Good morning … unless, of course, you missed the TARIFFS IN EFFECT NEWS (see visual posted HERE over weekend for some levity and context …) … AND here we are and off we go in TO Feb … heck of a start to the year as Bianco detailed …
4wks ago, NOLA attack 3wks ago, LA fires 2wks ago, inauguration last week, DeepSeek this week … tariffs …
Someone bring on relative calm … before THAT (and NFP at weeks end), this …
Saturday, Feb 1, ‘47 news …
Whitehouse.gov IMPOSING DUTIES TO ADDRESS THE FLOW OF ILLICIT DRUGS ACROSS OUR NORTHERN BORDER
NEWSQUAWKUS Market Open: USD surges and stocks dip after post-Trump actions; RTY underperforms … USTs are a little firmer today, with the main focus on US President Trump's announcement of 25% tariffs on Mexico and Canada. Seemingly the impact of inflation/economic headwinds has been outweighed by a flock to quality. The US curve is currently in bear-flattening mode with the 2s10spread narrowing by 6.9bps. The 10yr yield had been as low as 4.496% but has since stabilised around the 4.55% mark. Ahead, US ISM Manufacturing metrics.
Finviz (for everything else I might have overlooked …)
Moving from some of the news to some of THE VIEWS you might be able to use… here’s some of what Global Wall St is sayin’ … most of what follows may come as a shock to you … is about tariffs and furthermore, likely all to be needing of a rewrite by days end …
First up, how / why we’re ALL ‘bout to feel little pain …
In the first major tariff announcement, President Trump took a relatively soft stance on Canadian energy imports, likely reflecting caution, which is warranted, in our view. Substitution efforts will likely lead to a narrower WTI-Brent spread.
AND another (equity) note from same shop …
BARCAP: Public Policy: Tariffs: 'Promises Made, Promises Kept'
President Trump sets up additional 25% tariffs on Canada and Mexico and 10% on China to take effect on Tuesday. Markets should brace for a wide range of possible outcomes.
…We see three possible scenarios going forward, while acknowledging that our crystal ball is foggy.
The announcement of higher US trade tariffs confirms our core assumption that Donald Trump’s campaign promises should be taken literally and seriously.
In fact, the announced increase in tariffs were even larger and came faster than we had pencilled in.
In turn US consumer prices should rise sharply over the coming months, while tariffs should put the brakes on economic growth.
This cements the Fed’s ‘on hold’ stance, with the direction of the next move to be determined by the balance of growth, inflation and market reaction.
For the rest of the world, the increase in protectionism is a clear net negative for growth, not least because the risk of a tit-for-tat escalatory trade war has risen.
We continue to see a more ambiguous impact on inflation outside of the US, and thus the implication for other central banks will depend in large part on starting domestic economic conditions.
We think new sizeable tariffs on Canada, Mexico, and China without significant product exclusions will drive further USD upside.
Countries hit with tariffs have suggested that they will retaliate. The more retaliation we see, the worse we think it will be for global growth and risk assets.
In today’s note we provide our initial thoughts on what these new tariffs mean for the global economy and markets. We will follow up with more in-depth notes in the coming days.
… Figure 1 shows the rise in term premiums in recent months and how this has closely tracked the number of rate cuts priced into the front end of the curve. The relationship has strengthened since the FOMC meeting in September, when the presidential election became the main conversation in the market. There are multiple connections between Fed policy pricing and term premiums that now have become more relevant to investors than in the past, in our view. But core to it all is that as the Fed turns more hawkish (dovish), the fiscal picture for the US Treasury gets worse (better). Higher rates from the Fed feed directly into higher interest payments.
The tariff war is likely to be bearish for US rates and bullish for EUR (front-end) yields. This aligns with our initial post- US election assessment, subsequently reiterated in our 2025 outlook.. The tariffs announced today are more aggressive than assumed in our outlook. As a result, relative to our pre-announcement assessment, the bullish EUR front-end view is reinforced, while the bearish US long-end view will be more sensitive to any sharp repricing of risky assets…
DB: A huge shock - first thoughts on the tariff announcements
We offer a few thoughts on the tariff announcements from President Trump this weekend. If these tariffs go ahead, we see them as constituting the largest shock in global trade policy since the collapse of Breton Woods. We see immediate recessionary consequences for some of the economies involved and broad-based negative read-across to the world economy.
