Trade Policy Uncertainty Maintains a Volatile Market

What We Are Watching This Week

• ISM Manufacturing and Services 
• ADP Employment Report 
• US Jobs Report   

Highlights From Last Week 

• S&P Case-Shiller home price index (20 cities) 
• Consumer confidence 
• PCE index  

US stocks declined sharply, marking the worst week for major indexes since early September. The S&P 500, Nasdaq Composite, S&P MidCap 400, and Russell 2000 each dropped over 3%, while the Dow Jones fell 2.37%, erasing most of its year-to-date gains. Investor sentiment was dampened by ongoing trade policy uncertainty, particularly around tariffs imposed by the Trump administration. Despite exemptions and delays, including a one-month exemption for U.S.-Mexico-Canada Agreement goods, shifting policies contributed to market volatility. 

Canada’s main stock index rebounded from early losses to close higher on Friday as investors analyzed employment data from both Canada and the US. However, the index remained on course for its steepest weekly decline since September 2023. The TSX Composite Index climbed 174.72 points, closing at 24,758.76. Despite the gain, it recorded a weekly loss of nearly 635 points or 2.5%. Meanwhile, the Canadian dollar weakened by 0.38 cents to 69.58 cents US. Throughout the week, market sentiment was rattled by trade uncertainty. On Tuesday, US President Donald Trump’s 25% tariffs on Canadian and Mexican imports were enacted. However, in a sudden policy shift on Thursday, Trump announced a one-month exemption for goods from both countries under a North American trade agreement. On the economic front, Statistics Canada reported that the economy added just 1,100 jobs in February, while the unemployment rate remained steady at 6.6%. 

The STOXX Europe 600 Index declined by 0.69%, ending a 10-week winning streak due to uncertainty over US trade policy. However, expectations of increased defense and infrastructure spending in Germany and the EU helped limit losses. Major European stock indexes showed mixed performance, with Germany’s DAX rising 2.03% and France’s CAC 40 gaining 0.11%, while Italy’s FTSE MIB slipped 0.16% and the UK’s FTSE 100 fell 1.47%. The European Central Bank (ECB) cut its key deposit rate by 0.25 percentage points to 2.5%, signaling a shift to less restrictive monetary policy. ECB President Christine Lagarde highlighted significant uncertainty, including potential trade conflicts with the US. This uncertainty led the ECB to lower its eurozone growth forecast 2025 to 0.9% and raise its inflation projection to 2.3%. Meanwhile, eurozone inflation slowed to 2.4% in January from 2.5% in December, with core inflation falling to 2.6%. 

The U.S. manufacturing sector continued its marginal expansion in February, with the Manufacturing PMI® at 50.3%, slightly down from 50.9% in January. This marks the second consecutive month of growth after 26 months of contraction. 

Key Highlights: 

• Demand weakened: 
  • The New Orders Index fell into contraction (48.6%), down from 55.1% in January.
  • New Export Orders Index remained in expansion but slowed to 51.4%. 
  • The backlog of the Orders Index stayed in contraction but improved to 46.8%. 
  • Customers’ inventory index dropped further, signaling insufficient inventory levels. 

• Production remained stable: 
  • Production Index stood at 50.7%, slightly lower than January’s 52.5%. 
  • Employment Index fell into contraction (47.6%) as companies continued workforce reductions. 

• Supplier and inventory trends: 
  • Supplier Deliveries Index rose to 54.5%, indicating slower deliveries. 
  • Inventories Index improved to 49.9%, approaching expansion territory. 

• Rising costs due to tariffs: 
  • Prices Index surged to 62.4%, reflecting higher commodity prices from tariff concerns. 
  • Tariffs, set to take effect in mid-March, are already causing price increases and order placement slowdowns. 

• Manufacturing GDP impact: 
  • 24% of manufacturing GDP contracted in February, improving from 43% in January. 
  • Four of the six largest manufacturing industries expanded, including Petroleum and coal Products, Food and beverages, Chemical Products, and Transportation Equipment. 

Industry Performance: 

• 10 industries expanded, led by Petroleum & Coal Products, Primary Metals, and Food & Beverages. 

• 5 industries contracted, including Furniture, Textile Mills, and Machinery. 

Overall, manufacturing showed slight growth despite weakening demand and rising costs due to tariff concerns, leading companies to remain cautious in ramping production.¹ 

The February Services PMI® registered 53.5%, up 0.7 percentage points from January, indicating continued expansion in the services sector. Key highlights include: 

• Business Activity Index: There is a slight dip to 54.4% (-0.1 percentage points), but it is still expanding for the 57th consecutive month. 

• New Orders Index: Rose to 52.2% (+0.9 percentage points), showing improved demand. 

• Employment Index: Increased to 53.9% (+1.6 percentage points), marking five months of expansion. 

• Supplier Deliveries Index: Up to 53.4%, indicating slower deliveries, typically linked to rising demand. 

• Prices Index: Jumped to 62.6% (+2.2 percentage points), reflecting higher costs. 

• Inventories Index: Moved into expansion at 50.6% (+3.1 percentage points). 

• Backlog of Orders Index: Rose significantly to 51.7% (+6.9 percentage points), expanding for the first time since July 2024. 

Fourteen industries reported growth, including Finance & Insurance, Health Care, and Construction, while Retail Trade, Educational Services, and Management of Companies contracted. Concerns persist regarding tariffs and federal spending cuts impacting forecasts.² 

In January, new orders for manufactured goods rebounded after two consecutive monthly declines, rising by $9.8 billion or 1.7 percent to $589.9 billion, according to the U.S. Census Bureau. This increase followed a 0.6 percent decrease in December. Shipments, continuing their upward trend for the third month, grew by $2.4 billion or 0.4 percent to $592.1 billion, following a 0.6 percent rise in December. 

