MARKET UPDATE: Stocks Drop as Tariff Concerns Weigh on Markets

What We Are Watching This Week 

• US Consumer Price Index
• US Producer Price Index
• US Retail Sales

Highlights From Last Week 

• ISM Manufacturing and Services
• Job Openings
• ADP Employment Report
• US employment Report

Major indexes declined during the week, with the S&P 500 showing resilience, slipping just 0.24%. Stocks dropped sharply after President Donald Trump announced 25% tariffs on imports from Mexico and Canada and 10% on Chinese imports, effective February 1. However, Trump’s decision to postpone the Mexico and Canada tariffs by 30 days helped stocks recover some losses by the week’s end. Earnings reports also influenced market sentiment, with 77% of S&P 500 companies reporting fourth-quarter results that beat expectations. Earnings growth averaged 16.4%, surpassing the 11.9% forecast, while 63% of companies exceeded sales estimates.

Toronto markets ended a challenging week in the red on Friday, with losses spread across nearly all sectors. The TSX dropped 91.58 points, closing at 25,442.91. Over the past five sessions, the index slipped by just over 90 points or 0.35%. The Canadian dollar increased by 0.08 cents to 69.97 cents US. Meanwhile, Statistics Canada revealed that employment rose by 76,000 (+0.4%) in January, bringing the unemployment rate down by 0.1 percentage points to 6.6%.

The pan-European STOXX Europe 600 Index rose 0.60%, nearing a record high despite concerns over US trade policy and slowing economic growth. Italy’s FTSE MIB led gains with a 1.60% increase, followed by Germany’s DAX (+0.25%), France’s CAC 40 (+0.29%), and the UK’s FTSE 100 (+0.31%).

The Bank of England (BoE) cut its benchmark interest rate by 0.25% to 4.5%, marking its third cut since August. The decision, approved by a 7–2 vote, reflected efforts to curb inflation amid a sharper-than-expected economic slowdown. The BoE halved its UK growth forecast for 2025 to 0.75% and projected inflation to remain above target until 2027. Governor Andrew Bailey indicated that further rate cuts could be considered depending on future economic conditions.

The January Manufacturing ISM report highlighted US factory activity expanding for the first time in 27 months, but this news was overshadowed by concerns over announced tariffs on products from key trading partners—Canada, Mexico, and China. Industry participants, led by ISM Chair Timothy R. Fiore, expressed worries about how tariffs could disrupt supply chains and increase costs.

Key data included:

• PMI revised: Due to seasonal factors, March 2024’s PMI was adjusted from 50.3% to 49.8%.
• New Orders Index: Increased to 55.1%, the highest since May 2022.
• Production Index: Rose to 52.5%, signaling expansion after nine months of contraction.
• Employment Index: Reached 50.3%, ending seven months of job reductions.

Two areas of concern emerged:

1. Inventories Index: Fell 2.5 percentage points to 45.9%, reflecting difficulties balancing supply and demand.
2. Prices Index: Increased to 54.9%, suggesting potential price pressures as demand increases.

Fiore noted that January saw price pressures despite relatively weak demand, and the Supplier Deliveries Index (50.9%) did not align with the increased purchasing activity.¹

The US Bureau of Labor Statistics reported a decrease in job openings to 7.6 million (-556,000) at the end of December, reflecting a decline of 1.3 million over the year. The job openings rate dropped to 4.5%, with significant decreases in professional and business services (-225,000), health care and social assistance (-180,000), and finance and insurance (-136,000). Job openings increased in arts, entertainment, and recreation (+65,000).

Hires: The number of hires remained steady at 5.5 million but was down by 325,000 year-over-year. The hires rate stayed at 3.4%, with notable increases in finance and insurance (+48,000).

Separations: Total separations (quits, layoffs, and other separations) were unchanged at 5.3 million, with the rate stable at 3.3%. Quits, which measure voluntary employee departures, remained at 3.2 million, with a year-over-year decline 242,000. The quits rate was 2.0%, with notable decreases in transportation, warehousing, and utilities (-42,000).²

In January 2025, as surveyed by ADP in the US, private businesses added 183K jobs, surpassing December 2024’s revised 176K and forecasts of 150K. The service-producing sector led the gains with 190K new jobs, driven by trade/transportation/utilities (56K) and leisure/hospitality (54K). Other key contributors included education/health services (20K), information (18K), professional/business services (14K), and financial activities (13K). In contrast, the goods-producing sector lost 6K jobs due to a decline in manufacturing (-13K), partially offset by gains in natural resources/mining (4K) and construction (3K). Chief Economist Nela Richardson noted the labor market’s split performance, with strong consumer-facing hiring but weaker growth in business services and production. Annual pay growth stood at 4.7% for job stayers and 6.8% for job changers.³

The January Services ISM Report On Business revealed a post-holiday slowdown in the US services sector, with the Services PMI registering 52.8%, missing expectations. While all key subindexes (Business Activity, New Orders, Employment, and Supplier Deliveries) remained in expansion, the reading was the lowest for January since 2010. Notably, 14 of 18 industries reported growth, up from nine in December, signaling moderate but cautious momentum.

Key highlights include:

• Employment: The Employment Index improved to 52.3%, supported by ADP data showing 183,000 private sector jobs added in January.
• Business Activity & New Orders: The Business Activity Index dropped to 54.5%, while New Orders slowed further to 51.3%, indicating cautious demand.
• Prices & Supplier Pricing: After December’s spike, the Prices Index cooled to 60.4%, with suppliers possibly locking in higher prices amid tariff uncertainty.
• Inventories & Backlog: The Inventories Index remained in contraction at 47.5%, and backlogs decreased, reflecting potential concerns about the business pipeline.

