10%). Heightened policy uncertainty represents downside risk to valuation because it raises the equity risk premium and implies downward pressure on fair value.

Tariffs can negatively impact corporate profit margins if companies decide to absorb higher input costs. However, commentary from our 4Q 2024 Beige Book suggests that many managements are planning to push higher costs through to consumers.

The Magnificent 7 has been a pillar of S&P 500 sales and earnings growth during the last few years, but the magnitude of surprises has declined and participation from the other 493 stocks has broadened. In 2Q 2023, the Magnificent 7 reported quarterly sales that were 2.5% greater than consensus estimates. However, excluding NVDA, which is yet to report results, the group posted combined 4Q 2024 revenue that was in line with expectation. This marks the first quarter with no positive sales surprise for the Mag 7 since 2022. On an EPS basis, the gap between the mega-caps and the S&P 493 narrowed to 19 pp from a peak of 66 pp in 4Q 2023.

The outperformance of the Magnificent 7 has historically reflected its earnings superiority. 2025 bottom-up estimates imply the excess earnings growth of the Magnificent 7 will narrow from 32 pp in 2024 to 6 pp in 2025 and 4 pp in 2026.

Enough is enough?

Mag-7 Volume Warning:  Starting off with an intriguing eye-catcher, this chart shows the 1-year rolling average trading volume in Mag 7 Stocks. The concern is it seems to be doing a similar thing to what it did late-2021 into the pandemic stimulus frenzy peak. Taken by itself you might dismiss it, but there are a few other points to ponder on this…

Source:  @i3_invest via @dailychartbook