New Tariffs Surpass First-Term Levels, Escalating Trade Tensions The U.S. will impose sweeping new tariffs starting Tuesday, with a 25% levy on imports from Canada and Mexico and an additional 10% on Chinese goods. The move significantly expands Trump-era trade policies, heightening tensions with key allies and rivals alike. To ease consumer impact, Canadian energy imports—including oil, gas, and electricity—will face a lower 10% tariff. However, Canada swiftly retaliated with matching 25% tariffs on $155 billion worth of U.S. goods, including alcohol and fruit. Mexico also announced countermeasures, while China condemned the move, promising legal action and further retaliation. President Trump signed the tariff orders on Saturday, tying their removal to resolving illegal immigration and drug trafficking concerns at U.S. borders. Critics Question Strategy as Markets React While some China hawks support the tough stance, critics argue that Trump’s approach lacks a clear strategy. “There’s no coherent plan on tariffs,” said Derek Scissors, a former Trump trade advisor and senior fellow at the American Enterprise Institute. “He’s winging it—misstating trade deficits and blaming Canada for fentanyl smuggling.” The markets reacted negatively, with the Dow dropping 0.8%, the S&P 500 down 0.5%, and the Nasdaq slipping 0.3%. “We expected tariffs—but not Canada and Mexico first,” wrote Chris Krueger, a policy strategist at TD Cowen. “The chaos premium is real.” Legal Challenges and Economic Uncertainty The tariffs will be enforced under the International Emergency Economic Powers Act, requiring a national emergency declaration. While legal challenges are expected, courts generally defer to the president on national security issues. Brad Setser, a former senior U.S. trade advisor, warned on X that these tariffs represent a “massive shock” to the U.S. economy, describing them as “a bigger move in one weekend than all of Trump’s first-term trade actions combined.” Despite Trump’s tough talk on China, Setser argues his policies suggest a different goal—redirecting Chinese demand toward U.S. goods rather than cutting ties. Trump’s unpredictable trade policies, including his reversal on banning TikTok, have left investors struggling to anticipate the next move. “Investors have whiplash,” said Tobin Marcus, head of U.S. policy at Wolfe Research. “It’s exhausting trying to plan beyond the next two days.”

IBM’s AI-Powered Consulting Growth Sparks Market Optimism IBM is making a comeback, and Wall Street is taking notice. Evercore ISI analyst Amit Daryanani sees a bright future for International Business Machines Corp. (IBM), following its latest earnings report. Investor enthusiasm has sent IBM’s stock soaring, making it the top performer in both the S&P 500 and the Dow Jones Industrial Average. The stock is on track for its best single-day gain ever. What’s driving this rally? Confidence in IBM’s consulting business. “We believe IBM’s unique position across software and consulting is starting to inflect higher, with AI and potential mergers & acquisitions acting as key catalysts,” Daryanani wrote. IBM’s software revenue jumped 11.5% on a currency-neutral basis last quarter, showing strong momentum. Although consulting revenue declined by 1%, the company expects growth to accelerate, backed by $5 billion in AI-related contracts that can be converted into sales. Shares of IBM surged 12.5% in afternoon trading, marking their biggest one-day gain since a 13% rise on July 20, 2000. IBM’s revenue grew just 1% last year, but the company is now targeting at least 5% growth in 2025 after currency adjustments. Ben Reitzes of Melius Research emphasized that consulting is playing a critical role in this turnaround. “Shifting consulting from a headwind to a tailwind—along with an expected boost from the mainframe cycle later this year—enabled IBM to project 5%+ constant currency revenue growth for 2025,” Reitzes wrote. “For long-time IBM watchers, this level of growth is rare.” And the outlook could improve further. Will next week’s analyst day reveal a roadmap for even faster expansion? “We believe IBM has the potential to accelerate from 5%+ to 7% growth over the next few years as it shifts further toward Red Hat and other high-growth software segments like HashiCorp and automation,” Reitzes added. Morgan Stanley’s Erik Woodring noted that IBM’s stock momentum suggests the market views the 2025 outlook as conservative, with room for upside in areas like organic software growth. “There’s also a belief that IBM could be gearing up for more M&A activity (which we agree with), potentially driving even stronger results in 2025,” Woodring wrote. “At this point, the burden is on the skeptics to explain why IBM’s momentum won’t continue beyond next week’s analyst day.” IBM’s AI-driven transformation is gaining traction, and investors are betting this is just the beginning.

While the Federal Reserve is expected to keep interest rates steady on Wednesday, speculation about potential hikes has resurfaced. Analysts at Barclays still anticipate a gradual decline in rates through 2025 but acknowledge that a rate hike isn’t entirely off the table. Options markets currently price in a 25% chance of an increase. “The threshold for the Fed to reverse its rate-cutting course is high,” Barclays’ macro research team noted in a client report Tuesday. “Such a move could damage the Fed’s credibility.” However, they warned that a shift in economic conditions—such as a renewed surge in inflation, rising inflation expectations, or a sharp drop in unemployment—could prompt policymakers to reconsider. Lessons from Past Fed Reversals Barclays examined three historical cases where the Fed reversed course and raised rates: In all instances, labor market strength and a steepening yield curve were major drivers. Market Implications The 10-year Treasury yield (4.52%) has already climbed above the 3-month yield (4.29%), reflecting confidence in economic resilience but also concerns over potential inflationary pressures under a second Trump administration. Short-term yields initially declined when the Fed began cutting rates in September and December, bringing its policy rate to 4.25%–4.50%—a full percentage point below its peak. If the Fed signals a possible hike, Barclays expects the 2-year and 10-year Treasury yields to exceed 5%, which could weigh on equities. The bank previously warned that a 10-year yield at 5% could be problematic for stocks. Treasury Market & Liquidity Shifts A shift toward rate hikes could trigger a repricing in short-term Treasury rates, further expanding the $7 trillion money-market fund industry while pressuring bank deposits. The Road Ahead Despite the uncertainty, market sentiment still leans toward additional rate cuts in 2025. As of Tuesday, Fed-funds futures traders were pricing in a 50-basis-point cut this year, up from 25 basis points the prior week, per the CME FedWatch Tool. Investors will be closely watching Fed Chair Jerome Powell’s press conference on Wednesday and Friday’s release of the December personal consumption expenditures (PCE) index, the Fed’s preferred inflation gauge.