Week Ahead: Tariffs take centre stage ahead of NFP

Donald Trump followed through with his tariff threats by signing executive orders on Saturday to hit all imports from Canada and Mexico with a 25% levy, with the exception of Canadian oil and energy products. These will face 10% tariff. Imports from China will face 10% tariffs over and above existing US tariffs. Will this be the “biggest own goal yet” as some are saying? The Wall Street Journal was scathing with its Saturday leader titled, “The Dumbest Trade War in History.”

US exceptionalism continues with its economy outperforming every other major economy. But a full-blown tariff war is a recipe for increasing inflation and slowing down economic activity. The competitiveness of US domestic manufacturers might improve, but those with international supply chains will face higher costs, while exporters will fear retaliatory tariff from Canada, Mexico and China. Much of the cost increase will likely be passed onto US consumer, who have been one of the key drivers of the American Goldilocks economy.

Tariffs may force the Fed to keep rates higher for longer, which would tighten financial conditions, weigh on the growth outlook and likely support USD. It depends if policymakers overlook the one-time hit to prices and prioritise the potential downside risks to growth. In the near-term, risk assets may gap lower along with the CAD, MXN and CNH. We’ll be watching levels above 1.46 in USD/CAD which were spike highs from 2016 and 2020. Major resistance sits just below 21 in USD/MXN and at 7.3750 in USD/CNH. The euro may also suffer as it seems only a matter of time before their exports are targeted.

One caveat to market reaction is the fact that the executive orders only come into effect on Tuesday. Trump has said tariffs can be removed if enough steps are taken by Canada. That could imply there is still room to negotiate, with possible delays in implementation. Aside from this, stock markets will also have to assess more earnings from Alphabet on Tuesday, Novo Nordisk the following day and Amazon on Thursday.

 In Brief: major data releases of the week

Tuesday, 04 February 2025

– Eurozone CPI: Expectations are for the headline to remain at 2.4% and the core to ease one-tenth to 2.6%. Services prices are also seen modestly cooling. The annual changes in weighting to the basket may cause some volatility. The euro was weak last week, and bears will target the January low below 1.02.

– US ISM Manufacturing: Consensus sees the January figure rising to 49.6 from 49.3. The prior print was a nine-month high, though the tone of the survey was less upbeat. Production rebounded as new orders continued to grow. The threat of tariffs may raise inventory and import levels again.

Wednesday, 05 February 2025

– US ISM Services: January non-manufacturing ISM is seen rising to 54.3 from 54.1. Services activity has remained in expansionary territory since July 2024. Higher input costs and selling price inflation remains broad-based.

Thursday, 06 February 2025

– Bank of England Meeting: Another 25bps rate cut is strongly favoured by money markets and consensus. That would take the bank rate to 4.5%. Recent growth data disappointed while all-important services inflation cooled to 4.4% from 5%. The bank is expected to continue with a “gradual approach” to policy easing. Cable could be rolling over and heading back below 1.23 after selling throughout last week.

Friday, 07 February 2025

– US Non-Farm Payrolls: Consensus sees 170k jobs added, down from the prior 256k. The unemployment rate is predicted to remain steady at 4.1% and wage growth at 0.3% m/m. The data can be volatile around the turn of the year. Annual benchmark revisions will be published. The previous figures showed a big overestimation of jobs created.

– Canada Jobs: Jobs growth is forecast to cool considerably after December saw 91k jobs added, the highest since January 2023. That was nearly four times the number forecast, with two-thirds coming from full-time work. The jobless rate is expected to stay at 6.7%.

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