US: Trade war tensions on the rise. The Biden administration has handed over a US economy on the march to the Trump team. GDP grew by a robust 2.8% in 2024 with consumption, investment, and public spending firing on all cylinders. Strong demand fuelled imports, pushing up the trade deficit and making net exports a negative contributor to growth. A mix of protectionism, deregulation, tax/spending cuts, and immigration restrictions would influence the economy in the coming years; we think around 2% growth await.

Earlier this week, Trump had agreed on a 30-day delay on tariffs against Canada and Mexico. While Trump has temporarily averted tariffs on Canada and Mexico, a 10% levy on goods from China has been implemented with hints that tariffs against the UK and EU are up next. We remain cautious about the optimism for the UK to avoid US tariffs. While the US does not have a goods trade deficit with the UK, it does have a significant services deficit. Trump’s recent comments—calling the UK “out of line” despite describing the UK’s trading relationship with the US as “fair and balanced”—suggested that negotiations may be needed to avoid tariffs.

Given that Trump has talked about his belief in the potency of tariffs, actual and threatened, for four decades, we are sceptical that this four-year term would somehow begin and end with minimal application of his favourite tool. More critically, the current macro juncture does not lend much room for policy volatility. Economic momentum has been strong for years, and Trump’s actions to deregulate and cut taxes, in combination with desire to tighten labour supply and lower borrowing costs, are a recipe for economic overheating.

Based off recent data, there are no signs of a slowdown. Initial jobless claims and continuing claims are both still low, and JOLTs job openings missed (7.6mn vs consensus of 8.0mn). We also note that ISM manufacturing climbed above 50 for the first time since Oct 2022. Against this backdrop, we expect a reasonably firm nonfarm payroll print today (7 Feb; consensus: 170k). However, this might get muddled by the annual benchmark revision from the Bureau of Labor Statistics (BLS). Back in August last year, the BLS flagged that there would be 818k worth of downward revision. We suspect that the headline figure would probably garner more attention than the revisions.

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