Please see below, an article from Brooks Macdonald providing a brief analysis on the key factors currently affecting global investment markets. Received this morning – 21/02/2025
What has happened?
It seems that bullish markets have taken a pause after the MSCI All Country World Index hit a fresh record closing high on Tuesday this week in total return US dollar terms. A few things are driving that perceived pause in sentiment – among them is the upcoming German federal election on Sunday – though a weaker-than-expected growth outlook from US retailer Walmart also dampened the mood yesterday. Of note, yesterday also saw Gold close at a fresh record high of US$2,939 per ounce.
German election expectations
The first exit polls will land on Sunday afternoon at 5pm UK time. Currently, political website Politico’s polling average has the conservative CDU/CSU bloc in the lead on 30%, followed by the far-right AfD on 21%, with Chancellor Scholz’s centre-left SPD on 16%, the Greens on 13%, and smaller parties below that, such as the free-market FDP on 5%. A coalition between parties of some description is all-but-certain to be needed to form a working government majority, but as for whether the far-right AfD might be included remains long-odds for now.
Japan inflation
Data out earlier this morning showed Japan’s Consumer Price Index (CPI) annual inflation rate hitting a two-year high of 4% in January, and up from +3.6% in December. So-called annual “core-core CPI” (which in Japan excludes both fresh food and energy) was up at 2.5%. Markets are now pricing in an 84% chance of a 25-basis points interest rate hike at the Bank of Japan’s July meeting, up from a 70% chance at the start of the month.
What does Brooks Macdonald think?
There is a lot riding on the German election result this weekend. German government spending in particular is the focus for markets, and whether the next government can eventually muster the necessary two-thirds parliamentary vote majority to overturn the country’s so-called fiscal ‘debt brake’ (referring to a rule agreed in 2009 which restricts German annual structural deficits to 0.35% of Gross Domestic Product). Whether or not that is achieved, will have a bearing on expectations around economic growth and the wider outlook for risk assets, not just for Germany but for the wider European region as well.
Bloomberg as at 21/02/2025. TR denotes Net Total Return.
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Please see below article received from EPIC Investment Partners, which provides an economic update on the US.
In the minutes from the January FOMC meeting, released yesterday, Fed officials expressed their confidence in maintaining steady interest rates amidst persistent inflation and economic policy uncertainty. “Many participants noted that the committee could maintain the policy rate at a restrictive level if the economy remained robust and inflation remained elevated.” The meeting minutes highlighted the cautious approach Fed policymakers have adopted following their decision to reduce interest rates by a percentage point in the latter months of 2024.
Several officials voiced concerns regarding risks posed by the prospect of another debt ceiling confrontation in Washington. “Participants cited the possible effects of potential changes to trade and immigration policy, the potential for geopolitical developments to disrupt supply chains, or stronger-than-expected household expenditure.” Counterbalancing concerns over tariffs and inflation, the minutes noted “substantial optimism about the economic outlook, stemming in part from an expectation of a loosening of government regulations or changes to tax policies.”
Meanwhile, the US consumer’s financial health is deteriorating at an alarming pace, according to both The New York Fed’s “Household Debt and Credit” report and industry data from BankRegData, with credit card defaults surging to levels not seen since the aftermath of the GFC. In just the first nine months of 2024, lenders were forced to write off a staggering $46bn in seriously delinquent credit card debt – a 50% jump from the previous year.
This troubling development is particularly acute among lower-income households, with Moody’s Analytics chief Mark Zandi noting that “the bottom third of US consumers are tapped out” with a savings rate of zero. The situation appears set to worsen, with $37bn in credit card debt already at least one month overdue.
This distress stems from a perfect storm of factors: aggressive lending during the post-pandemic spending boom pushed total credit card debt above $1tn, while persistent inflation and elevated interest rates have left consumers paying $170bn in annual card interest (yoy to September 2024). With the Fed indicating fewer rate cuts than previously expected for 2025, and Donald Trump’s proposed tariffs threatening to drive inflation even higher, the outlook for stretched US consumers appears increasingly grim.
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Please see the below article from Evelyn Partners which details their thoughts on this morning’s UK inflation announcement for January, received this morning – 19/02/2025.
What happened?