First, we consider the announcements to be at the most hawkish end of the protectionist spectrum we could have envisaged…
Second, the market needs to structurally and significantly reprice the trade war risk premium…
…To conclude, given the magnitude of the economic impact involved, we hesitate to assume that the announced tariffs will be permanent. On the flipside, we have long been arguing that the market has been severely under-estimating revenue-raising considerations, and this will incentivize the administration to have tariffs in place ahead of the US budget negotiations in coming months. We expect the market reaction to at least in part shape the US reaction function, and this will be a reflexive learning process both for markets and the Administration in coming days. Irrespectively, the most long-lasting impact is likely to be a structurally more elevated tariff risk premium in coming months impacting all of America's trading partners.
DB: US Economic Perspectives - Groundhog day for trade wars
President Trump invoked the International Emergency Economic Powers Act (IEEPA) to impose 25% import tariffs on Canadian and Mexican goods as well as an additional 10ppt increase in tariffs on Chinese goods. Aside from a reduced rate of 10% on Canadian energy imports, there are no other carve outs or exemptions defined in the executive order. The increased rates will begin after midnight on February 4.
Our baseline forecast (see “Trump II: Growth too fast, inflation too furious for Fed cuts”) had already included a roughly 0.2ppt drag on growth from increased tariffs on China and European autos. If sustained, the 25% tariffs on Canada and Mexico could present an additional 0.4 – 0.7ppts drag on our baseline 2025 real GDP forecast of 2.5% (Q4/Q4).
There is admittedly substantial uncertainty about the passthrough of tariffs to inflation. Relative to our prior estimates of the inflationary impact of 25% tariffs on Canada and Mexico (see “What tariffs on Canada and Mexico could mean for our inflation forecast”), the reduced rate on Canadian energy along with dollar appreciation should moderate the impact. If sustained, the tariffs would likely add 0.3 - 0.7ppts to core PCE inflation this year, leaving it in a 2.8-3.2% range relative to our 2.5% (Q4/Q4) baseline.
The above assumptions critically depend upon the fiscal and monetary policy responses to the trade shock. Our baseline real GDP growth forecast assumed a roughly 0.4ppt boost from additional tax cuts on top of the TCJA extension. Indeed, an earlier implementation of tariffs could meaningfully lower the projected costs of the TCJA, potentially resulting in further tax cuts that we have not included in our baseline, which would (partially) offset the drag from the trade war.
If the drag on growth turns out to be near the lower end of the range that we outlined, growth would still be near the Fed’s view of potential with inflation roughly 1ppt above target — a combination that may not result in Fed rate hikes, but undoubtedly strengthens our base case of the Fed remaining on hold this year.
Same shop offering it’s monthly review of asset classes …
Markets started 2025 off strongly, with the S&P 500 and STOXX 600 both reaching all-time highs in January. However, three notable wobbles dominated the agenda, which each raised questions about how long the rally would last for. First, there was a sizeable bond sell-off early in the month, with hawkish data pushing the 10yr Treasury yield up to its highest since October 2023, at 4.79%, although that did subsequently unwind thanks to softer inflation prints. Second, there was a separate risk-off move because of DeepSeek’s new AI model, which led to big questions about the sustainability of US tech valuations. That also mostly unwound, but it demonstrated how dependent global equities were on a narrow group of stocks. And third, tariffs were back on the agenda, with markets losing ground at the end of the month as the new Trump administration said they’d be imposing tariffs on Canada, Mexico and China. So after a strong risk-on performance in January, that will go a long way to determining how different assets perform in February.
Morgan Stanley joins the tariff narrative party …
MS: US Public Policy: Situational Awareness - Tariff Twists & Turns
The US told Mexico, Canada & China it will levy new tariffs on imports from those nations on Tuesday. The situation may still be fluid. Since policy sequencing and severity is critical to the outlook, we lay out 3 scenarios and related impacts. A full implementation scenario does not appear in the price of key markets.
Key Takeaways
Our economists expect that fully implemented tariffs would have meaningful consequences. A recession in Mexico becomes the base case. US Inflation could be 0.3 to 0.6pp higher vs baseline over the next 3-4 months (putting headline PCE inflation at 2.9% to 3.2%) and US growth could be -0.7 to -1.1pp lower vs baseline over the next 3-4 quarters (putting real GDP growth at 1.2% to 1.6%). We see a similar or larger growth drag than the 100bps hit to Asia and China’s growth in 2018-19.(Note: Independent of the outcome Tuesday we maintain the assumption that tariff increases on imports from China and some European goods will manifest over the course of the year.)
Full implemented tariffs with staying power don’t appear to be in the price of key markets: A bullish scenario for UST duration, as weaker growth expectations increase demand beyond short maturities; meaningful USD strength relative to MXN & CAD; US equities may come under pressure, and services should outperform consumer goods.
…US Treasuries: Buy More Treasuries on Tariffs
… With the Fed on hold and the potential for higher inflation, why would investors buy bonds? We think investors have been waiting to buy due to these concerns. If the Fed doesn't continue to lower rates, then we think the market won't be able to price in a lower trough rate for policy. And if the market-implied trough policy rate doesn't decline, then Treasury yields further out the curve likely won't decline either (see Exhibit 7 ).
