Tariffs on $30 billion worth of US goods are set to come into force on Tuesday, impacting a broad range of products including health and cosmetic items, domestic appliances, pulp and paper, household goods, plastics, and tires. Analysts warn that these tariffs may push the Personal Consumption Expenditures (PCE) inflation in the United States to exceed 3%, prompting concerns over rising costs for consumers and potential impacts on the economy. As markets brace for the consequences, a swift sell-off in stocks is anticipated at the start of this week, as investors evaluate the implications of President Trump's tariff strategy on corporate margins and global economic prospects.
President Trump has indicated that the European Union could be next in line for tariffs, a move that has already elicited a stern response from Brussels, which vowed to "respond firmly" if such measures are enacted against EU goods. This escalation in trade tensions echoes the events of 2018, when similar tariffs on steel and other primary imports led to a decline in global profit margins. With the current aggregate blended net profit margin of the S&P 500 standing at 12.1%, higher than a year ago and surpassing the five-year average, analysts are concerned that future earnings reports may face downgrades if a trade war becomes reality.
The financial landscape is also witnessing shifts with expectations for interest rate cuts. Currently, three rate cuts are priced in by the market for 2025, with one potential cut anticipated this Thursday. The labor market is under scrutiny as well, with economists predicting a reading of 170,000 for non-farm payrolls (NFPs) last month, a decrease from December's 256,000. The anticipated total number of payrolls for 2024 is expected to be reduced by over 700,000. Despite these changes, the unemployment rate is projected to remain steady at 4.1%, while average weekly pay growth may see a slight moderation to 3.8% from 3.9% in December.
As the US prepares to release its non-farm payrolls, unemployment rate, and wage data for January at 1330 GMT, market participants are closely monitoring these indicators for insights into economic health. In the UK, although there is no immediate threat of tariffs, the FTSE 100 is signaling a 0.8% decline at the week's start, reflecting broader market apprehensions.
The introduction of these tariffs was well signaled, yet their actual enforcement and the prospect of retaliatory tariffs signify a significant turning point in international trade relations. Analysts remain cautiously optimistic about net profit margins improving through mid-2025; however, the likelihood of a trade war casts uncertainty over these projections.