UK annual headline CPI inflation for January was reported at 3.0% (consensus: 2.8), which was higher than December’s reading of 2.5%. In monthly terms, CPI was -0.1% (consensus: -0.3), compared to 0.3% in December.
Core inflation (excluding food, energy, alcohol, and tobacco) was 3.7% (consensus: 3.4%), which was above the prior reading of 3.2%.
What does it mean?
The UK continues to face stickier inflationary pressures compared with other advanced economies. This is arguably reflected in the bond market with gilts yields remaining considerably higher than their European counterparts, despite the UK facing a similarly weak growth profile.
Both the headline and core CPI measures ticked up this month, driven higher by transport, food & non-alcoholic beverages, and education as VAT on private education shows up in the inflation data. Prices also increased in the recreation sector, which could have been driven by companies getting ahead of the rise in National Insurance contributions. Services inflation, which represents a better gauge of domestically generated inflation than headline CPI, also accelerated from 4.4% to 5%. Although it was slightly softer than the 5.1% estimated by consensus.
This CPI print undoubtedly complicates the Bank of England’s job. Last week’s GDP data confirmed the UK economy is barely growing, and the Bank increased its CPI forecast on the back of higher global energy prices. This combination of low growth and above-target inflation is a challenging mix for the Bank to navigate. They will be hoping that higher energy costs and tax rises will not lead to new inflationary spiral. It’s likely they will look to maintain restrictive policy to reduce the probability of this scenario materialising. The risk is that they further weaken the already fragile domestic demand. In our view, the growth risks will outweigh the inflation risks over the coming quarters, and the Bank will continue its interest cutting cycle.
As the gilt market opened there was a bit of pressure on front end yields. There was a limited reaction in foreign exchange markets, with the pound slightly weaker against the dollar. Similarly, money markets took the news in their stride, continuing to expect two interest rate cuts in 2025.
Bottom Line
January’s CPI inflation print came in higher than expectations. With higher energy prices forecast over the coming quarters, the Bank will have to balance the risks of low growth and above-target inflation. In our view, the growth risks outweigh the inflation risks, and the Bank will continue its interest cutting cycle over the coming quarters.
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Please see this week’s Markets in a Minute update below from Brewin Dolphin, received yesterday afternoon – 18/02/2025.
How could U.S. tariffs impact Europe?
“Tariff is a beautiful word. It’s a great word. It’s a word I like.” – U.S. President Donald Trump
President Trump loves tariffs. Not just that, but in a contrast to standard economic understanding, he described trade wars as “good” and “easy to win”.
When he first took power in 2017, the U.S. visible goods deficit was about $770bn per annum. When he left office, it was $880bn, an increase of 3.4% per annum over the duration of his first term (most of which would have related to inflation). At the end of 2024, the deficit had risen to $1.2tn.
Understanding tariff economics
Back in 2016, when the suggestion of rolling back decades of progress in reducing tariffs began to be taken seriously, economists pointed out that their research found few long-term links between tariffs and trade balances. It seems implausible that raising the price of an imported good wouldn’t lead to a drop in demand for that good, and indeed, that’s typically the case in the short term. However, this trend doesn’t hold over the long term. Why?
Economics is complex and sometimes struggles to conform to scientific analysis. We can’t perform experiments or have control samples on economies and so conclusions should be viewed with scepticism. That complexity means that when you change one thing, many other things may change as a result.
In the case of tariffs, the most obvious resulting change is a retaliatory tariff. There’s also a reaction in the currency market. If Americans buy fewer imported goods because of tariffs, they use less foreign currency, which can make the U.S. dollar stronger. That stronger dollar makes imports cheaper and exports more expensive. The tariff might apply to a particular good, but the exchange rate adjustment applies to all goods. So, you would expect to see an improvement in the balance on the tariffed good but a smaller deterioration in the balance on all other goods.
What’s the point of tariffs?
The point of the tariff might be to encourage consumers to switch suppliers. They may do so, but not necessarily to a domestic supplier.
Another reason might be to persuade the supplier to relocate its manufacturing. Again, it may do so, but not necessarily to within the U.S.
Since the U.S. imposed tariffs on Chinese imports, America’s bilateral trade deficit with China has improved. However, America’s overall trade deficit hasn’t improved because non-Chinese imports have taken the place of Chinese imports. Perhaps this is the reason that President Trump had been discussing imposing tariffs on all imports. That would limit the ability of consumers and suppliers to switch to other non-U.S. jurisdictions to avoid the tariff.
