Weekly Wrap

It was a busy week for stock market participants. The major indices ebbed and flowed, ultimately settling lower than last Friday. The S&P 500 slid 0.4% and the Nasdaq Composite logged a 0.5% decline.

The news cycle in the first half of the week was dominated by talk of tariffs. Participants learned last weekend that President Trump announced that the U.S. will be implementing a 25% tariff on imported goods from Canada and Mexico (but only a 10% tariff on imported Canadian energy) and a 10% tariff on imported goods from China. He also indicated to the press that tariffs for the EU will likely be implemented fairly soon.

Leaders from Canada and Mexico were able to strike a deal with the US to avoid tariffs for one month. Meanwhile, China said it will be imposing a 15% tariff on imports of coal and LNG from the U.S., and 10% tariffs on crude oil, agricultural machinery, and certain cars starting February 10. China also imposed further export restrictions on key minerals, such as tungsten, and said it will be starting an anti-monopoly investigation of Alphabet's (GOOG) Google.

The market interpreted China's retaliation as more postural than penal. Furthermore, the tariff talk has been viewed as more of a temporary negotiating tactic than a permanent feature.

There was also a slate of market-moving economic data to get through this week. The December JOLTS - Jobs Openings Report showed a stark drop in openings to 7.600 million versus an upwardly revised 8.156 million (from 8.098 million) in November; Services PMI readings for January out of China, Europe, and the U.S. were weaker-than-expected, fostering some growth concerns; the January Employment Situation Report featured a 0.5% increase in average hourly earnings, which may not bode well for inflation; and the preliminary February University of Michigan Consumer Sentiment survey showed an increase in year-ahead inflation expectations to 4.3% (from 3.3%).

Rate cut expectations adjusted in response to the economic data and tariff news. The fed funds futures market now sees a 52.8% probability of a rate cut by the June FOMC meeting, down from 64.6% yesterday, according to the CME FedWatch Tool.

Treasury yields also adjusted in response to the tariff news and data. The 2-yr yield settled four basis points higher at 4.28% and the 10-yr yield settled eight basis points lower at 4.49%.

The front of the curve was under pressure as the specter of higher inflation following the tariff talk and economic data will likely forestall future rate cuts by the Fed; the long end, which is more sensitive to inflation pressures, was actually a bit stronger (ironically) as participants mull the notion that demand will wane in the face of higher prices, hurting growth.

It was another big week for earnings news with results from Alphabet (GOOG), which dropped 9.0%, and Amazon.com (AMZN), which dropped 3.6%, headlining the calendar. Other notable names included Palantir Technologies (PLTR), Qualcomm (QCOM), Spotify (SPOT), Dow component Merck (MRK), Estee Lauder (EL), and PepsiCo (PEP).

Monday:

The week started with some turbulence in the stock market. This price action was in response to the weekend news that the US imposed a 25% tariff on imported goods from Canada and Mexico (only 10% for Canadian energy) and a 10% tariff on imported goods from China beginning at midnight.

Subsequent news emerged that Mexico's President Claudia Sheinbaum said she had a "good call" with President Trump and he agreed to "pause tariffs for one month." President Trump confirmed the update.

Stocks moved off their lows in response, but never fully recovered due to ongoing fears about tariffs impacting growth and pressuring inflation higher.

Reviewing Monday's economic data:

• January S&P Global US Manufacturing PMI - Final 51.2; Prior 50.1
• January ISM Manufacturing Index 50.9% (Briefing.com consensus 49.1%); Prior was revised to 49.2% from 49.3%
  • The key takeaway from the report is that manufacturing sector activity overall moved into expansion territory for the first time after 26 straight months of contraction, underscoring an improved demand backdrop seen in the pickup in the new orders and employment indexes.
• December Construction Spending 0.5% (Briefing.com consensus 0.2%); Prior was revised to 0.2% from 0.0%
  • The key takeaway from the report is that new single-family construction activity picked up despite rising interest rates.

Tuesday:

Today's market showed a positive bias, with investor sentiment buoyed by several key developments related to tariffs and their potential impact on inflation and corporate earnings growth. Specifically, Canada was granted a 30-day reprieve from tariff actions, while China’s latest retaliatory measures appear more symbolic than substantial

Market expectations were high that President Trump would engage in talks with Chinese President Xi Jinping today; however, those discussions did not materialize.

Significant contributions to the market's performance were from large-cap stocks. 

The overall upside bias in stocks was also helped by the decline in rates following the December JOLTS - Jobs Openings Report, which showed a stark drop in openings to 7.600 million versus an upwardly revised 8.156 million (from 8.098 million) in November.

Reviewing Tuesday's economic data:

• December Factory Orders -0.9% (Briefing.com consensus -0.3%); Prior was revised to -0.8% from -0.4%
  • The key takeaway from the report is that the weakness in factory orders was concentrated in the volatile transportation equipment space; otherwise, there was a modest pickup in order activity.
• December JOLTS - Job Openings 7.600 mln; Prior was revised to 8.156 mln from 8.098 mln

Wednesday:

The stock market traded with a positive bias, but index performance was mixed due to declines in highly influential names. The Nasdaq Composite, which flirted with the unchanged mark through most of the session, ultimately settled 0.2% higher. The S&P 500 logged a 0.4% gain and the Dow Jones Industrial Average jumped 0.7%.

