Trump Plans to Enact 25% Tariffs on Mexico, Canada by Feb. 1
President Donald Trump said he planned to impose previously threatened tariffs of as much as 25% on Mexico and Canada by Feb. 1, reiterating his contention that America’s two immediate neighbors are letting undocumented migrants and drugs flood into the country.
“We’re thinking in terms of 25% on Mexico and Canada, because they’re allowing vast numbers of people” into the US, Trump said in response to questions from reporters in the Oval Office on Monday night. “I think we’ll do it Feb. 1.”
Trump’s plans for tariffs on two nations vital for US energy and auto imports threatens to set off a trade war among the signatories of the US-Mexico-Canada Agreement, the successor to Nafta negotiated at Trump’s insistence during his first term. The pact governed the flow of $1.8 trillion in goods and services trade, based on 2022 data. (…)
There was some relief in Chinese markets as Trump fell short of announcing immediate levies against the world’s second-largest economy. (…)
Tariffs of the magnitude that Trump is proposing on the US neighbors would spell “disaster” for the US auto industry and Detroit’s carmakers, each of which import a significant number of vehicles from Canada and Mexico, Bernstein analysts said in a November research note. Stellantis NV imports about 40% of the vehicles they sell in the US, while General Motors Co. imports roughly 30% and Ford Motor Co. 25%, they said at the time.
The additional levies would hit about $97 billion worth of auto parts and 4 million finished vehicles that come into the US from those countries, and could boost average new-car prices by about $3,000, according to Wolfe Research.
Trump also indicated he was still considering a universal tariff on all foreign imports to the US, but said he was “not ready for that yet.”
“You’d put a universal tariff on anybody doing business in the United States, because they’re coming in and they’re stealing our wealth,” he said, adding that implementation could be “rapid.” (…)
Other orders:
- Trump plans to direct federal agencies to analyze federal trade practices and policies with China and North American allies, saying that he isn’t ready to move ahead with universal tariffs on goods from around the world. Trump also hinted there still could be tariffs coming on China and elsewhere. He threatened an at least 100% tariff on BRICS nations, which includes China, Russia, Indonesia and Iran. (WSJ)
- Inflation Emergency: Trump directed departments and agencies “to deliver emergency price relief,” including the cost and supply of housing, lowering health care expenses and eliminate climate policies that drive up energy prices.
- Energy & Climate: The president signed orders withdrawing from the Paris climate accord and revoked several executive orders related to the previous administration’s efforts to fight climate change. Trump also declared a national energy emergency–an action that will enable the federal government to slash permitting requirements for energy projects, fast-track power-plant construction and loosen curbs on fossil-fuel exports. Trump plans to open up more areas to oil and gas exploration, including offshore and in Alaska. “We will drill, baby, drill,” he said in his speech. Trump also said he plans to refill the US Strategic Petroleum Reserve “right to the top” and “export American energy, all over the world.”
- Electric Vehicle Mandate: Trump signed an order to eliminate what he’s called the “electric vehicle mandate” in part by terminating subsidies for the vehicles and terminating state emissions waivers “that function to limit sales of gasoline-powered automobiles.”
(…) The silence on China, so far, signals that Trump wants a deal, maybe even a Plaza Accord II, that encompasses Xi Jinping, and he’s using tariffs as a tool to bring others to the negotiating table. His bid to be the savior of TikTok sets him apart from China hawks. This is much better than many had feared. And as Chinese tariffs could upset the markets badly, deferring them makes sense until Trump can offer some certainty that his far more market-friendly tax cuts have survived what will inevitably be a drawn-out horse-trade with Congress. Day One might then be a well-camouflaged attempt to leave room for negotiations wide open, both with the legislative branch and with trading partners.
That, at least, was what I was planning to write before Trump was asked about Mexico and Canada. It’s harder to sustain that argument now. Whatever one thinks of Trump’s trade policies — he has a mandate for tariffs, but it seems crazy to start with friendly neighbors rather than China — this undisciplined approach to releasing information makes planning impossible and more or less guarantees volatility. Markets, executives, and foreign governments alike will all feel a similar frustration that this is to be their lot for another four years.
