Morning Brew Daily - US Tariffs Start Today & Euro Defense Stocks Take Off

Episode Date: March 4, 2025

Episode 531: Neal and Toby talk about the arrival of Trump’s sweeping 25% tariffs on Mexico, Canada, and China that, many analysts believe, could cause prices to soar, especially cars. Then, the public rift between President Trump and Ukraine’s President Zelensky has caused an upswing of European defense stocks as the continent prepares for the worst. Also, chip maker TSMC announces a $100 billion investment on US plants to avoid tariffs. Meanwhile, Toby shares the trend of stuffed pizza crusts. Finally, a rundown of the headlines you need to know.  Subscribe to Morning Brew Daily for more of the news you need to start your day. Share the show with a friend, and leave us a review on your favorite podcast app. Listen to Morning Brew Daily Here: https://link.chtbl.com/MBD Watch Morning Brew Daily Here: https://www.youtube.com/@MorningBrewDailyShow There are risks involved with investing in ETFs, including possible loss of money. ETFs are subject to risks similar to those of stocks. Investments focus in a particular sector, such as technology, are subject to greater risks and are more greatly impacted by market volatility, than more diversified investments. The Nasdaq-100 Index® includes the 100 largest non-financial companies listed on the Nasdaq. An investment cannot be made directly into an index.  Invesco is not affiliated with TikTok or YouTube.  Invesco Distributors, Inc. Learn more about your ad choices. Visit megaphone.fm/adchoices

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pwc.com slash US slash brew AI. That's pwc.com slash us slash brewAI. Good morning brew daily show. I'm Neil Fryman. And I'm Toby Howell. Today, tariffs on Mexico, Canada, and China have gone into effect sending shockwaves through global trade. Then, turns out that the biggest Trump trade of them all was European defense stocks. It's Tuesday, March 4th.

Let's ride. If you watch the Oscars Sunday night, you saw Adrian Brody give a really long. speech after winning best actor for his role in the Brutalist. You may not have known you were also watching history. Clocking in at five minutes and 40 seconds, it was the longest acceptance speech in Oscars history, topping the previous record Greer Garson set in 1943 by 10 whole seconds. When it was clear Brody was going well into overtime, the orchestra tried to play him off. Brody dismissed them saying, I will wrap up, turn the music off, I've done this before and promised to be brief, which turned out not to be the case. Toby, this probably disqualifies him from being tapped for any future best man speeches.

That is the worst part of it all, is that a fair amount of words of this speech were dedicated to talking about how he didn't want to go on too long, how this wasn't his first rodeo to shushing the orchestra. If you're going to have a speech that long, at least use the words wisely just to put his five minutes and 40 second spiel into perspective. That's nearly three times as long as the Gettysburg address, which clocked in at about two minutes, a speech so long it should have had an intermission like the Brutelists. Now a word from our sponsor in Vesco QQQ. Neil was looking at my screen time report the other day, and it was a little bit shocking. I thought you deleted TikTok.

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toxins, as these may increase the risk of serious side effects. Why wait? Ask your doctor, visit Botox Chronic Migraine.com or call 1-800-44 Botox to learn more. The great North American trade war has begun. Effective today, President Trump has slapped heavy tariffs on the U.S.'s three largest trading partners, 25% tariffs on most goods from Canada and Mexico, and an additional 10% on China, doubling the rate to 20% and affecting a total of $1.5 trillion in annual imports. Trump has accused these countries of not doing enough to stop the flow of migrants and fentanyl into the United States and is taxing their exports as punishment. The impact of these tariffs will be massive, dwarfing all of the tariffs Trump applied during

his first term and raising the average U.S. tariff rate to their highest levels since the 1940s. And the view from Wall Street was not good. Investors clearly showed they viewed this move as reckless for the economy after Trump confirmed yesterday afternoon that tariffs on Canada and Mexico would go ahead. Stocks tanked with the S&M. Posting its worst day of the year, down nearly 2%, and NVIDIA pledging 9%. Canada and China quickly responded overnight with retaliatory tariffs of their own. China will place additional tariffs of up to 15% on U.S. agricultural products, including chicken and soybeans, while Canada will impose immediate 25% tariffs on more than $20 billion

of U.S. imports, with $86 billion more to come in three weeks. Toby, turns out Trump was serious about tariffs and the business world is scrubs. rambling. In the global Catan game, the U.S. is looking like a very crankerous trading partner right now, which is creating a lot of uncertainty for business owners. Yesterday, if you looked at the ISM manufacturing report, which is based on a survey of manufacturing companies looking at things like new orders, production, hiring, etc. Almost every single comment in it was about uncertainty, was about hesitancy in doing business on account of these tariffs. Tariffs are creating a lot of uncertainty on both sides. They create rising input costs, which represents a challenge for