Alphabet (GOOG), which had been on an impressive run, saw a sharp decline after its earnings results didn't meet the high expectations set by investors, compounded by its $75 billion capital expenditure plan for 2025. This loss followed a recent peak all-time high of over $204 just five days ago on January 31.

The drop in market rates contributed to the upside bias in equities. The rally in the Treasury market followed weaker-than-expected Services PMI readings for January out of China, Europe, and the U.S. that fostered some growth concerns.

The rally in the bond market was undeterred by the news from the U.S. Treasury that it will increase the size of this month's 10-, 20-, and 30-yr auctions by three billion apiece.

Reviewing Wednesday's economic data:

• The December Trade Balance Report showed a widening in the deficit to $98.4 billion (Briefing.com consensus -$98.0 billion) from a downwardly revised $78.9 billion (from -$78.2 billion) in November. December exports were $7.1 billion less than November exports while December imports were $12.4 billion more than November imports.
  • The key takeaway from the report is that the big jump in imports was presumably a function of trying to get ahead of possible tariff actions.
• January S&P Global US Services PMI - Final 52.9 vs. 52.8 prior
• The ISM Services PMI decreased to 52.8% in January (Briefing.com consensus 53.9%) from a downwardly revised 54.0% (from 54.1%) in December. The dividing line between expansion and contraction is 50.0%, so the January reading reflects services sector activity expanding but at a slower pace than the prior month. January marked the 53rd time in 56 months that the Services PMI indicated expansion.
  • The key takeaway from the report is that the pace of expansion in the nation's largest sector decelerated in January. That will likely temper growth forecasts for the first quarter.

Thursday:

The stock market traded in mixed fashion through most of the session. The major indices traded above and below their prior closing levels due to a lack of conviction from either buyers or sellers. The S&P 500 and Nasdaq Composite ultimately closed near their highs, though, thanks to a late surge of buying in some mega cap names.

There was no specific new item to account for the afternoon climb that was driven by an ongoing inclination to buy on weakness, along with some short-covering activity. Apple (AAPL) was among the influential beneficiaries of the increased buying after trading down as much as 0.9%.

Outsized moves were mostly reserved for stocks that reported earnings.

Reviewing Thursday's economic data:

• Q4 Productivity-Prel 1.2% (Briefing.com consensus 0.8%); Prior was revised to 2.3% from 2.2%, Q4 Unit Labor Costs-Prel 3.0% (Briefing.com consensus 2.6%); Prior was revised to 0.5% from 0.8%
  • The key takeaway from the report is that the productivity is on the rise, which will help temper inflation pressures. The 1.8% annualized rate of productivity growth in the current business cycle (starting Q4 2019) is higher than the 1.5% rate of the previous business cycle (Q4 2007 through Q4 2019).
• Weekly Initial Claims 219K (Briefing.com consensus 213K); Prior was revised to 208K from 207K, Weekly Continuing Claims 1.886 mln; Prior was revised to 1.850 mln from 1.858 mln
  • The key takeaway from the report is that there simply hasn't been a material increase in initial jobless claims, which would suggest there is some real weakening in the labor market. Hiring activity might have slowed, but the layoff activity does not impart an indication that employers think the economy is on the brink of a meaningful slowdown.

Friday: 

The stock market began the final session of the week on a positive note, with major indices pushing higher thanks to gains in mega-cap stocks. Investors seemed largely unaffected by the January Employment Situation report, released at 8:30 ET. The report was solid, showing an increase in nonfarm payrolls and a historically low unemployment rate of 4.0%. Market participants took the 0.5% increase in average hourly earnings, a potential inflationary signal, in stride.

The optimistic start quickly unraveled at 10:00 ET following the release of the preliminary February University of Michigan Consumer Sentiment survey. The headline sentiment figure came in weaker than expected, posting 67.8 compared to the anticipated 71.3. The main point of concern, though, was that year-ahead inflation expectations spiked to 4.3%, a sharp jump from 3.3%.

Stocks faced additional selling interest when reports surfaced that President Trump had informed Republican lawmakers of his plans to impose additional tariffs as early as today. The potential for political shifts over the weekend, when markets would not be able to react in real-time, added a layer of uncertainty.

Reviewing Friday's economic data:

• January Nonfarm Payrolls 143K (Briefing.com consensus 155K); Prior was revised to 307K from 256K, January Nonfarm Private Payrolls 111K (Briefing.com consensus 163K); Prior was revised to 273K from 223K,
• January Avg. Hourly Earnings 0.5% (Briefing.com consensus 0.3%); Prior 0.3%, January Unemployment Rate 4.0% (Briefing.com consensus 4.1%); Prior 4.1%, January Average Workweek 34.1 (Briefing.com consensus 34.3); Prior was revised to 34.2 from 34.3
  • The key takeaway from the report is that it is a good "economic" report as the jump in average hourly earnings on a nominal and real basis is a good portent for consumer spending. The question will be if it is a good "market" report given that the jump in average hourly earnings can be construed as a sticky inflation indicator that will forestall another rate cut by the Fed.
• February Univ. of Michigan Consumer Sentiment - Prelim 67.8 (Briefing.com consensus 71.3); Prior 71.1
  • The key takeaway from the report is that the weakening in sentiment was described as "pervasive" across political, age, and wealth groups, underscoring the worrisome impact of higher inflation expectations.
• December Wholesale Inventories -0.5% (Briefing.com consensus -0.5%); Prior -0.2%