MARKET UPDATE – January 27^th – February 7^th, 2025

In a Nutshell: Global markets took a reprieve from volatility and began to stabilize after trade tensions were eased through negotiations across North America, with Tariffs being delayed until March 1^st.  A weak start to earnings season saw a number of companies missing guidance, and the U.S. showed some signs of a cooling economy, while green shoots may be starting to appear for the Eurozone.

U.S. Labour Markets

U.S. job openings declined more than expected in December, falling by 556,000 to 7.6 million, signaling a potential cooling in the labour market.  However, hiring remained steady, with 5.462 million hires in December, up from 5.373 million in November.  Layoffs remained unchanged at 1.8 million, reflecting employer reluctance to cut jobs despite a slowdown in hiring after post-pandemic expansion.

In contrast, private payrolls in January exceeded expectations, rising by 183,000 versus a forecast of 148,000.  December’s payrolls were also revised up to 176,000.  These figures suggest ongoing labour market stability despite fewer job openings.

Additionally, initial jobless claims for the week ending February 1^st rose to 219,000, surpassing the forecasted 214,000 and marking an increase from the previous week's 208,000 claims.  This uptick could indicate early signs of a labor market shift, though overall conditions remain resilient.  The data supports the Federal Reserve’s view that the labour market is not driving inflationary pressures, reinforcing its efforts for a soft economic landing.

 

U.S. Economy

The U.S. economy showed mixed signals in recent data.  Inflation, measured by the Personal Consumption Expenditures (PCE) price index, accelerated slightly in December, rising 0.3% month-over-month and 2.6% annually, in line with expectations.  Core PCE inflation remained steady at 2.8%.  Despite slowing Gross Domestic Product (GDP) growth at 2.3% in Q4 (below the expected 2.7%), consumer spending remained resilient, keeping the Federal Reserve cautious on future rate cuts.

Manufacturing showed signs of recovery, with the ISM Manufacturing Purchasing Managers’ Index (PMI) rising above 50 for the first time since 2022.  However, the services sector slowed, with the Services PMI falling to 52.8, below forecasts.  Durable goods orders declined for the second consecutive month, dropping 2.2%, while wholesale inventories also fell, signaling potential economic softening.

Geopolitical factors, including trade tensions and tariffs imposed by President Trump, could impact growth.  The Federal Reserve remains in a wait-and-see mode, monitoring inflation and labour market trends before adjusting interest rates.

 

 

 

Canadian Economy

Canada’s economy contracted by 0.2% in November due to transportation work stoppages but is expected to rebound by 0.2% in December.  Meanwhile, the services sector continued to struggle, with the Business Activity Index rising slightly to 49.0 but still in contraction territory.  Uncertainty around U.S. trade policies remains a key challenge for Canadian businesses.

Canadian manufacturing activity grew at a slower pace in January as looming U.S. tariffs reduced business confidence.  The S&P Global Canada Manufacturing PMI fell to 51.6 from 52.2 in December but remained in expansion territory for the fifth consecutive month.  Despite concerns, export orders rose for the first time in 17 months as companies rushed to get ahead of the tariffs.

President Trump imposed 25% tariffs on Canadian and Mexican goods, prompting Canada to retaliate with its own 25% tariffs on $155 billion worth of U.S. products, including beer, wine, lumber, and appliances.  After discussions between Prime Minster Trudeau and President Trump, there Tariffs were delayed until March 1^st.  Given that 75% of Canada’s exports go to the U.S., these trade tensions could have significant economic implications.

 

 

Eurozone and UK Economy

The Bank of England (BoE) cut interest rates by 0.25% to 4.5%, with some policymakers pushing for a larger reduction to 4.25% to counteract economic slowdown.  However, the BoE remains cautious about further cuts due to expected inflation nearing twice its 2% target in 2025.  The BoE also halved its 2025 growth forecast, posing challenges in the efforts to boost the economy.