Investors also may think that a stronger US dollar might align with higher Treasury yields. After all, the strong relationship between the two has lasted for over a year now (see Exhibit 8 ).
Despite these historical relationships, we think tariff implementation would change the dynamic. Rarely do all markets tighten financial conditions in unison. And when they do, the tightening rarely lasts for very long. US equity prices down, US real yields higher, and a stronger US dollar may result from exogenous shocks like a tariff. However, the shock would likely create a pressure system that would eventually needs an outlet…
If tariffs are implemented with meaningful product exceptions, or a quick resolution appears likely, the economic and market effects could be far more muted. In this event, we see impacts concentrated in certain key sectors, possibly those that have already been under pressure from ongoing tariff risks. If it's clear that the tariffs are limited or temporary, it could act as a clearing event for some Consumer Discretionary Goods stocks that have been weighed down by this risk.
If tariffs are avoided or delayed further, there would be no change to the broader economic outlook. USD could weaken on pricing out some tariff risk, and in US equities consumer discretionary as well as broader cyclical stocks could lead.
US courts are a wildcard: The president invoked authority under IEEPA to levy these tariffs. There’s debate among legal scholars about how this law can be used. Hence investors should keep an eye on the possibility of court challenges and injunctions.
Same shop with a specific weekly EQUITY note and yes, it too is on tariffs …
MS US Equity Strategy: Weekly Warm-up: Tariffs Reinforce Our Preference for Services Industries
Developments related to tariffs and AI further support our preference for services industries, strengthening an investment case that was already based on resilient EPS revisions and pricing power. In particular, we're constructive on Financials, Software, Media & Entertainment and Consumer Services.
… The Latest on Rates...In our view, one of the main reasons why equity indices have been resilient in the face of recent risks is that bond yields have fallen over the past couple of weeks driven by downside in the term premium. While rate sensitivity is present for the time being, we would highlight that the inverse correlation between equity returns and bond yields did get less strong last week as the 10-year yield tested the 4.50% level (rolling 1-month correlation is now -0.1 vs. -0.5 2 weeks ago). Since early December, we have viewed this yield level as an important threshold from a rate sensitivity standpoint. A sustainable break below 4.50% could mean yields become less important for index returns, putting the responsibility back on growth to support benchmarks…
… While the aforementioned events took center stage last week for markets, interest rates have been an important driver of equity market performance. In our view, one of the main reasons why equity indices have been resilient in the face of these risks is that bond yields have fallen over the past couple of weeks driven by downside in the term premium (Exhibit 8). While rate sensitivity is present for the time being, we would highlight that the inverse correlation between equity returns and bond yields did get less strong last week as the 10-year yield tested the 4.50% level (Exhibit 9; rolling 1-month correlation is now -0.1 vs. -0.5 2 weeks ago). Since early December, we have viewed this yield level as an important threshold from a rate sensitivity standpoint. A sustained break below 4.50% could mean yields become less important for index returns, putting the responsibility back on growth to support benchmarks.
Exhibit 8: The Reasons Behind the Move in Yields Are Even More Important to Explaining Equity Market Performance than Rate Levels
AND another note offered yesterday morning which was consumed in between gallons of coffee … and yet, due to the nature of the content, I still don’t get it … something about trying to teach an old dog this new AI trick … I’m still diggin’ deep but not NEARLY as deep as MS here is, diggin’ up the ‘ole Jevons Paradox (dating back to 1865 …?) …
MS: Sunday Start | What's Next in Global Macro: A Macro Take on DeepSeek and the Promise of AI
… The Jevons paradox (dating from 1865 but much invoked this week) states that as technological advancements reduce the cost of using a resource, overall demand increases, causing total resource consumption to rise. In other words, cheaper and more ubiquitous technology will increase its “consumption,” enabling AI to transition from innovators to more generalized adoption and opening the door to faster LLM-enabled product innovation, with wider consumer and enterprise adoption. Over time, this should result in greater increases in productivity and faster realization of AI’s transformational promise…
… The bottom line: our experts think it is unlikely that the DeepSeek development will meaningfully reduce capex related to AI infrastructure. From a macroeconomic perspective, there is a good case to be made for higher business spending as well as productivity growth. Obviously, it is still early days and we will see leaders and laggards at the stock level. But the economy as a whole will emerge as a winner, in our view. DeepSeek illustrates the potential for efficiency gains, which in turn foster greater competition and drive wider adoption of AI. We remain constructive on AI’s transformational promise.
