Michael Reinking:
Hello, I'm Michael Reinking, senior market strategist at the New York Stock Exchange, and this is Market Storylines. Every week, we are here to keep you up to date on the key trends and events driving global markets. We are recording on Thursday morning, so let's dive into this week's Market Storylines.
Now, last week after the DeepSeek conduced sell-off on Monday, the S&P 500 was able to recoup pretty much all of those losses by Friday afternoon. However, in the final hour of trade, President Trump took to the airwaves saying that the 25% tariffs against Mexico and Canada, and additional 10% tariffs on goods imported from China, would be enacted on Saturday, despite some press reports to the contrary, causing some weakness into the bell. Now that announcement did come on Saturday, sending futures sharply lower coming out of the weekend for the second consecutive week. At the lows on Monday morning, the S&P 500 was down about 2%. However, shortly after the open, it was announced that the Mexico tariffs would be put on hold for 30 days, and the Canadian tariffs were also paused after the close as the countries took steps to secure the border. Now, this helped equities recoup some of those losses with the S&P closing right at its 50-day moving average.
Now the China tariffs are still set to move forward, and on Monday evening, China announced some retaliatory steps putting tariffs on US energy products, imported farm equipment, amongst other products, while adding a couple of companies to its unreliable risk and reportedly opening investigations into some major US tech companies. Now, the overarching market view was that the response was limited with the estimates suggesting that less than $20 billion of US products would be impacted relative to the nearly 500 billion of Chinese imported goods. Now, those tariffs are expected to go into effect on February 10th, so there is still a little time for further negotiations, though President Trump has publicly downplayed reports of an imminent conversation with his counterpart.
Now, outside of the ramifications of the shocking NBA trade deadline and this weekend's Super Bowl, tariffs have been at the forefront of many conversations here on the trading floor, whether it be their usefulness as a negotiation tool or an economic tool to realign global trade and bring in revenue. From a market perspective, their impact on inflation and economic activity is also a very important discussion as it relates to the Federal Reserve and interest rates going forward. There are two sides to this debate, with one camp arguing that this will add to inflation and hence send rates higher. The flip side is that this is a one-time increase in prices, which companies will have a hard time passing on in the current environment, potentially impacting margins, and along with adding to the business uncertainty will slow economic activity, ultimately pushing rates lower. Now, the first view won out on Monday, however, the second played out through the remainder of the week, aided by some economic data pointed to a moderation in activity.
The treasury yields have moved sharply lower over the last couple of weeks with the 10-year yield down about 40 basis points from the high it hit a couple of weeks ago. Now, markets are still viewing tariffs as that negotiation tool, and given the quick about face earlier this week, that view is only strengthened. However, this seems to be something deeply ingrained in the administration's policy goals, so I'd argue that markets are underappreciating that risk.
Now, the big piece of economic data this week comes on Friday, but leading up to that, data continues to point to a moderating but resilient labor market. The JOLTS jobs openings fell to 7.6 million from about 8.1 million last month, though layoffs and discharges remain pretty much unchanged at 1.1% of the total workforce. Now, the ADP's job survey showed an increase of 180,000 jobs in January, driven by strength and services, while goods producing jobs fell slightly. Within that report, markets primarily focused on the wages data, given the larger sample size than the government data, and that pointed to some continued deceleration. Pay for job stayers held steady, but there was a decline to 6.8% from 7.1% for job changers, reversing the Q4 move higher. There was also a modest move higher in this week's claims data.
The piece of data that had the biggest impact on yields was yesterday's ISM Services reading, which came in below expectations after a beat in manufacturing earlier this week. There was a slowdown in new orders, however, the prices component also fell pretty sharply, reversing most of the move from the previous month. This along with some relief after the treasury announced that it didn't see an increase in auction sizes for the next couple of quarters, also helped to keep a bid in treasury markets.
Now, let's quickly talk about Friday's employment report. Analysts expect non-farm payrolls to be up about 170,000 down from a very strong 256,000 last month, while the unemployment rate is expected to hold steady at 4.1% and average hourly earnings to be up 3.8% annually down a tenth from the previous month. Now, the January report is particularly interesting as revisions for the previous year will be released with an expectation the number of jobs created will be revised lower.
Now, quickly moving to the earnings situation as promised last week, it's been another very busy week. Now, according to facts that about 60% of companies in the S&P 500 have reported to date with 78% beating estimates by just under 7%. Now, both measures are essentially in line with the averages seen over the last five and 10 year periods. Now, earnings season got off to a very strong start with financials, pretty uniformly beating estimates and providing solid guidance.
Now for multinationals, US dollar headwinds and weakness in Europe have been two consistent themes. The continued resilience of the consumer has also been evident with solid results from payment processors, travel-related companies and restaurants. Now, tech is always a focal point, and overall it's hard to argue that the results have been bad. But in many cases, we've seen the stocks trading lower, given the lofty expectations and valuations. Now we continue to see the hyperscalers increase CapEx budgets with Alphabet projecting $75 billion in spending this year, more than 15 billion above the street estimates. This has helped the semis and the AI-related infrastructure and power companies recoup some of last week's sell-off.
Now tonight, Amazon will provide another AI and cloud data point, but will also provide some additional insight into the consumer spending trends. Now, broadly, the quarterly numbers are coming in strong, but as we suggested in our preview, guidance has been more mixed, which is not surprising given the uncertainty in the environment.
This has led to some modest negative revisions to earnings estimates, but could set up a positive revision cycle later in the year as some of that uncertainty is removed and should economic activity pick up. Now, Amazon earnings and the jobs report will obviously set the tone for trading on Friday, but the University of Michigan sentiment survey, released later in the morning, could also get some attention with all eyes on the inflation expectations, setting the stage for next week where the focus will shift to inflation. Now over the weekend, China inflation data will be released, and then the US CPI will be released on Wednesday, followed by PPI on Thursday, and the week ends with the retail sales report on Friday. Now, as will be the case for the foreseeable future, Washington will remain in focus.
Now over the weekend, President Trump is expected to meet with GOP leadership as they try to formulate a plan to start moving the agenda forward. The deadline for China tariffs to go into effect on Monday, so there could be an update coming out of the weekend as well, and there are reports that the administration will lay out its peace plans for Ukraine at the Munich Security Conference next week. Now, Chair Powell will also be in the hot seat giving his semi-annual testimony before Congress on Tuesday and Wednesday, and the earnings calendar will also continue to be busy.
Now, once again, thank you for spending some time with us today. Remember, you can watch Market Storylines on tv.nyse.com, or our YouTube channel, or you can listen every Friday on the Inside the ICE House podcast feed. Enjoy the big game. Thanks for joining me. I'm Michael Reinking. I'll talk to you again next week.
Speaker 2:
That's our conversation for this week. Remember to rate, review and subscribe wherever you listen and follow us on X, @ICEHousePodcast. From the New York Stock Exchange, we'll talk to you again next week, Inside the ICE House.
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