Will Tariffs Bark or Bite? BOE Cuts…

Market Overview

It was a rollercoaster week for global markets as investors, market commentators, institutional money managers, governments, and everyone involved in finance tried to work out Trump’s strategy on Tariffs. Is it bark or bite time?

We should not be surprised; he published the Art of the Deal, which lays out a strategy of negotiation through uncertainty, keeping opponents guessing and using unpredictability as leverage. I suspect he envisages that this will be an ongoing strategy, keeping his ‘opponents’ on edge in perpetuity. Still, I suspect the financial markets will eventually tire of the constant uncertainty.

They didn’t like it on Friday, as we heard that Europe, Japan, and the rest of the world had come onto his radar. He plans to announce reciprocal tariffs on ‘many’ countries by Monday or Tuesday this coming week. This salvo being the next major escalation of his offensive to tear up and reshape global trade relationships in the America’s favour.

But for now, it does look as if this approach will continue as Trump is surrounded by ‘yes men’, but it’s not just markets that don’t like it. Central banks, governments, and business owners will find this increasingly unacceptable, but they are forced to tolerate it for the moment. Will the very voters that put him in office be so generous? I don’t think so, and we got the first clue that all may not be well in that regard on Friday. Consumers are rattled, and the latest University of Michigan survey confirms it. Short-term inflation expectations jumped to 4.3%, the highest since 2023, as Trump’s tariff brinkmanship stoked fears of price pass-throughs.

Confidence has taken a big hit, with the headline index dropping to 67.8, down 4.6% in a month and nearly 12% year-on-year. The pessimism cuts across all demographics, reinforcing that inflation is still front and centre for households. While longer-term inflation expectations increased slightly to 3.3%, the near-term outlook is shaking markets. The Dow Jones dropped nearly 300 points on the report, reflecting concerns that stubborn inflation, high credit costs, and tariff-driven price hikes could tighten household budgets. Trump may love tariffs as a negotiation tool, but the inflationary fallout is already weighing on sentiment. The key question? Whether the White House holds firm or backs off if this pessimism starts showing up in spending data. One interesting development has also been a decline in the number of ‘bullish’ individual investors, which surprised me, with more now in the bear camp. Typically, this is quite a helpful contrarian indicator that actually suggests that markets have room to move higher…

Jobs

In the United States, we got the Non-Farm Payrolls data, which was confusing. On the one hand, it seemed that job growth slowed in January, increasing by a (less than expected) 143,000, and annual revisions indicated that this had averaged 166,000 a month last year, lower than the previously reported 186,000.

And yet unemployment came in lower than expected at 4%, possibly through a decline in those now participating in the search for jobs. Regardless of semantics, it paints the right picture for the US economy: job growth is still healthy and not too inflationary, and unemployment is very acceptable. Ergo, in my mind, the Fed has probably got rates about right for the moment; why Trump wants to play with Tariffs right now is beyond me; he has inherited an economy in great shape. Even the US ISM Manufacturing index has popped back above 50, suggesting it is growing for the first time in a long time.

Earnings

Tech first – whilst the giants have delivered strong bottom-line results, worryingly, top-line growth and forward guidance have not been as good as investors would have hoped for. The earnings come from cost-cutting and listening to the CEOs; they are mostly still intent on ploughing billions into the AI dream. Given their lofty valuations, we are starting to see investors questioning the elevated valuations of the Mag 7, and without them doing the heavy lifting, the market (S&P 500 Cap weighted) might struggle to break higher. Nvidia has yet to report, but here is a summary of what we got from the rest:

• Apple (AAPL): EPS beat expectations, but revenue declined 2% YoY, weighed down by weaker iPhone sales in China. Guidance pointed to continued pressure in key markets.
• Microsoft (MSFT): Cloud growth slowed slightly, but EPS beat estimates thanks to cost efficiencies. AI-driven demand remains strong, though Azure growth is decelerating.
• Amazon (AMZN): EPS was a solid beat, but cloud (AWS) revenue growth slowed to its weakest pace yet, signalling potential enterprise spending fatigue.
• Alphabet (GOOGL): EPS exceeded forecasts, but YouTube and ad revenue came in lighter than expected. Cloud growth was solid, but overall revenue missed estimates, raising concerns.
• Meta (META): Strong EPS beat, fuelled by cost-cutting and AI-driven ad improvements. However, the company warned of slowing ad spending in 2025, worrying investors.
• Tesla (TSLA): Revenue missed expectations amid softening EV demand, particularly in China. Margins were squeezed as price cuts weighed on profitability.

