Market Brief: Trade War Nerves Offset Stale Jobs Reports 

Markets have joined economists in thinking that trade wars really aren’t good, or easy to win. After weeks of dizzying changes in US tariff policies, the S&P 500 is down 7 percent from all-time highs, Treasury yields have fallen sharply, and the dollar is down against all of its major counterparts—despite this morning’s relatively-stable non-farm payrolls report.

In the latest development, Donald Trump yesterday said he would pause tariffs on goods that comply with the North American free trade pact negotiated during his first tour in office—just two days after he imposed near-universal 25 percent tariffs on Canada and Mexico. The postponement, which will last until April 2, is believed likely to cover roughly 45 percent of Canadian and 50 percent of Mexican goods, leaving the remainder facing levies between 10 and 25 percent, and meaning that the administration’s relationship with America’s two largest trading partners is on very thin ice.

Uncertainty levels remain astonishingly high. Since Inauguration Day, confusion about the direction of US economic policy has reached the most extreme levels ever recorded outside the pandemic, topping events like the 9/11 attacks and the 2008 global financial crisis. Categorical subindices show that businesses and investors are baffled by the administration’s approach to a range of issues beyond trade, including fiscal policy, taxes, health care, and regulation.

US job creation rates are weakening. According to numbers just released by the Bureau of Labor Statistics, just 151,000 jobs were added in the month - representing an undershoot relative to the 160,000-position consensus forecast - and the unemployment rate rose to 4.1 percent. Releases in the preceding two months were revised lower by just 2,000 positions and average hourly earnings climbed 0.4 percent month-over-month, holding at the pace set in the prior month. Federal government employment fell by 10,000.

But the data is stale. The non-farm payrolls report survey week landed before the Department of Government Efficiency's cuts were communicated, before Trump's tariffs took effect, and ahead of the substantial decline in business and consumer sentiment that has unfolded more recently. Many investors will wait for the next payrolls report before taking directional views on the outlook for labour markets.

On the tariffied side of the border, Canadian employment growth flatlined in February, disappointing economists who had expected a modest gain. According to Statistics Canada, the unemployment rate fell to 6.6 percent from 6.7 percent in the month, but just 1,100 positions were created, and hours worked fell -1.3 percent, marking the biggest monthly decline since April 2022 as snowstorms slowed economic activity. Consensus estimates had pointed to roughly 20,000 new hires, with unemployment holding at 6.7 percent.

The monetary policy implications should be limited. With Canada facing a potentially-devastating exogenous shock to exports, employment, investment, and demand, policymakers at the Bank of Canada seem likely to depress rates further at their March meeting, even if they risk adding some heat to housing markets and consumer price indices.

Canadian data could remain difficult to read for a few months. Merchandise trade numbers, released yesterday, showed auto, machinery, pharmaceutical, and energy exports to the US jumping dramatically in January, and the country’s goods surplus surged to record levels, suggesting that businesses on both sides of the border were rushing to get shipments across before tariffs hit—and that a weak loonie was helping to boost overall overall volumes. It’s impossible to know exactly how much of this will be reversed over the coming months, but we suspect that exports will suffer as long as tariffs remain in play, confusion reigns over border procedures, and US demand slows.

A sudden deterioration in US activity metrics is contributing to a dramatic reversal in surprise indices across the major developed economic. For the first time since early last year, data releases in the euro area, United Kingdom—and even Canada—are outperforming their US counterparts, suggesting that overheated expectations for the Trump administration’s economic policies have cooled—and that moves like Germany’s effort to reform fiscal spending are translating into an improvement in the global growth outlook. We think this shift has legs: many market participants who have been painfully aware of overcrowding in the ‘US exceptionalism’ trade are growing more comfortable with rebalancing portfolios, and speculators are beginning to turn more bearish on the dollar itself. Although the path will be bumpy as tariff concerns reassert themselves, a number of major currency pairs could exhibit convergence dynamics in the coming weeks.

*Not all USMCA-compliant goods have been certified, and there are major ambiguities with respect to some categories, including crude oil and auto parts.

Please note: The morning Market Brief will be on hiatus between March 10 and March 21 as I take a badly-timed vacation. Try not to do anything that might trigger currency volatility. Thank you for your cooperation : )

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