manufacturers. But there's also this backdrop of potentially shrinking orders, which suggests that demand is at risk of retreating. So they really are in a rock and a hard place right now. I have often cited the SnipSnap, SnipSnap meme from the office. Michael is talking about getting a vasectomy, but businesses are living out this meme in real life when it comes to their investments. How can you plan on investing in the future without knowing what your cost will be going forward? So that is one thing that these companies are just looking at the current landscape and saying, I don't know what to do right now because these input costs are just going to rise so much. We don't know how to plan for the future, a lot of uncertainty out there.

And it's worth noting just how dramatic the shakeup is to place tariffs on Canada and Mexico, which we've had a free trade partnership with going back to NAFTA. in the 90s borders had virtually evaporated because transportation costs were so low. There was no taxes to send your goods across borders. So these three countries had started to trade a ton with each other. You had the United States making things that they do well, say like Florida orange juice or beef in the Midwest. We send that to Canada and Mexico.

Meanwhile, in Quebec, they have really cheap hydropower. So they send that to Vermont, New York, and New Hampshire. in Mexico, they make avocados that are bought by Chipotle and a lot of us. So this architecture had formed through free trade where each country did what they do best and then traded with each other because there were no taxes on imports. Now that those are going up to 25%, it says everybody's scrambling to change their supply chains. I'm glad you mentioned Chipotle there for a second because it's a good segue into how businesses are approaching this new environment. Some companies are just going to eat the extra cost.

and not try to pass it on to consumers. Chipotle CEO, Scott Boatwright, said for now, they intend to keep costs the same for consumers, even as some of its cost of goods moves higher. So that is one approach. Not everyone can do that, obviously, because other industries, let's look at specifically the car industry, that is really going to raise the cost of the input

of what it takes to make cars, because these tariffs don't just raise the cost for foreign. It also raises the cost for U.S.-built vehicles because domestic cars include a lot of parts from abroad, from places like Mexico specifically. So these levies on Mexico and Canada alone could add about $3,000 to the average U.S. car price. So if you're looking to buy a car right now, maybe get it done today because those input costs are going up, which will make the costs go up altogether. And so we'll see how this all plays out on Wall Street today.

Yesterday was a really bad day on the stock market as investors showed that they, think that this new tariff regime will lead to slower economic growth, less business investment, overall, less employment, everything's just going to contract. And you saw that in this Atlanta Federal Reserve GDP tracker. Now, this thing keeps a running tally of how much it expects GDP to grow or shrink in the current quarter. It's very volatile. It goes up and down. But yesterday, it showed a pretty remarkable reading. Yeah, these estimates are published pretty regularly as new economic data is released. So they can be quite volatile. That is kind of the precursor here.

But Friday had this shock reading of negative 1.5% which was led by a $153 billion trade deficit that was reported in January. That showed that firms were likely front-loading imports ahead of Terrace. But then this crazy Monday reading, which saw negative 2.8% growth, was also driven by the fact that we had that soft manufacturing report that I had spoken about at the beginning of this segment. So it looks like there's data is coming in thick and fast. The Atlanta Fed is saying, whoa, it's not looking too great right now. We're seeing a lot of imports front loaded.

We're seeing a lot of slowdown in the manufacturing front, which is why we see, you know, a Trump session potentially looming on the horizon here. Moving on, European defense stocks have emerged as the apple of investors eye early in 2025, as investors bet on a big surge in military spending across the region. As the Russian-Ukraine war stretches into a fourth year in Europe's debt. decades-long security relationship with the U.S. looking shaker than ever, governments are gearing up for what looks like a major rearmament push. That has sent stock soaring with Europe's Aerospace and Defense Index climbing nearly 8% yesterday, good for its biggest single-day jump

in nearly five years, and it's now up 30% on the year. At the heart of the rally is a harsh new reality. Europe may not be able to count on its longtime alley, the U.S., to come to its aid in a future conflict. The uncertainty was. underscored by the tense White House meeting between Trump and Ukrainian President Vladimir Zelensky, in which Ukraine, essentially Europe's front line against Russian aggression, pushed for firm security guarantees from the U.S. and got nothing in return. New York, companies like Francis Thales, Germany's Rhein Medal, Italy's Leonardo, and Sweden's sob all jumped 11% or more yesterday and are now some of the best performing

companies in the world so far this year. So maybe the real Trump trade was European defense all along. Take Rine Medal, for example. This is a German company that makes military equipment. It's climbed more than 80% in 2025. That makes it the best performer in the Stocks Europe's 600 index. Meanwhile, if you go to the United States, what's the best performer in the S&P 500? It's CVS, which is up 46%.