Many things have changed since Trump 1.0. The lack of message discipline isn’t one of them. (…)
US Industrial Output Tops Forecasts as Manufacturing Stabilizes
US industrial production rose in December by more than forecast, helped by a pickup in factory output that indicates manufacturing is stabilizing after two years of weakness.
The 0.9% increase in production at factories, mines and utilities was the largest since February and followed an upwardly revised 0.2% advance a month earlier, Federal Reserve data showed Friday. The December gain exceeded all projections in a Bloomberg survey of economists.
Manufacturing output rose 0.6%, the most since August and helped in part by the resolution of a strike at Boeing Co., after a stronger November increase than initially reported. Production of consumer goods and construction supplies also picked up. (…)
Manufacturing, which accounts for three-fourths of total industrial production, struggled last year as many companies limited capital spending amid high borrowing costs and inconsistent demand. Factory output declined 0.5% for a second year, the first back-to-back decrease since 2019-2020.
The pickup in December factory output reflected a 6.3% surge in production of aerospace equipment, the largest gain since May 2020, as well as a rise in metals. Output of non-durable goods jumped 0.7% on a broad advance that included increased production of apparel, petroleum and chemicals. (…)
Two consecutive strong manufacturing months, +6.3% annualized! Ed Yardeni suggests that the rolling recovery may now include manufacturing. I mentioned that possibility last November with two “what ifs” segments discussing manufacturing and vehicle demand.
With only housing lagging, the U.S. is getting close to full throttle amid a “still meaningfully restrictive policy” per Mr. Powell last December 18.
Speaking of housing, total starts jumped 15.8% MoM in December (consensus was +3.0%!). Apartment buildings were particularly strong, up 58.9% while the single-family component rose 3.3%. Permits were not strong however.
That contractors/investors would still be willing to build more rental units must say something about the rental supply/demand equation.
CPI-Rent growth rate has slowed from +0.42% last July (strongest MoM rise in 2024) to +0.29% in November contributing to the better inflation numbers recently. CPI-Rent growth is now back in line with the Zillow measure of new-rents which has been accelerating from its 2024 low of +0.17% in May to +0.32% in November.
One could hope that both series have reached cruising speed in the 3-4% annualized growth range like pre-pandemic but there is still a large 9-12% gap between new and existing rents:
The reality is that buying a house remains very challenging financially for most Americans who now need to earn $117,000 a year to afford a median-priced U.S. home, $33,000 more than the median household income in the U.S. of around $84,000.
Data: Redfin. Chart: Axios Visuals
A mid-2024 survey by John Burns Research and Consulting revealed that 36% of BTR (Built-To-Rent) residents (of all age groups) said they prefer renting their homes, up from 27% in 2023. The percentage of residents who plan to purchase a single-family home has dropped 7 percentage points since 2023, down from 63% to 56%.
Nearly half (47%) of residents said mortgage rates would need to drop before they could buy, compared to 40% who said they needed to save for a down payment. These responses are no surprise, given that purchasing a starter home costs $1,091 more per month than renting one, on average.
BLS data show CPI-Rent up 5.1% in 2024 (+4.3% YoY in December), this during a year when total new supply of apartments almost doubled to 800k units. Together with new privately owned units completed, the 974k new supply was still short of the estimated 1.2M new households.
Completions are set to decline in 2025-26 given that both starts and permits have declined back to their pre-pandemic levels. Housing is not about to start contributing to GDP growth. On the other hand, rental costs are still pressured by demand exceeding supply.
EU, Mexico Secure New Trade Deal as Trump Presidency Looms Mexico Is European Union’s second-largest trading partner in Latin America
The agreement, which still needs to be approved by governments on both sides, would see Mexico scrap the high tariffs it imposes on EU goods such as cheese and wine. The deal seeks to increase European exports in areas such as financial services and e-commerce, strengthen the supply chain of critical raw materials and encourage EU investment in Mexico. It will also give EU companies access to Mexican government contracts and vice versa.
