A New Leader, Fresh Tariffs, More Risks

Canada has elected a new prime minister:?Mark Carney, a former central banker who, as Bloomberg News points out, has never held a seat in parliament. Carney succeeds?Justin Trudeau who served as prime minister for nine years, stepping down amid plummeting approval ratings culminating in party infighting and a controversial tax plan. In his victory speech, Carney noted he will maintain Canada’s retaliatory tariffs against the U.S., seeing the latest move by the Trump administration as a threat to the Canadian economy.??

Of course, Canada isn’t the only economy that could face – at least near-term – repercussions as a result of the latest international tariffs. The Trump administration has been clear the U.S. economy could face a “period of transition.” But while acknowledging the prospect of higher consumer prices, Trump reiterated the importance of adjusting U.S. tariffs to match the barriers imposed by other countries. “There will be a little disturbance,”?he said.?“We’re OK with that.”?Taking a seemingly?“unapologetic” tone, as he did during his state of the union address last week, President Trump has consistently argued in favor of leveling the playing field, protecting American jobs and industry, and bringing back manufacturing. “Whatever they tariff us, we tariff them." ?

Recall, last Tuesday, the White House implemented new 25% tariffs on all Mexican and Canadian goods, with the exclusion of Canadian energy which will have a lower 10% tariff.?The administration also increased the initial tariff of 10% on Chinese goods implemented on February 4 to 20%.?

Just one day after the announcement, however, President Trump granted an exemption for the auto sector for a period of one month amid pleas from several large auto makers and then just two days after the tariffs went into effect, the Trump administration granted an exemption until April 2nd for Mexican and Canadian goods covered under the USMCA agreement. ?

Nevertheless, the latest initiatives from the White House have sparked concerns of a?“North American trade war”?with the counterparties already responding with retaliatory measures. Canada, for example, already announced 25% tariffs on more than $100 billion of imported U.S. goods in two phases. China has also vowed to take necessary countermeasures, responding immediately with tariffs on U.S. food and agricultural products, as well as banning exports to some defense companies.?

The push by the Trump administration to increase tariffs is, again, grounded in the desire to level the playing field. At present, for example, some U.S. exports to China face a 10% to 35% tariff on everything from electronics to luxury goods with an average additional Value Added Tax (VAT) of 13%, versus the average 13% tariff rate charged by the U.S. for Chinese imports, which has now increased to 33% as of last week. ?

At the same time, the latest moves are expected to create ripples in the relationship with the country’s largest trading partners and at least in the near term potentially result in some supply chain disturbances and/or add additional price pressures with roughly $1.5 trillion in goods potentially impacted.?

Amid the latest developments in Washington, investors remained somewhat squeamish throughout the week with equities dipping into the red and erasing the gains for the year while longer-dated yields remain under pressure. This morning equities opened in the red, down 1.5% at 5,660.92 as of 10:36 ET, with the ten-year yield at 4.22%.?

Meanwhile, Fed officials continue to warn of potential upside risks stemming from the President’s fiscal policy agenda, including tariffs. Speaking at a conference in New York, New York Fed President John Williams, for example, warned the implementation of the administration’s additional tariffs could drive higher inflation. Given all of the?“uncertainties,”?however, Williams said he is still supportive of where policy currently stands as the data evolve.?“It makes sense, he said” to collect some more information, not only about what's happening with trade policy, but obviously there is also what we're seeing in terms of other policies, fiscal policy and regulatory policy.”?In the meantime, Williams struck a relatively positive note, insisting he sees a solid labor market and persistent domestic growth. ?

The European Central Bank (ECB) however is less inclined to take a wait and see approach.?To guard against the prospect of weaker domestic activity amid potential fallout from U.S. tariffs, as well as a recent need to increase military spending, the ECB opted to continue with rate reductions in March, lowering the deposit rate from 2.75% to 2.50%, the sixth reduction in nine months. While growing the divide between borrowing rates overseas and in the U.S., the ECB saw the move as?“necessary”.

Turning back to the US, aside from fiscal policy news, there was plenty to digest from the economic calendar last week,?centered on an updated look at labor market conditions with the latest still showing a broadly positive –?but?still somewhat mixed picture

beginning with the latest ADP report showing private-sector employment rose less than expected in February, up just 77k verses the 140k gain expected and marking a seven-month low. According to the report, the weaker-than-expected rise was largely a reflection of job cuts in the service sector as well as inclement weather tapping down hiring, specifically in the Southern and Western regions of the United States.?

Also, jobless claims fell more than expected, declining 21k, to 221k, a two-week low and reversing from an earlier rise of 22k the week prior.?

The key reading of employment conditions, however, came on Friday with the February employment report.?Nonfarm payrolls rose by 151k in February, falling short of the 160k gain expected, albeit still a two-month high. ?

In the details of the report, education and health payrolls led the gain rising 73k, while goods producing payrolls rose 34k, and financial activities increased 21k, as did trade and transportation thanks to a 5k rise in information payrolls. Additionally, construction payrolls rose 19k, and government payrolls increased 11k, albeit marking smallest rise in nearly a year. On the weaker side, businesses services payrolls fell 2k, retail trade payrolls declined 6k and leisure and hospitality payrolls dropped by 16k. ??

