Published February 14, 2025
Through the first month of the new Trump Administration, the most market-impactful news has been the back-and-forth on tariffs. Below, Blaine Rollins observes the impact of tariffs on the markets. We hope you find it informative.
“The tariff threats continue. This weekend they were pointed to steel and aluminum as well as anyone who taxes U.S. imports. Higher prices on steel will hit the energy and construction industries. Tariffs on aluminum will hurt U.S. auto manufacturers and the beverage industry. But great news for aluminum can recyclers and scrap metal junkyards. The pharma, oil and semiconductor sectors are next to be threatened with tariffs along with Europe. Right now, the only new tariffs closest to being implemented are the newer 10% tariffs on China. But by the time the ink is dry on this note, Xi and Trump might have also made a deal to avoid them.
While the threats from the White House continue, we will need to wait and see what actually gets implemented before we can make any investment decisions. At the end of the day, the U.S. needs have not changed. Our country needs Canada’s natural resources, Mexico’s labor and China’s rare earth minerals. It is one thing for a country to protect a certain strategic product or industry with very specific tariffs. But it is another thing to raise the prices for all Americans, slow down the economy and let other nation’s pass by us with more advanced technology (because those robots, drones and electric vehicles don’t run on fossil fuels). I still would not expect much bite for all of the barking.
The markets have moved on from the trade threats. U.S. financial stocks are at all-time highs, credit spreads remain among the tightest in 30 years, and the volatility index has returned to a 15-handle. The financial markets have called the White House’s bluff. They don’t believe in economic and financial self-sabotage. But corner office executives have put (non-AI) capex spending and M&A plans on a temporary hold as the tariff threats have increased. No CEO wants to announce a major new deal or project with even a hint of ground shifting.
Last week’s jobs numbers punched in at decent levels with upward revisions in November and December offsetting a cooler January. The winter storms and fires likely hit the data in the first month of the year so better to trust the averages. The unemployment rate fell to 4.0% while wages were higher than expected, growing at a +3.8% y/y rate. More interesting was Friday’s pop in the Univ. of Michigan’s consumer inflation outlook. The survey did include the first week of tariff threats, so it was interesting seeing consumers view tariffs as a negative to their future inflation outlook.
This week we will see the January CPI and PPI data. But we will get a second inflation reading in March before the next FOMC meeting. Enjoy the week and have fun at the Philly parade.
U.S. stock prices no longer care about the tariff threats as measured by the VIX…
Prices reacted to the initial shock and awe announcements, but after seeing how quickly the Canadian and Mexican tariffs were set aside and then processing the whole chess board, investors quickly concluded that significant trade wars were unlikely to occur.
Financial Times
One big reason why broad global tariffs will not occur…
J.P. Morgan calculates that a White House tariff proposal to hit Mexico, Canada, China and Europe will hit S&P 500 earnings by 7-8%. This won’t happen because it will hurt stock prices, dampen company investments and weigh on future economic growth. That is everything that this White House is against.
According to FactSet, analysts estimate S&P 500 EPS will grow 13.0% to $272 in 2025 and 13.8% to $309 in 2026. So the announced tariffs could have a meaningful impact on earnings. And keep in mind that President Trump has discussed imposing tariffs beyond what’s been announced.
“We estimate that the current tariffs explicitly mentioned could result in an EPS headwind from first order effects of $7.50, $6.10 and $2.60 from Mexico, Canada and China tariffs, respectively,” JPMorgan’s Dubravko Lakos-Bujas wrote. “If we were to presume that Europe would face a 10% tariff, that would be another $3.60. In short, this could impact up to 2/3 of S&P 500 EPS growth this year from just the currently announced tariffs.”
TKer
Another big reason is that China extracts 60% of the world’s rare earth minerals…
Tungsten is one of those minerals. The U.S. would be at a major technological disadvantage if tungsten, and many other defense/battery/semiconductor component metals disappeared from the marketplace.
The phone has been ringing off the hook for Lewis Black after China imposed export controls on tungsten, a niche metal mined by his firm that’s crucial to weapons manufacturing.
The chief executive officer of North America’s Almonty Industries Inc. said his customers are in a “state of disbelief” following Beijing’s move on Tuesday, one of a suite of measures announced as a riposte to tariffs placed on Chinese goods by the Trump administration.