“The EU and Mexico are already trusted partners. Now, we want to deepen our cooperation even further, strongly benefiting our people and economies,” Ursula von der Leyen, the president of the European Commission, said on Friday. She added that exporters such as farmers and agri-food companies will benefit from new business opportunities under the agreement.
“This landmark deal proves that open, rules-based trade can deliver for our prosperity and economic security, as well as climate action and sustainable development,” she said. (…)
A swath of goods will become duty-free under the new deal, notably in the agriculture and food sector. The agreement also has provisions to safeguard geographical indications, a legal protection granted on products such as Parma ham and champagne.
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Mexico Plans Nearshoring Incentives to Curb China Imports Government unveils plan to strengthen North America trade
Mexico’s President Claudia Sheinbaum announced a plan to reduce the country’s imports from China in a bid to support local industry and align herself with the US and Canada as a trade partners.
Amid a shrinking share of North American exports to the world, Sheinbaum stated that Mexico would offer incentives for nearshoring, including tax deductions, and develop plans for individual sectors for how to increase the local content of goods made in Mexico. (…)
Sheinbaum said the US-Mexico-Canada trade agreement, known as USMCA, is the best way to compete commercially with China. She expressed confidence that the deal, which is scheduled to be reviewed in 2026, will continue despite the tariff threats by incoming US President Donald Trump. (…)
As a way to promote nearshoring, as the boom of factories moving to Mexico to be closer to the US market is known, Sheinbaum’s government will announce tax deductions for local and foreign companies. These deductions, which will be higher for technology, research and development, will remain in place until October 2030. (…)
As part of that plan, Mexico wants to by 2030 increase the percentage of Mexico-made components in each vehicle to 15%. (…)
The 2024 Kearney’s Reshoring Index report found American, Canadian, and Mexican nearshored and reshored industrial production efforts continuing to take market share away from manufacturers in LCCRs—including mainland China.
US imports from 14 Asian LCCRs declined by $143 billion, from $1,021 billion in 2022 to $878 billion in 2023. The majority of the drop in Asian LCCR imports was caused by a 20 percent (or $105 billion) reduction in Chinese imports.
The US isn’t importing as much as it has from mainland China, but that doesn’t mean mainland Chinese manufacturers are standing still. Chinese companies are still very much in the US import game. The KRI saw a correlation between increasing US imports from Asian LCCRs, excluding mainland China, and the imports these countries have from mainland China. (…)
Last year, for the first time since our inaugural KRI, Mexico surpassed mainland China as the largest exporter to the US. US imports of Mexican manufacturing goods grew from $320 billion to $422 billion (32 percent) since pre-COVID days.
