This week, U.S. President Donald Trump imposed a 25% tariff on imports from Canada and Mexico and increased tariffs on Chinese imports to 20%. However, following discussions on Wednesday, he announced that goods covered under the North American trade agreement, known as USMCA, would be exempt from the new tariffs for one month.

The exempted goods include automobiles and auto parts, which make up a significant portion of imports from Canada and Mexico, offering some relief amid ongoing trade tensions. However, President Trump warned that he would not grant another extension if his conditions were not met.

His primary demands include preventing illegal immigration and stopping the flow of fentanyl. Yet, his statements this week suggest that his objectives go beyond these issues. Trump had urged Mexico to take its own tariff measures against China. In response, Mexican President Claudia Sheinbaum announced on Thursday that they would review the tariffs applied to Chinese shipments.

The tariff exemption is set to expire on April 2, which is also the date when Trump is expected to announce new tariffs against all countries imposing restrictions on U.S. imports. Additionally, a 25% tariff on steel and aluminum trade is scheduled to take effect next week.

All of this keeps concerns about a potential trade war elevated, while Trump's actions this week highlight just how rapidly his policies can shift, further escalating uncertainty.

Amid rising tensions and economic uncertainty, confidence among U.S. businesses and consumers continues to decline. Inflation expectations have surged to their highest levels in decades, fears of rising unemployment have grown, and expectations for income and corporate profits have weakened. As a result, employers are delaying hiring and investment plans.

Recent surveys indicate growing concerns about tariffs and uncertainty. The latest survey conducted by the Association of International Certified Professional Accountants provides further evidence of this trend. According to the survey, 59% of business executives believe tariffs will have a negative impact on their businesses, while 85% say uncertainty is affecting their planning and investment decisions. Inflation remains the top concern for business leaders, followed closely by rising labor costs.

Ongoing Debate Over Tariffs and Inflation as Economic Growth Concerns Rise

The debate over the impact of tariffs and Trump's other policies on inflation continues. Treasury Secretary Scott Bessent argued on Thursday that tariffs would lead to a one-time price adjustment, a view shared by some economists. However, others see a risk that these price increases could accelerate inflation and become entrenched. Policymakers remain divided on the issue.

Philadelphia Fed President Patrick Harker stated that his baseline scenario still assumes inflation will decline toward the target rate, but he expressed growing concerns that the downward trend in price increases is at risk. In contrast, Fed Governor Christopher Waller believes the impact of tariffs on inflation is unlikely to be significant.

Fed policymakers have been clear that they need more evidence of how Trump's policies are affecting the economy before making further rate decisions. While they are not currently projecting additional cuts until inflation is firmly under control, they still expect inflation to move closer to the target this year and have not ruled out rate cuts entirely.

Policymakers had initially projected two rate cuts for this year, and yesterday, Waller mentioned the possibility of two or even three cuts. Ultimately, rate decisions will likely depend on whether they believe the impact of tariffs on inflation will be temporary or long-lasting. The second half of the year may be seen as a more suitable time for easing.

Beyond the risk of Trump's policies fueling inflation, concerns about economic growth have intensified in recent weeks, increasing expectations for Fed rate cuts. Futures markets now show that traders are betting on three rate cuts this year, with the first expected in May, as indicated by odds exceeding 50%. Recent weak economic data has reinforced these expectations.

According to data released by the U.S. Commerce Department on Thursday, the trade deficit surged to a record high in January as companies accelerated shipments ahead of tariff hikes. Since imports are recorded as a subtraction in GDP calculations, a widening trade deficit typically weighs on economic growth. The Atlanta Fed's GDPNow model, based on data released through March 6, is currently forecasting a 2.4% contraction in the first quarter.

U.S. Labor Market Data in Focus Amid Rising Layoff Concerns

Throughout the week, labor market data has been closely monitored for further clues about the U.S. economic outlook--- with the most critical report set to be released in just a few hours.

ISM surveys indicated a decline in manufacturing employment, while the services sector reported job growth. Meanwhile, ADP data showed that private payrolls increased by just 77,000 in February—the lowest gain since July.

On Thursday, a report from job placement firm Challenger, Gray & Christmas revealed that layoffs last month surged to their highest level since 2020. Employers announced 172,017 job cuts in February, marking a 245% increase from the previous month and a 103% rise compared to the same period last year.

Government job cuts led the way, accounting for 62,242 layoffs. Additionally, canceled government contracts, trade war concerns, and a surge in bankruptcies and corporate downsizing fueled further workforce reductions amid heightened uncertainty.

Since the start of the year, retailers have cut 45,375 jobs—a staggering 572% increase compared to the same period last year. Consumer goods manufacturers have also significantly ramped up layoffs, while job cuts in the tech and media sectors have declined. Economic conditions remain the primary driver of layoffs, followed by bankruptcies and corporate downsizing.

Over the past year, the U.S. labor market has gradually weakened under the pressure of high interest rates, but layoffs have remained relatively low. Since then, interest rates have been reduced by a full percentage point, yet the labor market is now facing the Trump effect.

Trump's efforts to shrink the federal workforce and the uncertainty surrounding his policies are amplifying labor market risks. More federal employees are expected to be targeted, though the total number of job cuts remains uncertain.

Moreover, the cancellation of federal contracts is forcing private sector firms that work with the government to reduce staff, while cuts in federal funding are set to impact employment in nonprofit organizations as well.

That said, federal job reductions account for only a small share of total employment and are unlikely to be severe enough to push the economy into stagflation. However, since 2023, the government has added new jobs every month—except for two—playing a significant role in overall employment growth. As a result, these cuts will be meaningful, especially due to spillover effects, and are likely to weigh on the labor market in the coming months.

Comerica Bank, Evercore ISI, and Barclays estimate that, due to the spillover effect of federal job cuts, over half a million jobs could be lost by the end of the year, erasing a quarter of total job growth in 2024.

Payroll Report to Reflect Limited Impact of Federal Job Cuts, but Risks Remain

Today's payroll data will likely reflect only limited effects from federal job cuts, as the survey was conducted before most of the reductions took place. As a result, economists' median forecast suggests that the economy added a solid 160,000 jobs in February.

However, some economists believe that the hiring freeze implemented by Trump on his first official day in office may have weighed on payroll growth. When combined with the impact of severe weather conditions, some forecasts fall well below the median, ranging from a low of 65,000 to a high of 200,000 new jobs.

As Duhani Capital Research team, we assess that federal cuts and adverse weather conditions have negatively impacted the labor market, and we see the potential for job gains to come in lower than January's 143,000 increase.

Looking ahead, weather-related job losses are likely to be recovered in the coming months. However, federal job cuts and their ripple effects could lead to continued job losses, while uncertainty may prompt employers to remain cautious about hiring, keeping payroll growth modest.

Such a scenario would indicate a cooling labor market, but it would still be premature to suggest any significant deterioration. Notably, the Challenger, Gray & Christmas report shows that despite rising layoffs, employers are still expressing hiring intentions, which could offset some of the job losses.

Today, on the other hand, a weaker-than-expected payroll figure could fuel bets that the Fed may cut rates sooner than expected, putting further pressure on the U.S. dollar. Conversely, a stronger-than-expected report would likely help the USD recover some of its recent steep losses. In this case, traders would also have to reassess stagflation concerns.