Given that we have gone past halfway through this earnings season (62% have reported) overall, there is still plenty of good news, with 77% of companies beating EPS estimates. The blended earnings growth rate has climbed to 16.4%, making it the best year-over-year performance since late 2021. Financials, Communication Services, and Consumer Discretionary have led the gains, while Energy remains a drag. However, revenue growth has been more muted, with just 63% of companies exceeding estimates, falling below historical averages. The blended revenue growth rate is 5.2%, an improvement from quarter-end but still lags expectations. Health Care and IT are driving top-line gains, while Industrials and Materials are seeing declines. Analysts expect solid earnings momentum to continue into 2025, with forecasts of 8.7% and 10.2% growth in the next two quarters. The forward P/E ratio is still sitting around 22 x Earnings, and that is expensive any way you want to cut it, and if Big Tech isn’t going to drive earnings like previous years, market levels look vulnerable to a correction here – a 2025 pause in the bull market would not be surprising.

Bank of England : Between a Rock and a Hard Place

The Bank of England cut interest rates to 4.5%, its third reduction since August, as policymakers attempted to balance stubborn inflation with sluggish growth. Two members pushed for a more aggressive 50bps cut, but the majority favoured a slower approach, signalling that future easing will be gradual. Despite the cut, inflation is now expected to peak at 3.7% later this year, higher than previous forecasts, while growth projections have been revised down. The pound dropped sharply, and money markets now price three more cuts this year.

With the economy stagnating and inflation still a concern, the Bank risks navigating an increasingly stagflationary environment. Labour’s tax policies are adding pressure, and with growth barely moving, the real question is how much room policymakers have for further easing. I think the risks to economic downside will probably outweigh the inflation concerns, and whilst the ECB was the bank that cut the most in 2024, the BOE might win that accolade in 2025.

Falling rates should help support the equity market, as a weaker currency seems likely, so don’t necessarily conflate economic weakness with a weaker stock market. The UK remains cheap, well supported by dividends and buybacks, and should not get caught up too much in the tariff tantrums. It is attracting more attention as a safe ‘go-to’ market this year. Perhaps that is why we are still seeing it outperform the US year to date.

‘Dr Copper’ & China

People refer to ‘Dr. Copper’ because the metal is seen as a leading indicator of global economic health, particularly in China, almost like an economic doctor diagnosing growth or slowdown. There is validity in this. Copper is essential in construction, manufacturing, and infrastructure, making it highly sensitive to economic activity. I recently read an article arguing that recent moves higher were signalling the start of a turnaround in the Chinese economy.  

As the world’s largest consumer of copper, accounting for over half of global demand, China’s industrial activity, property market, and infrastructure investments are all closely tied to movements in copper prices. The recent rise in copper prices suggests improving demand, which may presage the economic upturn we have all been waiting for.

I am not convinced yet, as there are probably short-term factors at play, including policy support, seasonal restocking, and speculative trading, which could be driving prices higher without reflecting genuine underlying demand. Chinese firms often accumulate copper ahead of anticipated stimulus or in response to potential supply shortages. With expectations of further rate cuts and government support, some recent price movements may be driven by traders positioning ahead of policy changes rather than actual industrial demand. Even if China sees some improvement, its recovery is heavily dependent on external demand and trade wars could upset this.

Despite these concerns, the rise in copper prices should not be ignored, and I have added it to the ever-growing list of things to watch. If prices remain elevated beyond short-term optimism and industrial production continues to improve, there may be stronger evidence of a more durable recovery taking shape.

Next Week

US Inflation Data (CPI – Tuesday, Feb 13) – The key focus will be January’s consumer price index, with markets watching for any signs that inflation is proving stickier than expected. A hotter-than-expected print could challenge rate cut expectations.

Retail Sales (Thursday, Feb 15) – US retail sales data will provide insight into consumer spending momentum. Strong numbers could reinforce resilience, while any weakness may revive concerns over a slowdown.

UK Jobs & Inflation Data (Feb 13-14) – The Bank of England has signalled a cautious approach to rate cuts, but fresh employment and inflation figures could shift expectations. Wage growth in particular will be a key factor for policymakers.

Earnings Season Continues – Key reports include Coca-Cola, Airbnb, Cisco, and Shopify, alongside more retail-focused names that will offer insight into consumer trends. Tech results have been mixed so far, and investors will be watching whether concerns over revenue growth persist.

China Data Dump (Feb 16) – Industrial production, retail sales, and fixed asset investment numbers from China will be closely watched for confirmation that recent optimism around the economy is justified.