But US companies and consumers are starting to truly “buy American,” as shown by our US self-sufficiency index (SSI). The SSI gradually declined from 2013 to 2020 but started flipping modestly in 2021 and increased by 5 percent between 2022 and 2023. (…)
Thirty-eight percent of manufacturing executives responding are looking to continue to reshore or nearshore operations from mainland China, while another 25 percent are discussing moving operations away from India, and 14 percent are thinking about exiting Vietnam. (…)
From Americas Quarterly:
The trade relationship between Mexico and China has experienced unprecedented growth. Over the last five years, Chinese exports to Mexico have increased by an annualized rate of 10.6%. (…)
Mexico’s industrial parks have become hubs for Chinese firms, including state-owned enterprises (SOEs). Over the past three years, the number of Chinese companies in these parks has doubled, particularly in sectors hit by U.S. tariffs, such as automotive, electronics, and consumer goods. Notably, Hofusan Industrial Park located in the bordering state of Nuevo León, hosts over 30 Chinese companies. (…)
In 2023, Chinese firms announced $2.72 billion in automotive investments, making up 72% of all Chinese FDI in Mexico that year. This increase is mainly driven by parts manufacturers, such as ZC Rubber, which unveiled a $600 million investment in 2024. Chinese automotive groups are investing over $1 billion at Alianza Industrial Park in Coahuila, 250 km from the U.S. border. In September, the Chinese electric car maker BYD denied reports of pausing plans for a Mexican plant. (…)
Chinese automakers have established a strong foothold in the Mexican market, accounting for one-fifth of new cars sold in the country last year, a sharp rise from just 4% in 2020, in a market where 36 brands compete for the consumer’s favor. In 2023, Mexico became the second-largest importer of Chinese vehicles globally, trailing only Russia. (…)
Rhodium Group’s analysis suggests that Chinese direct investment could be over six times higher than reported by Mexican and Chinese authorities. Many investments are channeled through offshore hubs like Hong Kong, further complicating transparency. (…)
From China Briefing:
Mexico’s second-largest trading partner, while Mexico’s position as a key North American gateway provides Chinese businesses with strategic access to the US market. Chinese firms are increasingly investing in Mexican industries, with many tech and manufacturing companies setting up operations to leverage Mexico’s favorable labor costs, developed infrastructure, and extensive network of trade agreements. (…)
With over 44 trade deals in place and strong ties to the US economy, Mexico offers Chinese businesses unique opportunities to access North American and Latin American markets. (…)
China’s top exports to Mexico included electrical and electronic equipment (US$22.33 billion), machinery (US$13.67 billion), and vehicles (US$10.17 billion), reflecting Mexico’s reliance on China for industrial and automotive imports. Plastics (US$3.14 billion) and furniture, lighting, and prefabricated buildings (US$2.23 billion) were also significant. (…)
In compliance with the US-Mexico-Canada Agreement (USMCA), Mexican authorities have increased scrutiny of Chinese imports. For example, in August 2024, Mexico’s tax authority seized more than 1.4 million Chinese goods due to documentation issues, part of broader efforts to curb tax evasion and smuggling through stricter import regulations.
The US has also advocated for strict USMCA standards on “melt-and-pour” steel, mandating that steel entering the US through Mexico must be produced within North America to avoid tariffs. This policy places additional restrictions on Chinese metals and complicates trade for Chinese exporters hoping to access the U.S. market via Mexico.
Automotive trade is another key area of tension. There have been growing calls for new tariffs and regulations on Chinese-made vehicles assembled in Mexico, underscoring US efforts to limit China’s role in North America’s EV market. (…)
However, concrete evidence of a large-scale reshoring trend from China to Mexico remains limited. Reports indicate that while some companies have moved operations out of China, the numbers are still largely anecdotal. Many businesses continue to recognize China’s advantages, including its robust manufacturing infrastructure, skilled labor force, and extensive supply chains. For industries relying on high-tech manufacturing, China’s well-developed capabilities in automation and data-driven production provide unique efficiencies that can be difficult to replicate elsewhere. Additionally, China’s massive consumer base remains an attractive market in itself, with many companies choosing to establish operations specifically to serve local demand.
For companies serving markets outside of the Americas, Mexico’s geographic and market advantages are less compelling compared to alternatives in Asia, like Vietnam or Indonesia, where labor costs are even lower. Instead of fully relocating, many companies are adopting a “China+1” strategy, diversifying supply chains by supplementing Chinese operations with facilities in other low-cost regions. This approach allows businesses to maintain the advantages of China’s manufacturing ecosystem while mitigating risks associated with geopolitical tensions and rising costs. (…)
China’s Growth Surprises to the Upside
China’s gross domestic product grew 5.4% YoY in Q4’24, topping the expectation of 5% and the preceding period’s 4.6% pace. Full year 2024: +5.0%, right on target!
Sequentially, GDP jumped 6.6% QoQ in Q4 following +5.3% in Q3 and +3.6% in Q2.