However, it’s still unlikely to be beneficial.
America has a low rate of unemployment. It arguably has very little spare capacity. And so, for Americans to displace the activities of importers, they would likely need to stop doing other things.
Under free trade, America’s educated and largely skilled workforce produces higher value goods and services than those it imports. So, the effect of the tariffs would be expected to be inflationary, but not necessarily productive. Indeed, since many imports are components that end up in exported products, there’s widespread belief the tariffs would lead to increased prices and reduced growth.
Recent data seemed to support the notion that the U.S. labour force is currently highly employed. The working age labour force participation rate is relatively high, and inflation has remained persistent.
In last week’s Consumer Price Index (CPI) report, most measures of inflation showed some persistence, which makes cutting interest rates very difficult. Federal Reserve Chairman Jay Powell seemed to endorse this message in his testimony to Congress.
EU and UK at risk due to high VAT rates
Last week, President Trump seemingly shifted his stance from imposing universal tariffs on all imports to focus on reciprocal tariffs — those imposed in response to tariffs from other countries on U.S. goods. Most of these countries are emerging markets with higher average tariffs on U.S. imports.
However, last week’s memorandum from President Trump specified that he believes that value added tax (VAT) is effectively a trade restriction.
In many countries that have a VAT, imports from the U.S. would be subject to it, while exports to the U.S. would receive a VAT refund. Despite studies indicating that VAT doesn’t impact trade balances, President Trump and his adviser Peter Navarro don’t subscribe to conventional economic analysis. The Secretary of Commerce has now been tasked with reviewing the effects of tariffs and VAT rates on U.S. trade in order to develop recommendations for U.S. import tariffs by 1 April.
Without knowing exactly how they’ll reach their judgements, it seems likely the EU and UK could appear to be imposing some of the highest tax rates on imports from the U.S. (should they be evaluated by those standards). This is the case despite the UK having a relatively balanced trade relationship with the U.S.
Research indicates that tariffs don’t cause lasting adjustments in trade deficits, which are more influenced by differences in competitiveness. The U.S. has a trade deficit because its wages are much higher than those in other regions, making production more costly.
While tariffs may encourage more domestic manufacturing, this could also lead to less affordable products due to higher production costs. The U.S. already receives significant investment from abroad, which effectively mirrors the trade deficit it runs. However, as President Trump encourages further investment, he inflates the U.S. dollar and makes its exports less competitive.
Trimming the fat
There are some actions being taken by the U.S. administration that may help curtail the deficit.
If Elon Musk’s initiatives at the Department of Government Efficiency are successful, they could reduce U.S. government borrowing. The trade deficit reflects America’s ability to spend beyond its means and reducing borrowing is key to closing this gap. The typical times when this happens is during recessions, when you normally see an improvement in America’s balance of trade.
There are things other regions could do as well…
They could improve their own investment appeal. If, by doing so, they were able to divert some U.S. investment into say Europe or the UK, that would help to restore some of America’s export competitiveness.
Fundamentally, there are ways to improve the U.S. trade deficit, yet most of them would be associated with lower domestic demand and higher investment in trade partners. This doesn’t really seem aligned with the administration’s goals, and it seems unlikely they’d be particularly popular.
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Please see the below article from EPIC Investment Partners detailing their thoughts on the technology sector in China. Received this morning 18/02/2025.
“This photo taken yesterday of Jack Ma shaking hands with Premier Xi Jinping is perhaps THE most important photo that I have seen in China in the last 5 years!!”
Jefferies’ Janet Harbison. She is not wrong.
Four years after launching a regulatory crackdown that plunged the technology sector into turmoil (and saw the Asia ex Japan region index fall over 40% from the February 2021 high to the October 2022 low), the Chinese leader sat down publicly on Monday with Alibaba co-founder Jack Ma.
Alibaba and subsidiary Ant Financial, whose IPO was cancelled in late 2021, bore the brunt of that campaign.
Xi delivered a speech after hosting Ma, Meituan’s Wang Xing and Xiaomi’s Lei Jun. Also present were Wang Xingxing (head of robotics startup Unitree), DeepSeek’s founder Liang Wenfeng and Huawei Technologies founder Ren Zhengfei among others. All key players in China’s technology sector.
