
Markets Weekly podcast
Trump’s tariffs, US data and UK rates
10 February 2025
In our latest podcast, Julien Lafargue, Chief Market Strategist, reflects on another busy week for financial markets. Topics include the latest developments on President Trump’s tariffs, the US economy and corporate earnings, as well as the Bank of England’s revised growth and inflation forecasts.
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Julien Lafargue (JL): Welcome to a new edition of Barclays’ Markets Weekly podcast. My name is Julien Lafargue, Chief Market Strategist here at Barclays Private Bank, and I will be your host today.
And, today, I will be flying solo simply because there was so much going on in the world last week that we thought we would not necessarily have time for a guest. But don’t be afraid, we will get a guest back hopefully next week.
But in terms of last week, we saw a lot in terms of both good and less good earnings. We saw some mixed US data, a weak service ISM, a not really strong jobs report in the US, and we also had a ton of noise coming from Washington.
In terms of market reaction overall, well, US equity indices were lower last week with the S&P, the Nasdaq and the Russell 2000 all closing down for the second straight week. But, on the other hand, the European equities market ended higher for the seventh consecutive week with fresh record highs for the STOXX Europe 600, the UK FTSE 100, the German DAX, the Italian FTSE MIB, as well as the Spanish IBEX.
Now, the big news of the week was the relatively quick backtracking from Donald Trump on his Canada and Mexico tariff threat, deferring their implementation for 30 days before they ever went into effect. And after what we saw with Colombia back in January, it would seem that President Trump is now more focused on grabbing the headlines and scoring some political points rather than really trying to fix the US trade deficit via a prolonged tariff war.
There’s a bit of an issue here, though, for investors is that if we start thinking that all this is just a game, tariffs, or just a way for Donald Trump to get what he wants, ie it’s purely transactional and a bargaining chip, when real tariffs will be implemented, and they will, then the market may have a nasty surprise.
We have seen Chinese tariffs being implemented, 10% across the board, and those are still in effect as we are awaiting a call between the US and the Chinese President. Those tariffs could be lifted, or they could also be increased, and we also have heard over the weekend that Donald Trump is looking at 25% tariffs on both steel and aluminium. So, again, the headlines from Washington are going to keep coming and investors shouldn’t underestimate the impact that those could have.
Now, in terms of macroeconomic data from last week, we also got some mixed data from the US as the service ISM fell short of expectations in January at 52.8. The consensus was looking for 54. In contrast, though, the manufacturing activity accelerated 1.7 points, ascending above 50, the demarcation line between growth and contraction, for the first time since late 2022.
So, we are seeing a reversal of the trend that has been with us for the best part of the last two years which is manufacturing underperforming, services doing pretty well. It looks like manufacturing is finally rebounding while services still in expansion are starting to disappoint expectations. So, something to keep an eye on, which could be just a reversal of the bouncing around from those two sides of the US economy we’ve seen since really the COVID-19 pandemic.
Now, turning on to the labour market, the data was very confusing and somewhat messy I must say. So, at the headline level, nonfarm payroll disappointed. They increased by 143,000 in January, which was below consensus expectations. Economists were looking for 170,000. However, job growth was revised up by 51,000 in December and 49,000 in November, so the last two months 100,000 jobs created that weren’t there initially which is surprising.
Not only that, but we also had to contend with benchmark revisions which is an annual exercise done by the BLS, the Bureau of Labor Statistics in the US, where they’re basically looking at things like population and revising all the numbers. And, basically, what has transpired this time around is that the total number of jobs in the US at this particular point in time are close to 600,000 lower than what was initially reported, so very, very messy.
Now the bottom line, I think, if we try and make sense of all that noise is that the US is still creating jobs, but the pace is clearly slowing, so something to keep an eye on. That said, we saw the unemployment rate, which is again computed using a different survey, the household survey. We saw that the unemployment rate fell to 4% in January from 4.1% in December, and it’s the second month in a row that the US unemployment rate is coming down.
So, the conclusion probably is that the Fed has no need to rush really. The market agrees, and with one interest rate cut not being priced in before September now, it looks like markets have taken all this data as a signal that the Fed could be even more patient than what was expected. Remember, just a week ago, that first cut was expected in June or July.
Now, for the full year the market sees only a 40% chance of a second cut. This sounds, and it’s probably quite aggressive but, so far, the data really is not weakening fast enough for more cuts to be priced in.
And talking about cuts, the Bank of England, the BoE, followed the European central bank, as expected, and lowered the bank rate by 25 basis points to 4.5%. There were two dissents pushing for an easing of 50 basis points, but the MPC stuck to 25 basis points given a larger than expected downgrade to the 2025 full year growth forecast.
Indeed, the Bank of England cut in half its initial 1.5% GDP growth forecast for this year, so the BoE is now looking at around 0.7% growth only this year.
Meanwhile, inflation is now expected to hit a much higher peak of 3.7% in the third quarter of this year, and previously the BoE was expecting that peak to be around 2.8%. So, inflation up, growth down, that is looking very much like stagflation which is definitely not a great place to be. So, the Bank of England is expected to cut interest rates two or three more times this year, which seems justified given the growth outlook.
Finally, moving to micro after discussing a bit the macro picture. Last week was also very busy on the earnings front. We are now two thirds of the way in this earnings season in the US, and earnings are coming strong. 77% of companies have beaten expectation by an average of 7.5%. So, as a result, the year over year earnings growth is tracking at some 16% which, if confirmed, would be the highest growth we’ve seen since 2021. So, a pretty solid earnings season.
That said, we’ve seen something that we highlighted in our Outlook 2025 as a likely key characteristic of the year ahead, the fact that there is a ton of dispersion, and you’ve seen companies react pretty violently at times to earnings reports. Last week, for example, we saw some disappointment in Alphabet or Amazon but, clearly, you’re seeing really a divergence in terms of how share prices react to the release of quarterly earnings which makes a great environment for stock pickers.
Now, to conclude, if we look ahead to this week, we will get a few more earnings reports to pass through but the focus is likely to be on inflation in the US with the CPI, the Consumer Price Index, to be released on Wednesday, followed by the PPI, the Producer Price Index, on Thursday.
When it comes to the CPI at the consumer level, the consensus is looking for a stable headline reading at 2.9%, and a small downtick to 3.1% at the core level.
We will also, of course, keep a keen eye on Washington first and foremost because we do expect more headlines coming from the US Administration in particular around tariffs, but also because the Chair of the Federal Reserve Jerome Powell will be testifying in front of the US Congress for the first time under this Trump 2.0 Administration.
So, we will be back next week to debrief all that. But, in the meantime, as always, we wish you the very best for the trading week ahead.
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