Goldman Sachs says several “temporary factors” account for the acceleration:
First, heat waves and heavy rainfalls disrupted certain activity in July and August, and the daily traffic congestion data showed meaningful declines in the summer. Even before the abrupt policy turn at the September Politburo meeting, some economic measures were already showing signs of recovery as weather-related disruptions abated.
Second, both company comments in the November Caixin manufacturing PMI and the stronger-than-expected December exports point to exporters front-loading shipments ahead of potential US tariffs. Export front-loading boosts production in the near term but reduces exports and production in the future.
Third, this year’s Lunar New Year (LNY) day falls on January 29. The earlier-than-usual LNY caused activity acceleration in December: construction PMI jumped as migrant workers sped up construction before returning home for the long holiday. None of these temporary factors – improved weather conditions, export front-loading, and LNY distortions – should persist.
That said, some of the stimulating measures announced in Q3 and Q4 had an impact: property sales, especially for existing homes in top-tier cities, rose in Q4; the consumer goods subsidized trade-in programs boosted auto (+13%) and home appliance (33%) sales while total retail sales grew only 3.7% YoY in Q4.
Industrial capacity utilization and production growth rate increased from 75.1% and 5.4% to 76.2% and 6.2%.
Source: The Daily Shot
How sustainable?
China’s real estate industry continues to weaken with its House Price Index falling 5.3% YoY (NBS). Unless and until household expectations of future house price growth improves significantly, housing will remain a major headwind.
Goldman thus expects sequential real GDP growth to soften to 4.0% QoQ annualized in Q1, arguing that China’s financial conditions are actually not easing and that consumer demand remains constrained.
EARNINSG WATCH
From LSEG IBES:
42 companies in the S&P 500 Index have reported earnings for Q4 2024. Of these companies, 81.0% reported earnings above analyst expectations and 16.7% reported earnings below analyst expectations. In a typical quarter (since 1994), 67% of companies beat estimates and 20% miss estimates. Over the past four quarters, 78% of companies beat the estimates and 17% missed estimates.
In aggregate, companies are reporting earnings that are 10.6% above estimates, which compares to a long-term (since 1994) average surprise factor of 4.2% and the average surprise factor over the prior four quarters of 6.6%.
Of these companies, 64.3% reported revenue above analyst expectations and 35.7% reported revenue below analyst expectations. In a typical quarter (since 2002), 62% of companies beat estimates and 38% miss estimates. Over the past four quarters, 62% of companies beat the estimates and 38% missed estimates.
In aggregate, companies are reporting revenues that are 1.1% above estimates, which compares to a long-term (since 2002) average surprise factor of 1.3% and the average surprise factor over the prior four quarters of 1.2%.
The estimated earnings growth rate for the S&P 500 for 24Q4 is 10.7%. If the energy sector is excluded, the growth rate improves to 13.9%.
The estimated revenue growth rate for the S&P 500 for 24Q4 is 4.1%. If the energy sector is excluded, the growth rate improves to 4.9%.
The estimated earnings growth rate for the S&P 500 for 25Q1 is 12.0%. If the energy sector is excluded, the growth rate improves to 13.7%.
THIRD YEAR NOT THE CHARM?
The 3rd year of the bull market (which we are now in) tends to be troublesome. This excellent chart maps out the average path of bull markets during the 3rd year. I suspect there’s probably a bit of variation around it, but it does go to show that we’re likely in for a fair amount of range-trading and volatility this year. So embrace the chop? Callum Thomas)
Goldman Sachs explains the recent setback:
The recent S&P 500 decline mirrored almost exactly the typical experience in past episodes of sharply rising interest rates. The S&P 500 declined by 3% between mid-December and this week as rates surged. During the past 20 years, stocks have generally tolerated gradual increases in rates but sold off by an average of 4% when the pace of increases exceeded two standard deviations in a month. Today, a two standard deviation monthly move equates to roughly 60 bp, similar to the magnitude of the increase in rates since early December. While the S&P 500 declined by 3% the Russell 2000 has fallen by 6%.
