February 3, 2025 | Tariff Impact, Credit Spreads and SPX Support

MARKETS

S&P 500: Down -42 points to 5998, VIX: 17.92

Asia: Japan -2.66%, China closed, Hong Kong -0.04%

Europe: Euro Stoxx 50 -1.33%, FTSE -1.17%, DAX -1.51%

FX: USD (DXY) up 0.45%, EUR down 0.41%, GBP up 0.26%, JPY up 0.34%, CNH down 0.06%

Energy: WTI Crude down 0.03% to $72.49, Brent down 0.28% to $75.45

Cross markets: Terminal rate down ~1bp at 4.33, Implied rate cuts 2-years from terminal down ~9bp at 63bp, 2/10 yield spread +28bp

Treasuries: 2-year yields up ~3bp at 4.226%, 10-year yields down ~4bp at 4.502%, 30-year yields down ~5bp at 4.738%

WHAT WE'RE THINKING

Snapshot: US equities?are lower after weekend tariff announcements but off worst levels after Mexico’s President announced that Trump will delay implementation of 25% tariffs for 30 days following a productive call.??Trump is due to speak with Trudeau later today with media reports suggesting Canada isn’t optimistic about a Mexico-like deferment.??Companies with a heavy overseas manufacturing presence are hardest hit with downside in AAPL and other hardware companies (DELL, HPE, HPQ, SMCI) weighing on Tech.??Autos and apparel companies underperform for the same reason, while an uptick in short-term bond yields hits rate sensitive groups like homebuilders, banks and asset managers.??Defensive sectors like Health Care outperform with IDXX leading the S&P 500 (SPX) after better organic growth and strong gross margins lead to an EPS beat/increased guidance.??Consumer Staples also advance/outperform based on defensive characteristics and a better Q4 earnings print from TSN.??Treasury yields are mixed with bearish curve flattening reflecting a short-term inflationary impulse and stagflation concerns from tariffs. The Dollar Index is higher but off peak levels from this morning.??Gold is a bit higher as a safe haven asset and copper also lifts, while WTI crude is little changed.??

• Tariff announcements are the obvious/overwhelming driver this morning with Trump saying the US will definitely place fresh tariffs on imports from the EU, while reports suggest that China is preparing a list of concessions to avoid escalation.?
• US macro data takes a back seat, but January ISM manufacturing merits some attention after beating consensus (up +1.7 points MoM to 50.9) and crossing into expansion territory for the first time since October ’22. New orders, production and employment components all advanced, while the prices index rose +2.4 points to an elevated reading of 54.9. December construction spending also beat consensus, rising +0.5% MoM.??
• Tomorrow brings JOLTS job openings and factory orders for December.??ISM services, ADP private payrolls and the Treasury refunding announcement are highlights for Wednesday.??Thursday brings weekly jobless claims and Q4 productivity/unit labor costs with the January Jobs Report and Michigan consumer sentiment capping off the week on Friday.
• Consensus is looking for January nonfarm payrolls to step down to +165,000 from +256,000 in December with expectations for an unchanged Unemployment Rate of 4.1%.??For context, nonfarm payrolls have averaged +170,000 over the last three months, the 6-month average is +165,000 and the 12-month average is +186,000.??
• Overseas data featured Eurozone CPI for January that ran a bit hotter at +2.5% vs. consensus and last month’s reading of +2.4%. Final Australia manufacturing PMI for January also made into expansion territory at 50.2, while China Caixin manufacturing PMI slipped to 50.1, from 50.5 in December.??Mainland markets remain closed for the New Year holiday, while Hong Kong’s Hang Seng Index managed to finish well off lows.??
• Shares of SAIA reverse early gains from higher operating revenues and better tonnage trends.??Major reports due after the close include results from CLX, EQR, NXPI and PLTR.?

Impact: Sustained 25% tariffs on Mexico/Canada and 10% incremental tariffs on imports from China would likely add ~70bp to core US PCE prices (one time over ~2 quarters) and take GDP down by ~40bp, holding everything else unchanged.??The impact on markets is more difficult to predict because some companies will decide to absorb some/all of the higher input costs, while others decide to pass it along to customers.??As a guess, expect sustained tariffs at these levels to take estimated 2025 SPX earnings down ~3%.??There could also be some minor impact on earnings if these/other tariffs lead to more dollar strength. In total SPX companies get ~28% of their revenue from outside the US, so a ~10% increase in the dollar could take another ~2% off 2025 EPS estimates. None of this happens in a vacuum, but taking 5% off SPX EPS estimates should take the index down 5% as well, which suggests a worst-case SPX level of ~5740.??There will likely be more tariff announcements in the days ahead (Eurozone) with the quick/aggressive approach potentially weighing on US business confidence and economic activity.??We actually see greater risk to business confidence/economic activity from a prolonged period of tariff threats.??Trump’s first ‘trade war’ with China was a long process that definitely took a toll on business confidence and tightened financial conditions until the Fed was forced to respond with policy easing.?

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Near-term: Markets won’t price the full impact of known tariffs due to the expected frequency of conflicting headlines.??However, the longer this drags out, the worse it gets for equity markets, in particular.? ?The economic impact would be insignificant and the market could maintain the Goldilocks narrative if deals/agreements can be reached within ~2 weeks.??Credit markets will be important to watch during this period with widening spreads indicating greater likely economic impact.