Household employment fell by 588k in February, while the labor force decreased a lesser 385k. As a result, the unemployment rate unexpectedly ticked up from 4.0% to 4.1% in February, a two-month high while the labor force participation rate unexpectedly dropped two-tenths of a percentage point to 62.4%, marking a more than two-year low.

Additionally, on the wage front, average hourly earnings rose 0.3%, as expected, and 4.0% year-over-year, a two-month high. ?

Bottom Line: The U.S. labor market continues to expand, albeit at a somewhat reduced pace. While still positive, a declining trend in hiring coupled with a – minimal – rise in the unemployment rate reinforces concerns of a potentially more persistent downturn in the U.S. labor market and more broadly, in the domestic economy. Largely the result of weakness in areas hit by extreme weather conditions, there was also a noticeable slowdown in services hiring in recent months which could be a reflection – at least in part – of the effort by the White House to reduce the number of federal employees and sever government contracts, as well as trepidation surrounding new layers of international tariffs. ?

Of course, regardless of the particular catalyst, and while far from cataclysmic, the clear rise in hiring hesitancy has some investors raising the probability of a downturn – or even an outright domestic recession – and increasing bets of further Fed policy relief sooner than later as the Committee struggles to balance a need to provide support to the labor market while reining in price pressures. ?

Moving beyond the labor market, also last week, an updated look at US manufacturing showed a downtick in activity with the ISM Manufacturing Index falling 0.6 points to a reading of 50.3 in February. ?While the first month of waning momentum after three months of acceleration, the February report still marks the second consecutive reading in expansion territory (a reading above 50). ?

In the details of the report, prices paid surged by 7.5 points to the highest reading since June of ‘22. ?Also on the upswing, supplier deliveries rose nearly four points to 54.5, inventories gained four points to 49.9, a six-month high, and backlog of orders inched higher by nearly two points to 46.8, making more than two years in contractionary territory or a reading below 50. On the other hand, production decreased nearly two points to 50.7, a two-month low, and new orders plunged by 6.5 points to a four-month low, albeit still marking the second consecutive month in expansion. Also, employment slipped nearly three points to a reading of 47.6, the lowest reading since December.?

Meanwhile, On the services side, the ISM Services Index unexpectedly improved in the second month of the year, rising 0.7 points to 53.5 in February, a two-month high and marking the eighth consecutive month in expansion (or a reading above 50).?

In the details of the report, prices paid increased 2.2 points to 62.6, a two-month high, and employment rose nearly two points to 53.9, the third month of expansion and marking the highest reading since December 2021. Additionally, supplier deliveries, new orders, backlog of orders and inventories all improved as well in February. While on the weaker side, business activity slipped from 54.5 to 54.4 in February, a six-month low.?

Taken together,?A solid rise in services activity in February offers some comfort against a growing fear of increasing weakness in the U.S. economy, with all major components including Business Activity, Employment, New Orders, and Supplier Deliveries holding steady in expansionary territory. Furthermore, while the report indicates businesses remain concerned regarding bad weather, a reduction in federal assistance, and tariffs, near-term uncertainty regarding implementation and scope of the latter appears to be weighing far more on business than a lingering concern of resulting sustained elevated prices?

This week the economic calendar begins tomorrow with the February NFIB Small Business Optimism Index, and the January JOLTS report, or the Job Openings and Labor Turnover Survey.

On Wednesday, well take a look at weekly mortgage applications, and the first highlight of the week – the February CPI,?followed by the February PPI on Thursday.?

Following an acceleration in January, the CPI is expected to rise 0.3% in February and 2.9% year-over-year, potentially falling from the 3.0% annual pace at the start of the year.?

On the producer side, following a hotter-than-expected January report, the PPI is expected to rise 0.3% in February and 3.2% over the past 12 months, potentially falling from a 3.5% pace reported at the start of the year.?

Excluding food and energy costs, like the headline, the core CPI is also expected to increase 0.3% in February following a larger 0.4% rise in January, and increase 3.2% year-over-year, potentially easing from a 3.3% gain in January.

The core PPI, meanwhile, is expected to rise 0.3% in February and 3.6% on an annual basis, potentially matching January’s annual increase.?

Bottom Line: After four months of acceleration, a relatively benign February PPI and CPI report should offer welcome calm amid rising fears of upside inflation risks. While nominally price pressures remain elevated, a resumption of a cooling disinflation trend is likely to furthermore reinforce expectations for at least some further policy easing in the second half of the year. At present, according to Bloomberg data, investors are anticipating three or more rate cuts by year-end, up from a January forecast of just 1 or 2 additional cuts.?

Also on Thursday, the latest read on weekly jobless claims will be released.

Wrapping up the week, on Friday, we’ll take a look at the preliminary March University of Michigan Consumer Sentiment Index print widely anticipated to improve minimally after falling 2.3 points in the February report to a three-month low.?

Finally, on the Fed-speak front, there are no scheduled Fed speeches or appearances this week, as Fed officials entered their Fed-speak blackout period ahead of the March FOMC meeting, set to begin just eight days from today.

-Lindsey Piegza, Ph.D., Chief Economist