The technology sector already accounts for some 15% of GDP and is likely to overtake the housing market within the next few years.
The focus was clearly intended to offer Government support and assistance for China’s rapidly developing technology sector but it has much broader and very positive ramifications for domestic consumption. The technology companies are, broadly speaking, domestically orientated and this is part of a bigger push to encourage households to consume.
Household savings are, as we have pointed out in previous notes, nothing short of MASSIVE. Unlocking this savings pool will see domestic consumption surge thus underpinning growth in the world largest economy (in purchasing power parity terms).
This is a game changer. Hold on to your hats.
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Please see below, this week’s Monday Digest from Tatton Investments Management:
Europe First?
A dramatic week in global politics ended with Chinese and European stocks outperforming the US, the dollar falling back and gold prices soaring. This unusual constellation of trends points to economic sentiment re-evaluation – and perhaps declining confidence in in US institutions.
US consumer inflation unexpectedly increased, pushing back expectations of the next Federal Reserve interest rate cut. The retail sales data was better pointed to decreasing inflation pressure, but the Fed will be nervous about sticky inflation. That coincided with investment flows out of the US. The longer this goes on – especially for big tech stocks – the more likely it will trigger negative momentum trades. US investors are less buoyant, but this hasn’t yet spread to consumer confidence. Inflation and government disruption could change that, though.
European stocks benefitted massively remarkably – even though Donald Trump’s negotiations with Putin are considered a nightmare scenario by European politicians. Investors see an end to the war as good for Europe, and recognise that growth is already improving. Higher European defence spending could support growth further, since it will have to come out of fiscal expansion. This applies to the UK too, even though the Office for Budget Responsibility (OBR) removed Rachel Reeves’ fiscal headroom and while she promised discipline regardless. Reeves will be aware that OBR forecasts came before last week’s rate cut, and surprisingly positive Q4 growth.
Rallying gold prices could be a sign of investor fears. One explanation for this – explored last weekend in the FT by Nobel-prize-winning economist Daron Acemoglu – could be declining faith in US institutions. Anecdotally, we are hearing that wealthy Americans are concerned about Trump moving fast and breaking things.
These concerns might mean higher gold demand, a weaker dollar and US bond yields moving above elsewhere. If we squint, we can see those trends now, but it’s too early to say and they can be explained by many factors. Still, long-term investors should not dismiss the signs altogether.
China’s stars align
Investors have turned positive on China again – with Hong Kong stocks up 16% over the last month. It’s worth remembering how negative China sentiment was as recently as September, when many deemed the sluggish economy “uninvestable”. The government’s autumn stimulus promises stemmed the capital outflows and boosted domestic stocks, but Beijing’s record on demand-side stimulus has been mixed since. That is unsurprising, given the communist party’s ideological focus on production. Chinese stocks went sideways into the end of 2024, as the fundamental problem remained: will the party allow them to profit over the long-term?
Low-cost AI DeepSeek at least shows where profit could come from. Chinese tech stocks rallied 25% over the last month, following an apparent “Sputnik moment” in the US-Chinae tech race. A key part of shaking the “uninvestable” label is that domestic Chinese seem happier to invest in their own stocks. The old savings model relied on unstable shadow banking and an inflated property market, and it seemed that the government wanted to make property less attractive while encouraging equity ownership. That may beis happening, but it still remains to be seen whether profits get locked up by Beijing or sanctioned by Washington.
It helps that the communist party wants to lead the tech race and won’t want to upset the investment flows it needs to do so. That has eased investors’ concerns about capital controls, and so too has the fact that Trump seems much more concerned with trade imbalances than geopolitical rivalry. The signs are looking good for Chinese stocks – but optimism should be tinged with caution. Trump might not care about geopolitical rivalry but many in his orbit care deeply. President Xi may allow tech profit for now but this could turn the moment big tech clashes with the party’s priorities. For western investors, Chinese optimism should always be cautious.
Will tariffs work?
Donald Trump likes to threaten tariffs as a negotiating tactic, but he clearly thinks they are viable policies too. Economists usually disagree, but the case against tariffs isn’t as simple as sometimes presented.