Economists are geeks. Star Wars parallels are tempting: US President Trump as the Trade Federation leader; Trump’s largest donor Musk as Chancellor Palpatine, railing against bureaucrats; and economists as Jedi Knights. But threatened US trade taxes have real consequences. Investors’ hope is the precedent of Trump’s rapid retreat from taxing Colombian imports.
Even if short-lived, threatened tariffs have two consequences. Trump renegotiated NAFTA in their first term, and has now torn it up. Distrust may make negotiating trade deals more difficult. If the news cycle makes US consumers fearful about real income growth or job security, they may be less inclined to spend.
The direct impact of the taxes does most damage to complex supply chains. A component in a US-made auto might cross the Mexican border a dozen times or more. A 25% tax on each Mexico-to-US flow quickly raises costs. Higher auto prices imply higher second-hand car prices, and higher auto insurance costs.
US price increases will be rapid for some items, with reports of fuel companies announcing price increases already. There may be profit-led inflation if consumers expect price increases. China was able to reroute exports after Trump’s first-term taxes, but that is difficult for Canada and Mexico (some of China’s rerouted exports may have gone via those countries).
Finally, a somewhat deeper dive (and a visual of stocks and Fed cycles) …
DeepSeek is a Chinese AI lab that has rocked the world of artificial intelligence (AI) by developing a competitive Large Language Model, or LLM, that reportedly outperforms ChatGPT but was developed at a fraction of the cost with much less time required to “teach” the program. It also functions with cheaper and less powerful Nvidia GPU chips. And it is available on an open-source basis.
Will DeepSeek cause a bear market? Since the late 1920s, there have been 22 bear markets in the S&P 500 (Fig. 1 below). Over the same period, there have been 17 recessions (Fig. 2 below). In other words, more often than not, bear markets are caused by recessions. And more often than not, bear markets and recessions are caused by the tightening of monetary policy—not because tightening eventually curbs demand, as often assumed, but because tightening triggers a financial crisis that balloons into an economy-wide credit crunch, and that causes a recession (Fig. 3 below and Fig. 4 below).
…We started the year expecting that it would be more volatile for the stock market during the first half than the second half. That's still our call. Our S&P 500 price targets remain unchanged, however. We continue to bet on the resilience of the US economy and our Roaring 2020s scenario.
Aside from plenty of news about tariffs, the economic week ahead is jampacked with economic indicators that might be affected by tariffs in coming months. Capped off by January's monthly employment report on Friday, the week will also include releases on manufacturing, worker productivity, and bank lending.
We're expecting more strong employment data this week, consistent with our overall bullish outlook for the US economy. The impact of tariffs may show up in February's manufacturing and nonmanufacturing PMIs next month. Here's more:
(1) Employment. We expect January's employment report (Fri) will beat expectations, rising around 175,000. The large jump in the three-month moving average through December of Challenger's net hiring plans series (Thu) suggests employers are eager to hire (chart).
We doubt that immigration and deportation orders impacted January employment. In coming months, fewer undocumented workers might weigh on payroll employment gains without boosting the unemployment rate. Meanwhile, December's jump in the Conference Board’s "jobs plentiful" series will likely be reflected in December's JOLTS report (Tue) (chart).
… And from the Global Wall Street inbox TO the WWW … a few curated links …
First up a VIEW on tariffs intelligence …
BLOOMBERG: How Stupid Is This Trade War? Let Me Count the Ways Markets didn’t want to believe that Trump really meant broad tariffs, because they’re such a plainly bad idea.
… Bond market inflation breakevens rose menacingly Friday, but it’s doubtful they’re yet at a deterrent level:
Trump himself suggested to reporters Friday that the levies weren’t meant as fentanyl or border bargaining tools, but were rooted in large trade deficits: “It's something we’re doing, and we’ll possibly very substantially increase it, or not, we'll see how it is. But it's a lot of money coming to the United States.” That’s an argument for sustained tariffs, which would have sustained effects. If that’s right, the longer-term consequences for the global order are profound…
Positions matter and while there was lots on equity flows and positions noted HERE over the weekend, well, a larger NET SPEC SHORT 10s (largest in 6w) while a spec LONG in bonds …
Hedgopia CoT: Peek Into Future Through Futures, How Hedge Funds Are Positioned
Something then about NOT learning from history and being … well, you get it …
WOLFST: What Trump’s Tariffs Did Last Time (2018-2019): No Impact on Inflation, Doubled Receipts from Customs Duties, and Hit Stocks
I watched this stuff last time, amazed by the lack of inflation. Sure, “This time it’s different,” but those are the four most costly words on Wall Street.
https://x.com/EricLDaugh/status/1886431575987921276
New Jersey is turning Maga Red.