The current S&P 500 P/E multiple also appears in line with fair value given the current level of interest rates. Our macro valuation model for the S&P 500 takes into account Treasury yields as well as other macro and fundamental variables including inflation and profitability. The S&P 500 multiple declined alongside the rise in yields, and today the S&P 500 22x P/E multiple matches the fair-value multiple implied by our model. Holding all else equal, a 50 bp change in real yields from current levels would shift the S&P 500 fair-value P/E by about 3%.
Persistently higher rates than we expect would affect earnings as well as valuation multiples, but the direct impact of higher rates on S&P 500 EPS should be very small. Increasing the effective borrow cost for the S&P 500 by 50 bp would reduce earnings by 2%, holding all else equal.
However, the borrow costs paid by S&P 500 companies do not move hand in hand with Treasury yields, in large part because most S&P 500 debt is fixed-rate with long maturities. Of the $6.2 trillion of debt currently carried by S&P 500 non-Financials companies, 94% is fixed rate, and 51% matures after 2030. This explains why S&P 500 borrow costs have increased by less than 100 bp (from 3.0% to 3.9%) since their record low in 2022 despite the fact that nominal 10-year Treasury yields have risen by more than 200 bp during that same period.
Equities typically have an easier time digesting rising yields when the changes in interest rates are driven by improving economic growth expectations. Demonstrating this relationship, yields and stocks rose together from September through Election Day, at the same time as the outperformance of cyclical industries reflected an improvement in equity investor economic growth expectations.
Since then, however, our Cyclicals vs. Defensives basket pair has traded sideways, reflecting a stable outlook for economic growth. While this stable outlook has made the increase in yields more difficult for equities to digest, it also indicates little current investor concern about the potential for rising rates to weigh on economic activity.
In that vein, it is interesting that U.S. inflation has behaved very well while the U.S. economy has significantly outperformed all other DM countries. American productivity!
But this 3rd year of the bull market happens to be year 5 of this decennial. 
The decennial cycle says 2025 will be great. The chart below depicts the pattern of the DJIA by decade from 1897 onward, showing the average pattern of all years ending with the same digit. DJIA stocks delivered an exceptionally strong average performance in years ending in the digit “5”. The average gain amounted to 26.8%. This corresponds to more than one third of the entire average 10-year return! However, in years ending in 7, strong slumps frequently occurred.
Dow Jones Industrial Average, 10-year cycle, since 1897
Source: Seasonax
AI CORNER
David’s research findings of recent months are now making it mainstream:
China’s AI keeps getting better — and cheaper
Chinese AI makers have learned to build powerful AI models that perform just short of the U.S.’s most advanced competition while using far less money, chips and power.
American policies restricting the flow of top-end AI semiconductors and know-how to China may have helped maintain a short U.S. lead at the outer reaches of the AI performance curve — but they’ve also accelerated Chinese progress in building high-end AI more efficiently.
In late December, Hangzhou-based DeepSeek released V3, an open-source large language model whose performance on various benchmark tests puts it in the same league as OpenAI’s 4o and Anthropic’s Claude 3.5 Sonnet.
Those are the most advanced AI models these companies currently offer to the broad public, though both OpenAI and Anthropic have next-generation models in their pipeline.
Training V3 cost DeepSeek roughly $5.6 million, according to the company. OpenAI, Google and Anthropic have reportedly spent hundreds of millions of dollars to build and train their current models, and expect to spend billions in the future.
AI pioneer Andrej Karpathy called DeepSeek’s investment “a joke of a budget” and described the result as “a highly impressive display of research and engineering under resource constraints.”
The V3 model was trained on Nvidia H800 chips, a less-powerful version of a chip the U.S. banned for export to China in 2022. Export of the H800 was then prohibited when the U.S. tightened controls again the following year. (…)
FYI: Evergreen Gavekal Quarterly Market Update- January 2025