Analysts suggested factors such as inflation hesitancy, slow demand, and tariff uncertainty could contribute to the lull. The February data is anticipated to provide more precise insights, with the moderate growth offering cautious optimism.⁴

Initial jobless claims for the week ending February 1 rose to 219,000, up 11,000 from the previous week’s revised 208,000. The 4-week moving average also increased by 4,000 to 216,750. Continued claims for all programs decreased by 76,031 to 2,196,784 for the week ending January 18, compared to 2,212,478 during the same week in 2024.⁵

In January, nonfarm payrolls increased by 143,000, significantly down from 307,000 in December and below the 169,000 forecast. The unemployment rate dipped to 4%, with labor force participation rising to 62.6%.

Job growth was primarily seen in:

• Health care (+44,000)
• Retail (+34,000)
• Government (+32,000)

Meanwhile, wages rose sharply, with average hourly earnings up 0.5% for the month and 4.1% year-over-year—beating estimates of 0.3% and 3.7% respectively.

The Bureau of Labor Statistics (BLS) introduced substantial revisions to 2024 data, reducing the prior job count by 589,000 through March. However, the number of those reporting employment surged by 2.23 million due to adjustments for population and immigration.

Despite weaker job growth in January, revisions to November (+261,000) and December (+307,000) resulted in a net 100,000 increase in payrolls for those months. Broader unemployment measures, including discouraged and part-time workers, held steady at 7.5%.

Federal Reserve officials are closely monitoring this data as they assess future rate changes, with markets predicting no immediate rate cuts until mid-2025. Although some concerns were raised about the impact of the California wildfires, the BLS confirmed no significant effect on job counts.

This report also serves as the first under President Donald Trump’s administration as it navigates fiscal policies aimed at growth and trade reforms.⁶

Consumer sentiment declined for the second consecutive month, falling 5% to its lowest level since July 2024. The decline was widespread across political affiliations, age groups, and income levels. All five components of the sentiment index weakened, with a notable 12% drop in buying conditions for durable goods, partly driven by concerns over the impact of tariff policies. Expectations for personal finances fell 6%, hitting their lowest point since October 2023, as many consumers worry about a resurgence of high inflation within the next year.

Year-ahead inflation expectations surged from 3.3% to 4.3%, the highest since November 2023, marking two consecutive months of significant increases. This is only the fifth time in 14 years that year-ahead inflation expectations have risen by at least one percentage point in a month. Long-run inflation expectations also increased slightly to 3.3%, remaining elevated compared to the 2.2-2.6% range before the pandemic.⁷

	Feb 2025	Jan 2025	Feb 2024	M-M Change	Y-Y Change
Index of Consumer Sentiment	67.8	71.1	76.9	-4.6%	-11.8%
Current Economic Conditions	68.7	74.0	79.4	-7.2%	-13.5%
Index of Consumer Expectations	67.3	69.3	75.2	-2.9%	-10.5%

Next week, the highlight US economic data will be CPI, estimated to be 0.3%, falling 0.1% from the previous reading, and year over year at 2.8% from the previous 2.9%. On Thursday, the Producer Price index is estimated to increase from 0.1% to 0.3%, compared to the last reading of 0.3%. The latest inflation data reveals a key divergence: if the CPI falls by 0.1%, indicating lower consumer prices due to factors like weakening demand, lower energy costs, or seasonal effects, offering short-term relief to households. Meanwhile, if the PPI rises by 0.1%, reflecting higher production costs driven by rising input prices, labor, or supply chain issues. This suggests potential future inflation if businesses pass these costs to consumers. For now, many firms may be absorbing the costs to remain competitive. Analysts are closely watching whether this CPI decline is temporary and if rising PPI will eventually lead to inflation, influencing central banks’ policy decisions.

On Friday, U.S. retail sales are projected to decline by 0.4% from the previous reading, bringing monthly growth to 0.0%. Flat retail sales could indicate anything from a short-term pause in consumer activity to a potential warning of slowing demand, with significant implications for future economic growth and central bank policy, depending on whether the trend persists.

	WK	Year to Date
Dow	-0.54%	4.13%
S&P500	-0.19%	2.45%
Nasdaq	-0.35%	1.10%
S&P400 Mid-cap	-1.00%	2.74%
Russell	-0.35%	2.22%
TSX	0.40%	2.90%
Oil	-2.10%	-1.00%

1. https://www.ismworld.org/supply-management-news-and-reports/news-publications/inside-supply-management-magazine/blog/2025/2025-02/report-on-business-roundup-january-2025-manufacturing-pmi/
2. https://www.bls.gov/news.release/jolts.nr0.htm
3. https://adp-ri-nrip-static.adp.com/artifacts/us_ner/20250205/ADP_NATIONAL_EMPLOYMENT_REPORT_Press_Release_2025_01%20FINAL.pdf
4. https://www.ismworld.org/supply-management-news-and-reports/news-publications/inside-supply-management-magazine/blog/2025/2025-02/report-on-business-roundup-january-2025-services-pmi/
5. https://www.dol.gov/ui/data.pdf
6. https://www.bls.gov/news.release/archives/empsit_02072025.htm
7. http://www.sca.isr.umich.edu/

Important Information:

Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.

Sightline Wealth Management LP (“Sightline”) is an investment dealer and is a member of the Canadian Industry Regulation Organization (CIRO) and the Canadian Investor Protection Fund (CIPF).

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