The tariff question is the one that began modern economics. Leaders used to think that international trade was zero sum, but Adam Smith – the father of classical economics – argued trade could be mutually beneficial. David Ricardo underpinned those arguments with theory, and critiqued Britain’s corn law tariffs in the 19th century. Smith and Ricardo’s ideas still underpin free trade organisations like the WTO today, but pro-tariff arguments have always been around. The most common is the idea that tariffs protect infant industries. US President William McKinley used this to argue for sky-high tariffs at the turn of the 20th century. Trump is so fond of McKinley that he (re-)named Alaska’s a highest mountain after him.
The WTO maintains that tariffs are universally bad, but even they acknowledge the ‘infant industry’ argument and make allowances for developing countries. Empirical evidence suggests tariffs damage a country’s long-term economic output, but that they can also boost short-term production and growth. You can’t really apply this infant industry argument to the US, though; it’s the largest economy in the world.
Still, the output argument probably misses the point of Trump’s tariffs. Voters favoured them because globalisation hasn’t rewarded the average citizen – even if it’s boosted aggregate profits and output. Trump doesn’t wants to address this discontent without old-school redistribution, which might upset the capital-owning winners of globalisation. But trade barriers will curtail growth and, in the end, hurt capital owners and steelworkers alike. What’s more, trade protectionism tends to create the conditions for oligopoly, rent-seeking and corruption. Trump doesn’t seem to be worried about those social effects, but they might be the real legacy of his tariffs.
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Please see the below article from EPIC Investment Partners received this morning 14/02/2025:
The United States is once again contemplating new tariffs, yet a focus solely on headline trade surpluses obscures a more complex reality. While deficits grab attention, the strategic importance of industries and global supply chain roles are equally critical in Washington’s tariff calculus.
Vietnam, for example, presents a paradox. Its 2024 trade surplus with the US surged to $123.5 billion. As a vital manufacturing hub for apparel, electronics, and footwear – a key alternative to China – sweeping tariffs could disrupt crucial supply chains, a move Washington may deem self-defeating despite the headline deficit.
Taiwan, with a $73.9 billion surplus, is similarly shielded by strategic necessity. Its semiconductor sector, dominated by TSMC, underpins the US tech ecosystem. Tariffs here risk economic and political shocks, outweighing any perceived benefit from addressing the trade imbalance alone. Mutual dependency in high-tech may discourages tariffs based on trade balances alone.
Conversely, nations where the US runs a trade surplus appear more secure. The United Kingdom, with an $11.9 billion surplus for the US in 2024, benefits from robust American exports in financial services, travel, and machinery. The deep-rooted alliance between London and Washington also makes punitive tariffs improbable.
Saudi Arabia, despite its oil exporter image, now sees a slight trade surplus in favour of the US thanks to increased American machinery and high-value goods exports. Its geopolitical significance further diminishes tariff risk.
Latin American partners like Panama, Colombia, and Chile also illustrate strategic insulation. Panama, under a trade pact, reliably imports US petroleum and machinery. Colombia, a security ally, trades in refined petroleum and agriculture. Chile, with a free trade agreement, exchanges copper and fruit for US machinery. For these nations, allowing the US to maintain influence in Latin America, amidst Chinese economic expansion, combined with the fact that the US runs trade surpluses will likely work to their advantage.
In the final analysis, trade deficits are a simplistic starting point. Strategic dependencies, geopolitical imperatives and favourable trade balances all reshape the tariff equation. While nations with US surpluses currently seem insulated, the volatile nature of trade policy means no country can be entirely sanguine about their long-term exposure. Ultimately, in the unpredictable world of Trump’s trade policies, logic alone offers limited reassurance.
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Please see below article received from EPIC Investment Partners this morning, which provides a global economic update.
Federal Reserve Chair Jerome Powell emphasised the central bank’s cautious stance on interest rate cuts during his recent congressional testimonies, a position bolstered by yesterday’s inflation data. The January Consumer Price Index (CPI) showed headline inflation rising 0.5%mom to 3.0%yoy, whilst core inflation, excluding volatile food and energy prices, increased 0.4%mom to 3.3% annually.