So these companies are in an absolute tear, and that's because Europe is doing this huge push to rearm in the face of America, pulling back. You saw that in Stark Relief yesterday. Donald Trump ordered a pause on all U.S. military aid to Ukraine yesterday said we're not going to do any of that until Zelensky and other Ukrainian leaders say that they want to have peace. Of course, they're probably not going to do that because they don't want to cede so much territory to Russia. And then you had the EU come out also this morning saying that we're going to unveil a plan that requires $841 billion more in spending. Where is that $840 billion going? It's going to defense companies, and that's why you're seeing these stocks hit record highs. Yeah, European defense companies have been strong performers since Russia invaded Ukraine all the way back in 2020.

But that trade has certainly accelerated in the face of Trump's view on American support for Ukraine. Last year, EU nation spent about 2% of their combined GDP product on defense. French President Emmanuel Macron has come out and said that he wants the block to aim for closer to three. to 3.5% of GDP. The Secretary General of NATO also said he wants European military spending to be north of 3%. Right now, only 23 of 32 members hit that 2% goal for NATO members, hit that 2% goal. So a 3%, 3.5% spending of GDP would correspond with a much bigger defense outlay. So you have these catalysts for these companies to trade a lot higher. And the Europeans stock 600 index is now beating the S&P 500 in year-to-date returns, which I don't think anyone

saw coming when we entered 2025. Moving on, more of the chips powering your smartphones and AI chatbots are going to come with a made-in-the-USA tag. Yesterday, in an announcement alongside President Trump, the world's top chipmaker, Taiwan Semiconductor manufacturing company, or TSM, said it will invest $100 billion over the next four years to build chip production plants in the United States. That comes on top of the $65 billion the company had already committed to building out facilities in Arizona. Bringing more chip production onto U.S. soil has been a top priority for American leaders on both sides of the aisle,

who say they're used for military applications and other key products is a national security concern. So why is TSMC pledging all this money now? The threat of tariffs has a lot to do with it. Trump has floated steep tariffs on semiconductors coming from Taiwan, TSM's home country. which could devastate its economy that is dependent on chip exports. Trump has repeatedly claimed that Taiwan stole chip-making dominance from the United States, so this U.S. investment promise could be a way to placate the president and avoid tariffs. Toby, there's been a distinct pattern of corporate giants lining up one by one

to announce major investments in the United States under the new administration. Let's go down the Congo line, Neil, because this is another one to add to the list. Oracle Open AI and SoftBank pledged to invest $500 billion into building AI infrastructure. structure in the U.S. under that Project Stargate deal. Last week, Apple said it plans to spend more than $500 billion over the next four years to expand its manufacturing footprint in the U.S. And now here is this $100 billion pledge by TSM. One of the big sticking points with TSMC setting up its Arizona factory was they were only

building their legacy tech here. They weren't building their cutting edge chips. They were reserving that technology for their home base in Taiwan. They are now saying that they will kind of scale. up that manufacturing to make its most advanced chips, which is a big win for the U.S. as it tries to, you know, reshore some of its ship industry that it had outshored over the last, you know, decades or so. It's curious to see the different strategies applied by the two recent administrations because both of them want more chip, wanted more chip production happening here in the United States

because they cited it as very important for national security. The pandemic put that into Stark relief when there was that huge chip shortage and the car, you know, automakers couldn't get enough chips to make cars and there was, you know, snarled supply chains all over the globe. The Biden administration went with the carrot. They put out the Chips Act, which dangles $52 billion in grants and loans to chip companies to come to the United States and build factories that led to a lot of investment, including from TSM, which got a $6.6 billion grant. Trump is going more with, he's ditching the carrot, is going more with a stick by threatening tariffs on semiconductors, 25 percent. You know, those haven't really come to pass.

But just the threat of the stick has led TSM, at least, you know, for one, come to invest more in the United States. Up next, it is time for Toby's trends. Study and play. Come together on a Windows 11 PC. And for a limited time, college students get the best of both worlds. Get the unreal college deal, everything you need to study and play with select Windows 11 PCs. eligible students get a year of Microsoft 365 premium and a year of Xbox GamePass Ultimate with a custom color Xbox wireless controller. Learn more at Windows.com slash student offer.