China accounts for about 80% of the world’s tungsten output, and there are concerns the government could add measures around tungsten scrap that would further constrict its availability. Almonty’s stock in Toronto has soared 41% over the last two days as investors price in scarcer supply of the super-dense material used in armor-piercing munitions, as well for engine parts and chip making.
“It’s the warning shot, because we cannot exist without it,” Black said in a phone interview from his base in New York on Thursday. “Our economy, manufacturing, defense, everything, is so dependent on it. And yet, Russia, China and North Korea have about 90% of the output.”
Bloomberg
The other big news last week was that the Treasury let it be known that they are laser focused on the 10-year Treasury yield…
Good to know that there is a high priority on the top borrowing rate anchor. This should tell us also that our leaders are watching inflation and growth closely and will not be rocking the boat.
Treasury Secretary Scott Bessent said the Trump administration’s focus with regard to bringing down borrowing costs is 10-year Treasury yields, rather than the Federal Reserve’s benchmark short-term interest rate.
“He and I are focused on the 10-year Treasury,” Bessent said in an interview with Fox Business Wednesday when asked about whether President Donald Trump wants lower interest rates. “He is not calling for the Fed to lower rates.”
Bessent repeated his view that expanding energy supply will help lower inflation. For working-class Americans, “the energy component for them is one of the surest indicators for long-term inflation expectations,” he said.
“So if we can get gasoline back down, heating oil back down, then those consumers not only will be saving money, but their optimism for the future will” help them rebuild from the recent years of high inflation, Bessent said.
Bloomberg
Speaking of inflation, this set of numbers woke up on Friday…
Now let’s all remove tariff from ‘the word of the day’ and return to a consumer only thinking about egg inflation.
Yardeni: “Exacerbating Friday’s stock and bond market selloffs was news that the one-year expected inflation rate jumped to 4.3% this month from 3.3% in January, according to the University of Michigan’s latest consumer survey. The interviews for the survey concluded on February 4, just days after the Trump administration announced 25% tariffs on Mexico and Canada, which were quickly delayed by 30 days…The jump in expected inflation reduces the likelihood that the #Fed will be cutting the federal funds rate again anytime soon. For now, we remain in the none-and-done camp in 2025 regarding Fed rate cuts.”
@neilksethi
Foreign stock markets are also ignoring the U.S. tariff threats…
With the U.S. dollar flat YTD, the major ETFs are little changed from the local index performance. As this YTD heat map shows, Europe is significantly outperforming the U.S. S&P 500. And for all the threats thrown at China, their stocks are barely changed. Pay close attention to when stocks go up or stay flat on bad news.
Stockcharts.com
Financials are now at all-time highs and outperforming the SPX by 1,600 basis points since July 1st…
If the U.S. was about to enter an economy damaging trade war, financial stocks would not be doing this. Bank stocks are the first to run into a cave at the sign of a credit crisis. Remember Silicon Valley Bank and March 2022?
Stockcharts.com
Speaking of credit, high yield credit spreads remain stellar…
WisdomTree
The lower the credit spreads the lower the concern among investors of a negative event impacting high yield credit (aka lower-rated “junk” bonds).
Market Update
Stocks opened the week higher as the Trump Administration announced hefty tariffs on steel and aluminum imports. The tariffs sent prices of basic materials stocks upward while AI chipmaker Nvidia bounced higher by +3%. The company has been recovering from a selloff on the DeepSeek news posted a couple of weeks ago. Stocks were mixed Tuesday as Fed Chairman Powell testified before Congress. He reiterated that the central bank is in no hurry to lower interest rates. A +3% increase in Wednesday’s consumer price index report sent yields strongly higher. Stocks were modestly lower on the rise in rates. But rates fully reversed Thursday after a report on producer prices gave investors optimism on the inflation outlook. The Nasdaq pushed higher by +1% as Apple and Nvidia both continued their recent moves upward. Stocks were mixed Friday as the monthly retail spending report showed consumers to be more cautious.
Stocks generally continued their recent upbeat mood this week with the S&P 500 rising +1.49%. The Nasdaq 100 (QQQ) lifted to record high territory on a +2.91% rise. Small caps ran in place this week after falling on the higher inflation reading earlier in the week. International stocks posted their fifth straight weekly advance as the U.S. dollar appears to have rolled over following a torrid three-month rally to end 2024.
Warm wishes and until next week.