Unfilled orders, which have increased in six of the last seven months, rose by $2.7 billion or 0.2 percent to $1,400.6 billion, after a 0.3 percent decline in December. The unfilled orders-to-shipments ratio fell to 6.85 from 6.93 in the previous month. 

Inventories also expanded for the third consecutive month, increasing by $0.8 billion or 0.1 percent to $863.7 billion, following a 0.3 percent gain in December. The inventories-to-shipments ratio remained steady at 1.46.³ 

For the week ending March 1, the seasonally adjusted initial jobless claims totaled 221,000, marking a decline of 21,000 from the previous week’s unchanged figure of 242,000. The four-week moving average increased slightly to 224,250, up by 250 from the prior week’s unrevised average of 224,000. Meanwhile, the total number of continued claims across all benefit programs for the week ending February 15 stood at 2,194,745, reflecting a decrease of 28,985 from the previous week. In comparison, the same week in 2024 saw 2,121,432 claims filed for benefits across all programs.⁴ 

The U.S. trade deficit widened by 34% in the latest report, reaching $131.4 billion, as imports surged 10% to a record $401.2 billion while exports grew only 1.2%. In response to trade imbalances, Trump imposed sweeping tariffs, including 25% on Canadian and Mexican goods and a doubling of tariffs on Chinese imports to 20%, prompting immediate retaliatory measures from Canada and China, with Mexico set to respond soon. Trump granted automakers a temporary one-month tariff exemption, but Canadian Prime Minister Trudeau remains firm on maintaining countermeasures if any U.S. tariffs persist. Meanwhile, Canada’s trade surplus with the U.S. hit a record high, driven by auto and oil exports. The Trump administration views tariffs as a tool to address perceived unfair trade practices, boost domestic production, and enhance national security.⁵ 

In February, total nonfarm payroll employment increased by 151,000, while the unemployment rate remained relatively unchanged at 4.1%, with 7.1 million unemployed individuals. Job gains were observed in health care, financial activities, transportation and warehousing, and social assistance, while federal government employment declined. 

Household Survey Highlights: 

• Unemployment Rate: Held steady at 4.1%, within the 4.0%–4.2% range since May 2024. 

• Long-term Unemployment: 1.5 million individuals remained unemployed for 27+ weeks, comprising 20.9% of the unemployed. 

• Labor Participation: The employment-population ratio fell slightly to 59.9%, while the labor force participation rate remained at 62.4%. 

• Part-time Employment: Increased by 460,000 to 4.9 million due to economic reasons. 

• Marginally Attached Workers: 1.7 million people wanted jobs but were not actively seeking employment. The number of discouraged workers fell to 464,000. 

Establishment Survey Highlights: 

• Health Care: Added 52,000 jobs, led by ambulatory services (+26,000) and hospitals (+15,000). 

• Financial Activities: Increased by 21,000, with real estate and insurance leading gains. Commercial banking lost 5,000 jobs. 

• Transportation & Warehousing: Rose by 18,000, driven by couriers and messengers (+24,000). 

• Social Assistance: Added 11,000 jobs, mostly in individual and family services (+10,000). 

• Federal Government: Declined by 10,000 jobs. 

• Retail Trade: Declined by 6,000, with food and beverage retailers losing 15,000 jobs (partly due to strikes). 

Earnings & Work Hours: 

• Wages: Average hourly earnings rose by $0.10 (+0.3%) to $35.93 (4.0% increase YoY). 

• Workweek: Unchanged at 34.1 hours, with manufacturing overtime edging up to 2.9 hours. 

Revisions: 

• December employment revised up by 16,000 to +323,000. 

• January employment revised down by 18,000 to +125,000. 

• Net downward revision of 2,000 jobs over December and January. 

Overall, job growth remained steady but slowed compared to the previous year’s average. Wage growth continued, while labor force participation showed little change.⁶ 

Next Week: Tariff developments and geopolitical tensions are set to dominate the news, but key economic data will also be closely analyzed for their impact on recent US policy shifts. The US CPI report is expected to slightly moderate core and headline inflation. However, concerns persist that tariffs are pushing costs higher, as indicated by ISM and S&P Global surveys. US producer price data will be scrutinized for further tariff effects. 

The Bank of Canada is anticipated to cut interest rates to support an economy already impacted by US tariffs. Sentiment data, including US consumer inflation expectations and the University of Michigan consumer sentiment index, will provide insights into household confidence amid policy shifts. The S&P Global Business Outlook Survey will gauge global business sentiment, particularly regarding investment and hiring, while the Investment Manager Index (IMI) will shed light on investor risk appetite. 

In the UK, monthly GDP data is expected to confirm weak economic growth, with recruitment industry surveys offering additional insights into labor market trends. 

1. https://www.ismworld.org/supply-management-news-and-reports/reports/ism-report-on-business/pmi/february/ 
2. https://www.ismworld.org/supply-management-news-and-reports/reports/ism-report-on-business/services/february/ 
3. https://www.census.gov/manufacturing/m3/current/index.html 
4. https://www.dol.gov/ui/data.pdf 
5. https://www.bea.gov/news/2025/us-international-trade-goods-and-services-january-2025 
6. https://www.bls.gov/news.release/empsit.nr0.htm 

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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