UK manufacturing sector continued to struggle, with business confidence hitting it’s lowest level since late 2022.  The S&P Global UK Manufacturing PMI indicated contraction for the fourth consecutive month, but saw a slight increase to 48.3 in January from 47.0 in December.  Employment in the sector saw its biggest drop in nearly a year, reflecting ongoing economic strain.

The European Central Bank (ECB) cut interest rates for the fifth time since June and signaled another reduction in March, prioritizing economic growth over inflation concerns.  Markets anticipate two to three more cuts this year as inflation appears to be under control while the economy remains sluggish.

Economic activity in the Eurozone showed signs of recovery at the start of 2025.  The composite Purchasing Managers’ Index (PMI) rose to 50.2 in January, indicating a return to growth after two months of contraction.  Services activity remained stable, while the long-running downturn in manufacturing eased slightly.  The manufacturing PMI improved to 46.6, still below the 50 threshold but marking a positive shift from December’s 45.1.

Germany’s inflation held steady at 2.8% in January, while core inflation eased to 2.9% from 3.3% in December, reinforcing expectations of further ECB rate cuts.  However, the German labour market weakened, with unemployment rising to 6.2%, the highest in over four years.

On a brighter note, German industrial orders surged by 6.9% in December, far exceeding the 2.0% increase forecasted by analysts.  This growth was primarily driven by large-scale orders in sectors like aircraft, ships, and military vehicles, signaling resilience in certain industries despite broader economic challenges.

 

 

Energy

The Energy Information Administration (EIA) reported a 174-billion-cubic-foot decrease in U.S. natural gas storage, exceeding the forecasted 167-billion-cubic-foot decline.  This stronger-than-expected drop suggests increased demand, which is bullish for natural gas prices.  Although the decrease is smaller than the previous week's 321 billion cubic feet, it still signals a tightening market, potentially impacting the Canadian dollar due to Canada’s reliance on natural gas exports.

Meanwhile, the EIA also reported a significant increase in U.S. crude oil inventories, with stockpiles rising by 8.664 million barrels—far exceeding the forecasted 2.4 million barrels.  This large buildup suggests weaker-than-expected demand, which is bearish for crude oil prices.  The oversupply could put downward pressure on petroleum prices and may influence inflation trends.

These reports highlight contrasting trends in the energy market: bullish signals for natural gas due to stronger demand and bearish signals for crude oil due to rising inventories and weaker consumption.

Reuters Market Updates http://www.reuters.com

Bloomberg Market Updates - https://www.bnnbloomberg.ca/markets

 

Market Data	S&P/TSX	S&P 500	DOW	NASDAQ	STOXX EU	WTI	GOLD
Last Week	0.3%	-1.0%	0.3%	-1.6%	1.8%	-2.9%	2.0%
This Week	-0.4%	-0.2%	-0.5%	-0.5%	0.8%	-2.0%	1.8%

Market data taken from https://www.marketwatch.com/

 

 

CIBC Economics Quick Take: Canada GDP (Nov. Dec/Q4 adv) by Andrew Grantham (Summarized)

Canada's economy faced challenges heading into potential U.S. tariffs, with November GDP declining by 0.2%, slightly worse than expected.  Multiple work stoppages in the transportation sector and mild weather, which reduced demand for utilities, contributed to the slowdown.  Additionally, sectors like mining, oil & gas, manufacturing, wholesale, and retail also saw declines.  However, construction, real estate, and food & accommodation saw growth, providing some offset.  

The December advance estimate indicated 0.2% growth, which helped counterbalance November's decline.  For Q4, the economy is expected to grow at an annualized rate of 1.75%, close to the Bank of Canada's forecast of 1.8%, driven largely by strong performance in October.  Despite this, the economy shows moderate health with rising risks, suggesting that further interest rate cuts from the Bank of Canada may be likely.

 

 

MacroMemo - January 28 - February 10, 2025 by Eric Lascelles Link to Article

Everything Tariffs

The White House's threat of tariffs, particularly a proposed 25% tariff on Canada and Mexico, has caught the attention of investors and economic analysts.  While President Trump did not impose tariffs, concerns remain about their potential economic impact.

