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.” (…)
(…) 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