The data, which represented the largest monthly increase since August 2023, prompted a swift market reaction. US Treasury yields surged, whilst equity futures declined and the dollar strengthened. Notably, shelter costs accounted for nearly 30% of January’s increase, with both owners’ equivalent rent and primary residence rent rising 0.3%. The grocery sector also experienced significant price pressures, with egg prices alone contributing two-thirds of the food price increases.
However, beneath the headline figures, several encouraging trends emerged. Food prices, which had been a major concern for two years, have largely stabilised and are now running below the overall inflation rate, with the notable exception of egg prices. Core measures, including the Fed’s “supercore” (services excluding shelter), showed decreases, supporting the broader disinflation narrative. Even the January uptick in sticky price inflation appears to be largely seasonal, reflecting the typical clustering of price increases at the start of the year.
During his testimonies Powell maintained that the economy remains robust, characterising the labour market as “largely in balance.” However, he stressed that inflation, though easing, continues to run “somewhat elevated” above the Fed’s 2% target. “The economy is strong, and we have the luxury of being able to wait and let our restrictive policy work to get inflation coming down again,” Powell stated.
The Fed Chair also addressed various political challenges, carefully sidestepping questions about Trump’s proposed trade policies, including potential new tariffs on China, Mexico, and Canada. Powell emphasised that whilst it was not the Fed’s role to comment on tariffs directly, the central bank would respond through appropriate monetary policy adjustments if necessary. Throughout the proceedings, Powell repeatedly emphasised the Fed’s independence and commitment to data-driven decision-making, arguing that maintaining political neutrality leads to better policy outcomes and lower inflation.
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Please see the below article from Brewin Dolphin, providing a brief analysis of the key factors currently affecting global investment markets. Received last night – 11/02/2025
It seems investors may have to get used to weekend bombshells. The week before last, it was the announcement that the U.S. would impose an additional 10% tariff on imports from China, while imports from Mexico and Canada would be subject to 25% tariffs, taking effect within days. The additional curbs on China are unwelcome, but as a large internal market, it’s not overly sensitive to individual country restrictions. For Canada and Mexico, on the other hand, these additional costs would risk pushing the countries into recession.
However, these tariffs would also result in increased costs for the U.S. Tariffs would cause prices to rise, discouraging consumption and weighing on growth. They’d bring in revenue, but whether that revenue would be reinjected into the economy would depend on tax policy negotiations in Congress. Higher prices would mean a higher rate of inflation, although it would likely be a one-time increase rather than a steeper inflationary trajectory.
Will tariffs be universal?
After much anxiety swept through the financial and corporate communities, U.S. President Donald Trump delayed the imposition of these tariffs following telephone calls with their respective leaders. Nominally, he extracted concessions, although most offerings had already been pledged.
Last weekend, the goal posts seemed to move again. President Trump revealed he would be imposing a 25% tariff on all steel and all aluminium imports. Back in 2018, he imposed 25% tariffs on steel imports and 10% tariffs on aluminium imports before exempting certain countries (Canada and Mexico) as part of the renegotiation of NAFTA (the North American Free Trade Agreement). Some of these tariffs were also commuted to quotas. The new tariffs will apply universally, and the aluminium tariff rate has risen. Although Trump announced there will be no exceptions, he is reportedly considering making one for Australia.
The moves reflected an environment where leaders seem compelled to take bold action. This is a contrast to the Washington consensus era, in which policymakers attempted to get out of the way of the economy wherever possible.
While in the UK…
The Bank of England (BoE) cut interest rates, which was expected. However, the big surprise was the fact that Monetary Policy Committee (MPC) member Catherine Mann (who was once regarded as the most hawkish member of the Committee) joined Swati Dhingra in voting for a sharper rate cut of 0.5%. New MPC members are always something of an unknown quantity. When Catherine Mann joined, she was expected to be quite dovish but turned out to be a hawk. This evidence shows that rather than having a particular tilt, she is pragmatic but decisive with her actions.
In justifying their decision, the MPC had a number of complex issues to juggle, tariffs being one of these. There are a few ways in which tariffs could impact growth and inflation. Growth would clearly be weaker if the U.S. imposed tariffs, however the MPC saw as many reasons to expect weaker inflation as it did strong inflation.
Another quandary was the impact of last year’s increase in employer’s National Insurance contributions. Logically, these taxes will need to be paid through a mixture of companies charging more, paying staff less or earning less profit. The BoE surveyed businesses on this and found that the most popular response was lower wage growth and reduced employment. This suggesting, tentatively, that the tax increase could be disinflationary.