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Chartist: There was meaningful technical damage to AI themed equities last Monday and these names remain vulnerable to greater downside until they reclaim former technical support.??For the Philadelphia Semiconductor Index, that level is 5100.??The broad market also came under pressure last Monday and again this morning with SPX support remaining at the 5783 November election upside gap.??This was the level that triggered strong momentum divergence buy signals on January 13.??A sustained break below that level?would make 5615-5620 the next likely support range – this was the post-September Fed breakaway gap.?

FACT OF THE DAY

Nigeria has overtaken Ireland in Guinness sales and is the number 2 consumer of Guinness world-wide after the UK.??The US ranks #4 and Cameroon is #5.?

JSC IN THE MEDIA

Consumer Confidence Falls: Andrew joins Bloomberg Businessweek to discuss market outlook for 2025. Skip ahead to the 7:56 mark for Andrew’s commentary. Listen Now

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Outlook for Mag 7: Andrew joins a Schwab Network panel to discuss the narrowing gap between the Magnificent 7 and the rest of the S&P 500. Watch Now

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Markets react as tensions rise in the Middle East: Andrew comments on recent events in the context of a market that is richly valued and therefore more sensitive to shocks of all kinds. Read on Reuters

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See more of JSC in the Media.

THIS DAY IN HISTORY

February 3, 1690: The state of Massachusetts issues the first paper money in America. The notes were printed to help pay for military action during King William's War.

CATALYST CALENDAR

Tomorrow: 1) US December JOLTs report; 2) US factory/durable goods orders for December; 3) New Zealand jobs report for Q4; 4) South Korea CPI for January; 5) Japan labor cash earnings numbers for December; 6) China Caixin services PMI for January and; 7) earnings before the open: ADM, AMCR, AME, APO, ARMK, ATI, AXTA, BALL, BERY, CMI, CNH, CNC, EL, ENR, EPD, FOX, GPK, HLNE, HUBB, INGR, IT, J, KKR, MPC, MRK, MSGS, PEP, PFE, PINC, PJT, PNR, PYPL, RACE, REGN, SLAB, SPOT, TDG, WEC, WTW, XYL. After the close: ALGT, AMD, AMGN, APAM, ATEN, AZPN, BDN, CMG, COLM, CRUS, DEI, DXC, EA, ENPH, ESS, FICO, FMC, GOOGL, HRB, ICHR, IEX, JKHY, JNPR, KLIC, LUMN, MAT, MDLZ, MOD, MRCY, MTCH, NOV, OI, OMC, OSCR, PRU, SKY, SNAP, SPG, UNM, VLTO, VOYA, VRNS, WU. EU earnings: Amundi, BNP, Dassault Systems, Diageo, DSV, Entain, Infineon, UBS.

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Wednesday: 1) ADP jobs report for January; 2) the US services ISM for January; 3) Eurozone services PMI for January; 4) the Eurozone December PPI; 5) Singapore December retail sales; 6) Vietnam retail sales/exports/industrial production for January and; 7) earnings before the open: AMTM, ARCC, ARES, AZTA, BG, BSX, CDW, COR, CPRI, DAY, DIS, EMR, EVR, FI, HOG, ITW, JCI, KMT, NYT, ODFL, PFGC, REXR, RXO, SR, SWK, TECH, TKR, TROW, UBER, VSH. earnings after the close: AFL, ALGN, ALL, AOSL, AVB, BKH, CCK, COHR, CPAY, CSGS, CTSH, CTVA, EQH, F, FORM, GL, HOLX, HP, MAA, MC, MCK, MET, MOH, MSTR, MUSA, NWS, OHI, ORLY, PI, PTC, PTEN, QCOM, RDN, REXR, RRX, RYM, SITM, SWKS, SYM, TTMI, UDR, UGI, WFRD. EU earnings: GSK, Novo Nordisk, Santander, Total Energies.

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Thursday: 1) US nonfarm productivity and unit labor costs for Q4; 2) US weekly jobless claims; 3) Eurozone retail sales for December; 4) Germany factory orders for December; 5) India RBI policy decision and; 6) earnings before the open: AB, AGCO, APD, APTV, ARW, BDC, BDX, BMY, BTU, BWA, CMS, COP, EFX, ENTG, HAE, HII, HLT, HON, HSY, ICE, IQV, ITT, K, KVUE, LEA, LH, LLY, LIN, LNC, LQDT, MKTX, MMS, NVT, OMCL, OWL, PBH, PM, PTEN, PTON, RBLX, RL, TEX, TPR, TW, UAA, VVV, WMG, WMS, XEL, XPO, YUM, ZBH. After the close: AFRM, AMZN, BILL, BYD, CPT, CUZ, DOCS, EHC, ELF, ESE, EXPE, EXPO, FBIN, FTNT, G, HUBG, ILMN, LESL, LITE, MATW, MCHP, MHK, MPWR, MTD, MTX, NET, PCTY, PFG, PINS, POST, POWI, POWL, QLYS, QNST, REG, RGA, SKX, SONO, SSNC, SYNA, TTWO, VRSN, WERN. EU earnings: Anglo American, ArcelorMittal, AstraZeneca, Carlsberg, Compass Group, ING, Maersk, Siemens Healthineers, SocGen, L’Oreal.

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Friday: 1) US Michigan sentiment report for February; 2) US jobs report for January; 3) US wholesale inventories/trade sales for December; 4) US consumer credit for December; 5) Germany industrial production and exports for December; 6) Taiwan CPI and exports for January and; 7) earnings before the open: AVTR, CBOE, FLO, FTV, KIM, NWL, PAA. EU Earnings: Danske Bank, Konecranes, SAAB, Skanska.

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