While supplies last ends June 30th, terms at AKA.m.m.S. College PC. We're the Hartford with decades of experience ensuring millions of unique small businesses. When it comes to your small business insurance. Thank you. One size, absolutely does not fit all. Get a quote or find an agent today at thehartford.com slash small business. business. Domino's has finally caved. No, they aren't getting rid of the pizza tracker. That's the greatest piece of technology ever. But they are putting stuffed crust on the menu, looking to

rake in dough like the rivals, and what I am dubbing the cheesiest Toby's trends we've had so far this year. The country's top pizza chain is rolling out Parmesan stuff crust starting yesterday, hoping to appeal to younger customers willing to shout out extra cast for ooey-goey-chise-filled edges, something the chain has previously resisted. Pizza Hut has been on this stuffed crust bandwagon for 20 years now. Papa Johns and Little Caesars have also joined the cheesy arms race years ago, but Domino's is hoping to make up for lost time, looking to appeal to a new generation of pizza lovers that have never known a world without the stuffed delicacy.

The delay in hopping on the trend has actually confused eaters. One survey found that 73% of Domino's customers already thought Stuffcrust was on the menu. We're still 13 million customers a year. We're absconding to other chains just to get their stuffed crust fix. Neil, that is a lot of mozzarella leaving the bottom line, but now Domino's is finally trying its dairy best to recapture some of that business. But the thought process behind why it took 20 years to get to this point is actually really fascinating. Pretty fascinating insight into business strategy here. So when Papa Johns rolled out that stuffed crust pizza in 1995, they actually did so with an ad from a person named Donald Trump.

Trump, Domino's saw that happening and they said, ah, that's a gimmick. You know, I don't think this is going to be a long-term trend. It's going to fizzle out. But Stuffcrust has turned out to be a huge money maker when Pizza Hut launched it. It generated $300 million in sales in its first year. Papa Johns came along in 2020. That boosted sales by nearly 30% in the quarter that it launched. Domino's is looking at Stuffcrucass and saying,

this is the only gap we have in the menu between us and our competitors, and at a time when sales are stagnating because people are pulling back on spending and looking for more value, they said, okay, maybe this is the time we need to actually dive in. And it hasn't been this willy-nilly effort either. Their chief marketing officer said it's been one of the longest development efforts in company history. First, they did extensive market research, and they found that a lot of stuff crust customers are actually, you know, those apex predators of the pizza ecosystem. They often spend more per transaction.

They buy pizza more frequently, so they were missing out on that really big customer base. And then they also went through eight potential iterations of how to find not just the right recipe for Parmesan Stuffcrust, but to how to best assemble it, because one of the big problems with Stuffcrust is it's a delicate process. You don't want that cheese oozing out of the edges. You don't want to, you know, sacrifice the structural integrity of the pizza. So Domino's did a lot of training. It spent 12 weeks training franchisees at 7,000 stores on how to make it properly.

They do not want the rollout to stumble at the finish line here. So I do think that Domino's, just speaking as Toby Howell here for a second, they got the best crust around already. You're speaking as otherwise? That's a good point. But just my own personal preferences are coming out here. I do think they have the best tasting crusts already. So adding some cheese in that, I think we'll do quite well in their foray here. All right, let's sprint to the finish with some final headlines.

A shocker in Isle 5, Kroger's CEO, Rodney McMullen, abruptly stepped down yesterday following a board investigation of his personal conduct. The country's largest supermarket chain by sales said that McMullen's conduct was not related to its financial performance or operations, but it was, quote, inconsistent with the company's business ethics policy. McMullen had been at Kroger for more than four decades. AIDS beginning as a stock clerk at a Lexington, Kentucky location before working his way up to CEO in 2014. The surprise leadership shakeup adds more turmoil for Kroger, which is still nursing

a failed acquisition of smaller rival Albertsons. Yeah, this was a shocker. They, Mick Mullen did not issue a public statement. Kroger also declined to further comment. So I started searching around. I went to Reddit to see what they had figured out. And they are stumped too. So right now, things are being kept pretty tightly underwrapped. but it is a pretty big shift here because McMullen was this lifer at this company. It's been there for four decades. And it is just the hits keep coming right now for Croger because they tried to buy Albertsons. It didn't work.