Overall, the MPC acknowledged that the neutral rate of interest seems to have risen over recent years. The main empirical evidence for this would be the softening labour market.
U.S. labour market remains strong
The U.S. released its employment report on Friday, which suggested its labour market remains strong. Substantial positive upward revisions to previous months made up for a slight disappointment in terms of the first estimate for January. Wage growth picked up more than expected, so overall, the U.S. labour market justifies a pause in rate cuts from the Federal Reserve (the Fed).
DeepSeek and the Magnificent Seven
Most of the Magnificent Seven have reported earnings now. Nvidia, to build the drama, doesn’t report until 26 February.
Amazon and Google (Alphabet) reported this week. They both saw strong growth in cloud services but were held back by capacity constraints, which echoed Microsoft’s results from the week before. Microsoft emphasised shortages of space and power over central processing units and graphics processing units. Amazon said most of the $26bn on capital expenditure in Q4 was to build artificial intelligence (AI) capability at Amazon Web Services. Google is anticipating spending $75bn over the coming year.
The companies seem unphased by the release of the DeepSeek model, believing, as we discussed last week, that more efficient models will increase adoption of AI rather than reducing demand for AI infrastructure. Amazon’s CEO described AI adoption as a once-in-a lifetime business opportunity, which the company is expanding its capacity to fill.
What’s next?
This week, the focus will be on Fed Chairman Powell, who will be delivering testimony to the U.S. Congress on Tuesday. This isn’t normally a market-moving development, however the Chairman being in the spotlight may prompt President Trump to make one of his unorthodox comments on the appropriateness of monetary policy or policymakers.
There will be a host of earnings numbers due, but with two thirds of companies having now reported, shocks seem less likely.
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Please see the below article from EPIC Investment Partners received this morning 11/02/2025.
Trump’s announcement of a 25% tariff on steel and aluminium imports from all countries, with implementation expected “almost immediately,” has sparked significant concern. The US remains heavily dependent on metal imports, particularly aluminium, which accounted for over 80% of domestic demand in 2023, with major suppliers including Canada and Mexico. These tariffs are anticipated to substantially impact the automotive, aerospace, and energy industries, which rely heavily on these specialised metals.
The international response has been swift and critical. The Canadian Steel Producers Association condemned the tariffs as “baseless and unwarranted,” whilst the European Commission pledged to protect European businesses, workers, and consumers. South Korea’s Ministry of Industry, Trade, and Energy held an emergency meeting with steel executives, and Australian Prime Minister Anthony Albanese sought exemptions, citing Australian investments in the US steel industry. Following discussions with Albanese, Trump indicated he would give “great consideration” to exempting Australia from the tariffs.
The economic implications are far-reaching. The manufacturing sector is particularly vulnerable, with studies showing that steel-consuming jobs far outnumber steel-producing jobs, suggesting likely net job losses. Higher tariffs will increase production costs for manufacturers, raising prices for goods ranging from cars to household appliances. Analysts warn of heightened inflationary pressures, which could reduce consumer purchasing power and slow economic growth.
Academic research has been overwhelmingly critical of such policies. A Chicago Booth survey, conducted in 2018, of 43 economic experts revealed that none believed steel and aluminium tariffs would improve American welfare. The Tax Foundation’s analysis suggests these tariffs have in fact consistently damaged the US economy and American consumers, by raising prices, and lowering economic output and employment since the trade wars began in 2018.
The imposition of high tariffs can also appreciate the value of the US dollar, making American exports less competitive and further worsening trade imbalances. Furthermore, tariffs disrupt global supply chains, increasing inefficiencies and limiting the benefits of international trade. Overall, while tariffs might offer short-term protection for certain industries, they can have far-reaching negative impacts on both consumers and businesses, ultimately slowing down broader economic growth.
Separately, credit agency Moody’s has warned that US withdrawal from international organisations could threaten the triple-A ratings of institutions like the World Bank. This comes as Trump ordered a review of US government support for intergovernmental organisations, potentially leading to withdrawal from certain United Nations agencies, with Moody’s cautioning that reduced US commitment to multilateral development banks could have negative credit implications.
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