Tariffs have complex effects beyond simply increasing government revenue.  While they can boost domestic production and generate tax revenue, they also tend to raise product prices, reduce consumer purchasing power, and disrupt supply chains.  Additionally, they can strengthen the currency, reduce specialization, and limit product selection.

The economic burden of tariffs is unevenly distributed across the supply chain.  Foreign suppliers with differentiated products may pass costs onto others, while those producing commodities may bear more of the burden themselves.  Consumers who buy discretionary goods or domestic substitutes can avoid some tariff costs, but those purchasing necessities or unique imported goods will likely face higher prices.

Past tariff experiences (2018–2019) showed that most costs were passed to U.S. consumers rather than foreign suppliers.  If the same pattern holds in 2025, tariffs could function similarly to a sales tax, indirectly raising government revenue at consumers’ expense.  This could provide funds for tax cuts but would also come with significant economic costs.

Economic damage from tariffs comes via a range of subtle channels

As indicated by Eric Lascelles, the most likely scenario, with a 45% chance, is the implementation of partial tariffs.  This would involve moderate tariffs on key products like steel and aluminum, targeting several major trading partners.  The expected economic impact would be a loss of 0.1% to 0.3% of GDP for affected countries, with those closely tied to the U.S., such as Canada, experiencing the higher end of this range.

Canadian tariff considerations

The likelihood of a 25% universal tariff on Canada is low due to several factors: Trump's negotiation style often starts with extreme demands, tariffs are being used as leverage for other issues like border security (which Canada can address), and imposing such tariffs would harm the U.S. economy—especially in sectors like energy and autos.

Historical precedent from 2018–2020 suggests that while initial tariff threats were severe, the actual measures implemented were smaller, temporary, and ultimately resolved through negotiations.  The U.S. imposed a 25% tariff on steel and a 10% tariff on aluminum, leading Canada and Mexico to retaliate with targeted tariffs before the dispute was settled with the USMCA trade deal.

With new tariff threats looming, key Canadian exports—especially oil, gas, and transportation equipment—would be difficult to target without significant economic repercussions for both countries. While the current situation is more uncertain than before, a similar pattern of negotiation and compromise is likely.

Oil and gas are by far the largest export from Canada to U.S.

 

If U.S. tariffs are intended to extract Canadian concessions, negotiations will be key.  While Canada and Mexico secured a relatively fair USMCA deal last time, achieving a similar outcome now may be harder.  Some areas of consideration for Canada are as follows:

• Border Security:  Trump wants stricter controls to curb illegal immigration and drug trafficking.  While Canada is less of a concern than Mexico, we’ll also need to contribute to this end.
• Defense Spending: Trump wants NATO allies to increase military budgets.  Canada currently spends 1.3% of GDP—raising this to 2.0% (or even higher) may be necessary.
• Digital Services Tax: The U.S. opposes Canada’s 2024 tax on large American tech firms and could push for its removal, along with a proposed 5% streaming tax.
• Canadian Protectionism: The U.S. may target Canada’s dairy and egg industries, which are shielded from competition.
• Softwood Lumber: A long-standing trade dispute, lumber tariffs are likely to remain a sticking point.
• Purchasing U.S. Goods: Canada might be pressured to buy more U.S. products, similar to Trump’s past demands of China.
• Reopening USMCA / Targeting Mexico: The U.S. will likely push to renegotiate USMCA, either now or in 2026. One possibility is cutting Mexico out of the deal due to labor costs, border issues, and Chinese transshipments.  Alternatively, new wage commitments and stricter trade rules for Mexico may be imposed.
• “Fortress AmCan” Strategy: Rather than separating, Trump may seek to strengthen U.S. - Canada economic ties, particularly regarding resource security.

 

While negotiations will be complex, Canada has some room to maneuver, especially if it aligns with U.S. strategic interests.

 

 

Wicks Quinn Houghton Group are Investment Advisors with CIBC Wood Gundy in Calgary, Alberta, Canada. The views of Wicks Quinn Houghton Group do not necessarily reflect those of CIBC World Markets Inc.

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