And then just to zoom out here, we have seen a particularly turbulent time for CEOs in corporate America over the last few years. CEO departures hit a record high in 2024. And we're already pacing faster than that this year just a few months into 2025. So things are rocky. We've already talked about the uncertainty earlier in the show. It looks like, you know, Kroger is entering a period where they're going to face similar sort of uncertainty. Yesterday, Anthropic announced a $3.5 billion funding round, bringing its valuation to $61.5 billion, because when you're making frontier models, the money printer never runs out of ink.

Founded by former open AI execs, the company's Claude Chatbot has quickly become an industry favorite alongside ChatGBT. The funding comes as Anthropics' revenue has started to mature, recently hitting an annualized $1 billion in December, a 10x increase year over year, thanks mostly to enterprise clients like Zoom, snowflake, Pfizer, and Novo Nordisk. It also struck a deal with Amazon to power. It's souped up Alexa Pluts,

which we spoke about on the show last week. Neil Anthropic is now the second biggest AI startup behind OpenAI, passing Elon Musk's XAI with this latest round. We're in a total arms race right now, where these companies are raising so much money. I don't know about the rest of the startup world, but if you're, as you mentioned, as you mentioned,

if you're an AI company making a top line model, I mean, VCs are just, you know, writing you a blank check essentially. Open AI is still the leader in the field. They are raising money right now at a $300 billion valuation from folks like SoftBank. But Anthropic thinks that it's taking a more safety-focused approach and it thinks that, you know, that competitive advantage might help it weasel in, you know, past

Open AI and these partnerships with Amazon, which has invested tons of many billions of dollars, including a recent $4 billion investment will help it surge past its rivals. Well, the Oscars numbers are in, and they are brutalist. Just under 18.1 million people tuned into the Academy Awards on Sunday, a 7% decrease from the year before. That total comes from a combination of normal linear viewership on ABC plus live streams on Hulu, which could help explain why the show had its first viewership drop in four years because Hulu fumbled the Oscars bag hard on this one. First, people had issues logging in with down detector, spiking with reports as the red carpet wrapped up, but then Hulu inexplicably shut off the live stream before the awards

were given out for Best Actress and Best Picture. So instead of watching Mikey Madison and Nora gave thank you speeches, viewers saw a thank you for watching message that falsely claimed the live event has now ended. Neil, disaster-level performance from Hulu here. Really, disaster. It recalls the 2018, the Super Bowl, which I wasn't watching on Hulu, but it ended early in some markets before the game even ended. That was 2018. I think you could get away with a streaming company having some technical glitches then, but now, you know, as streaming has almost overtaken linear TV.

and how people consume television, it is a bit baffling that companies have not, you know, had their IT ducks in order. We saw this with Netflix a couple of times most recently with the Tyson Paul fight having many, many glitches. But it seems like streaming may not yet be ready for prime time, even though it's been around for decade now. Yeah, they keep fumbling the bag here. And also, I mean, when we spoke about the Oscars on Monday, we said, ah, there's a lot of good momentum behind it. It looks like this was a pretty positive show over. all, but we are seeing that, you know, 7% decrease year over year. Who knows how much it is actually attributable to Hulu, just, you know, messing up big time here.

But we talked about how a lot of best picture nominees are not these big box office successes anymore. They don't have wide appeal. So it looks like that's trickling down into the award show as well with that, you know, decrease in viewership. Let's wrap it up there. Thanks so much for starting your morning with us and have a wonderful Tuesday for any questions, comments, or feedback. Send an email to Morning Brew Daily at Morning.

Brew.com. And if you're enjoying the show, share it with a friend, family member, or coworker. Toby, who should everyone listening share it with today? I want you to share the show with someone in Canada, Mexico, or China. There is no 25% tariff on MBD techs

in the international group chat. Okay, let's roll the credits. Emily Milliron is our executive producer. Raymond Lute is our producer. Olivia Graham is our associate producer. Yucenoa Ogu is our technical director. Garrett Peck is on audio, hair and makeup, totally thought Domino's already had Stuff Crest Pizza. Devin Emery is our chief content officer and our shows are production of Morning Brits.

Great show today, Neil. Let's run it back tomorrow. Yamava Resort and Casino at San Manuel is California's number one entertainment destination for today's superstars. Catch the Jonas Brothers return to the Yamava Theater stage on April 30th, the powerful vocals of Demi Lovato on May 17th, and the signature Southern Country Rock of Eric Church on July 19th. Tickets on sale now at Yamavatheater.com. Only at Yamava Resort and Casino. celebrating its 40th anniversary. UN must be 21 to enter.