Tariff-ied Markets and Workweek Woes

Markets are on edge as tariffs, inflation, and job data create a whirlwind of uncertainty. Join Andrew Wilkinson, Steve Sosnick, and Jose Torres as they dissect the latest economic shifts, political curveballs, and what it all means for your portfolio

Summary – IBKR Podcasts Ep. 225

The following is a summary of a live audio recording and may contain errors in spelling or grammar. Although IBKR has edited for clarity no material changes have been made.

Andrew Wilkinson 

Welcome to our monthly economics and markets edition of this IBKR podcast. I’m your host, Andrew Wilkinson. Joining me today are Steve Sosnick, Chief Market Strategist, and Jose Torres, Senior Economist. Welcome, both of you. 

Steve Sosnick 

Great to see you, Andrew. Great to see you, Jose. Happy day after the Super Bowl to both of you. 

Jose Torres 

Hi Steve. Hi Andrew. 

Andrew Wilkinson 

Jose, let’s come to you first. The unemployment rate in January fell to 4% in an unexpected turn of fate. What are the key takeaways from you on the January employment report?  

Jose Torres 

We’ve seen easing pressures, declining unemployment, and favorable revisions over the past two months. However, this month’s data revealed narrow roster expansions. One key component of the jobs report—the average hourly workweek—fell to 34.1 hours, the lowest since March 2020 during the pandemic. Before that, you’d have to go back to 2010 to find a similarly low figure. 

So what does the average hourly workweek tell us? Historically, employers tend to reduce hours before trimming their labor force. They might move full-time workers to part-time status or cut hours for part-timers. 

Additionally, there were some signs of weakness in the report. Most of the gains came from private education, health services, and government—three non-cyclical sectors. In the cyclical sectors, retail and other services were the only areas contributing meaningfully. Sectors like finance, construction, manufacturing, wholesale trade, information, transportation, and warehousing added very few jobs, ranging between 100 and 8,000. Meanwhile, leisure and hospitality, mining, and professional and business services saw job losses. 

Overall, despite strong wage growth and a good headline number, the composition of job growth was narrow and not particularly buoyant. The drop in the average workweek was an unwelcome surprise. 

Steve Sosnick 

If I may, Jose, two points stood out to me. First, average hourly earnings rose by 0.5% when 0.3% was expected, yet hours worked declined. That seems like living the dream—getting paid more to work less! How do we reconcile these two factors? 

Second, the government showed employment growth, but that might reverse in the next report. How much could that weigh on the numbers going forward? 

Jose Torres 

We could see a 20,000-job drag from government employment in the coming reports, which could weigh on payroll growth. 

As for reconciling the decline in hours worked with wage pressures, I think leisure and hospitality plays a key role. That sector has been decelerating and is prone to cutting hours. Bartenders, waitstaff, and similar roles are known for this. I believe this is happening in discretionary spending categories, while other areas continue to see robust paycheck growth due to higher costs, elevated interest rates, and reduced credit availability. 

Andrew Wilkinson 

Let’s switch gears and discuss politics. Last week, there were announcements about tariffs. The market initially tumbled but later rebounded. Are we out of the woods politically? What might drive the market decisively up or down from here? 

Steve Sosnick 

The problem with tariffs right now is the inconsistent messaging. The market isn’t sure what to expect. As we’re taping this on Monday morning, we’re seeing a bit of a relief rally. On Friday, the president hinted at bilateral tariffs, possibly as soon as that day. 

But this morning, there are steel and aluminum tariffs, though not in the form we expected. Eventually, the market might begin to feel like it’s facing “the boy who cried wolf.” If threats aren’t followed by significant action, people may start ignoring them. 

So far, we’ve seen tariffs on steel, aluminum, and some Chinese goods. China responded with targeted measures that didn’t disrupt the market much. Tariffs on Canada and Mexico were postponed. If these threats continue without major actions, the market may become desensitized. However, the ongoing back-and-forth remains a source of uncertainty, preventing full recoveries after market declines. 

Andrew Wilkinson 

Steve, I’ll circle back to you on inflation. But first, Jose, we have inflation data coming out this week. How important is it, especially considering January’s labor market report? 

Jose Torres 

From a monetary policy perspective, I don’t expect this week’s CPI and PPI reports to move the market significantly. January’s price pressures were tame based on nowcasting tools. However, if the data comes in above expectations, it could raise concerns about goods price uncertainty related to tariffs. 

That said, as Steve mentioned, both market participants and investors seem fatigued by tariff talk. In terms of broader policy, the Treasury Department has been more disciplined. Treasury Secretary Besant’s efforts to limit spending and balance the budget incrementally have helped cap bond yields and spur a bond market rally. This gives the administration more breathing room on trade negotiations and inflation risks from tariffs and restrictive immigration policies. 

Steve Sosnick 

Jose, Treasury Secretary Besant put a damper on one of our best podcasts—the one you arranged with Drs. Muran and Roubini. They discussed how the Treasury was depressing interest rates by issuing too many short-term notes instead of longer-term ones. The implication was that Besant agreed with their assessment. However, the Treasury ultimately maintained its focus on managing the long end of the curve without Fed intervention. 

This has contributed to the recent relief rally, as fears of more supply and higher yields in the long end didn’t materialize. 

Jose Torres 

Steven, that’s true. If the Treasury were to issue more long-term debt, it could spike yields, which the former administration tried to avoid. In 2023, we saw that a 10-year Treasury yield above 5% was psychologically painful—not just for equity investors but also for homebuyers and consumers financing major purchases. 

Andrew Wilkinson 

Steve, it’s one thing for Besant to focus on 10-year bonds, but that hinges on anchoring inflation expectations. Last week’s University of Michigan consumer sentiment survey suggested that the administration’s honeymoon period might be over. What stood out to you in that survey? 

Steve Sosnick 

It wasn’t encouraging. Inflation expectations spiked, even though gas prices didn’t seem to be the cause. The survey revealed a political divide—Democrats reported significantly worse expectations, while Republicans and independents didn’t change much. 

This drop in consumer sentiment, combined with tariff talk, likely contributed to Friday’s market decline. Despite a solid jobs report, these factors unsettled investors. 

Andrew Wilkinson 

Jose, what are forecast traders expecting for this week’s CPI? 

Jose Torres 

Forecast traders are aligned with Wall Street’s consensus: a 2.9% year-over-year increase and a 0.3% month-over-month rise for headline CPI. Core inflation is expected to be 3.1% year-over-year and 0.3% month-over-month. 

The Fed seems comfortable with 3% inflation, which is positive for equities because it means less tightening. However, if inflation climbs above 4%, the Fed will have to act, creating risks—especially from potential tariff and immigration policies. That said, domestic policies and measures from the Treasury Department are helping to counter those risks. 

Andrew Wilkinson 

Jose, thanks for joining me today. 

Jose Torres 

My pleasure. Thank you. 

Andrew Wilkinson 

Steve, thanks for being here. 

Steve Sosnick 

My pleasure, as always, Andrew. Great to see you both. 

Andrew Wilkinson 

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