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Hello, everyone, welcome to Economic Impact. Today is March 11, 2025 and as usual, I am with our Chief Economist, Stéfane Marion. Hello, Stéfane. A lot of change since the last time.

Good morning, Denis. We're– I guess we're getting closer to the eye of the storm here with economic data that suggests that even the almighty U.S. economy is being impacted by the potential of the tariff war. And we saw that for the first time in two years there might be a service economy that shows contraction. And that Denis, is important because that's 2/3 of the US economy, so if you hit the service sector, which was not so much exposed to the so-called tariff war, but uncertainty has done its job. This bodes for a weaker U.S. economy in the months ahead.

And above that we have the bond market that are sending us a message now.

Things are in sync now, remember when we had a discussion a few months ago, the economic data was sometimes so so but now everybody seems to be thinking the same. And from US bond market perspective, the yield curve, which is the difference between a 10-year Treasury yield and a 3-month T-bill had is now flattening again. So historically Denis when they have a flatter or an inverted yield curve that would suggest weaker growth, not faster growth. So the bond market is clearly getting a little bit more worried.

Yeah. And at the same time, we're seeing a different signal on the equity market. If you're looking at Europe versus North America,

The equity market rarely inverts, actually the beginning of a flattening of the yield curve or potential inversion. And we've seen that things have changed quite significantly since we spoke last month in the sense that the equity markets are down, way down, particularly in the US. Notice too, that might be surprising, but, you know, some parts of the world which are threatened by US tariffs, emerging markets or Europe, are actually still up on a year to date basis, whereas the US is down significantly. So there seems to be a change in mindset from investors with the uncertainty related to what the global supply chain may look like in the months or years ahead.

And you want to put also in perspective, you know, the external sector, the export in the US versus what people think really.

Yeah. So there's been some denial in Washington by politicians, but also some economists who were claiming who cares if there's a tariff war, exports account for only 11% of the US economy. My answer to that is fine, that's on the economy. But what about the US financial markets, what about the S&P 500 where 41% of sales are realized overseas? So if you threaten the tariff war and you've had a strong U.S. dollar up until recently, then obviously you will threaten the performance of the US stock market. And that's part of the reason of, you know, what I showed you before of this lack, this underperformance of the US stock market versus other parts of the world.

And talking about that, not all sectors will be affected the same. And the one that will be, we know them very well.

Yeah. And we've all heard about the Magnificent 7 for the past two years generating most of the outperformance of the US stock market. So it's the IT sector, but the IT sector generates 56% of its sales from overseas economy. So imagine that, I'm threating you with a tariff war, there might be retaliation, what's going to happen to profits of the IT sector in particular? Well, it's not going to go well and that's fully reflected in we're seeing. So what we said before the US stock market down 9% from its recent peak, but the NASDAQ you know IT sector down almost 14% Denis. Note U.S. banks down more than 16%. Why is that? Well, if you decide that you're going to get, you know, a big change in the global supply chain, presumably that would entail also that maybe it will be yes, less exchanges in U.S. dollars and 92% of global trade happens in U.S. dollar. If people say I don't want U.S. dollars under these circumstances then U.S. banks are under pressure. So again, that does suggest weaker growth in the US in the months ahead.

And because everything is in sync right now, U.S. dollar is going down too.

Yes, so if you have these– if Europe is going up while the US is going down, clearly somebody is shunning the US dollar and U.S. dollar strength has vanished in the past four weeks and you're already down 4% to 5% year to date. So people are saying, you know, having second doubts about the rationale where the only place to be with Mr. Trump was to invest in the US. People said no, maybe I need to make sure that I–

Have bigger diversification.

More diversification, geographical diversification might make sense.

Yeah. If we come back in Canada, the external sector they did quite well in the last report.

Yeah, so we did well because US corporations decided with this tariff threat we will be importing like there's no tomorrow and that probably also impacted the US dollar. Whereas in Canada well it's the mirror image, if the US were import quite aggressively, we were exporting quite aggressively. So much so Denis hat we might have the trade contribution to our economic activity in the first quarter of this year, that will be the largest since we came out of Covid, so almost 5 percentage points. So think about this Denis, I might be seeing a negative GDP in the US in the first quarter and a positive one in Canada despite that we are the one threatened by a tariff war.

But that's going to be temporary.

I don't want to be complacent. You're absolutely right. People are trying to front run the impact of the tariffs. So that won't be carried into the second-half of this year. So I think that under these circumstances, despite the fact that GDP will be stronger than expected, I think that the Bank of Canada has no option but to cut rates at its next meeting, which will be tomorrow on Wednesday, March 12th.

And there's 2 words that we know very well now, "tariff" and "regulation". And when we talk about regulation in Canada, this is something that probably we should tackle right now.

Yeah. So we make a lot of fun about the president claiming that "tariff" is the most beautiful word in the dictionary. I would say, well, don't laugh too much because it seems that in Canada, "regulation" is the most beautiful word in our policymaker’s dictionary. They have their own dictionary sometimes Denis, unfortunately. So the point I'm trying to make here, Denis, is to say you know, did you know that regulations– we now have 320,000 regulatory requirements that are impacting our corporations and the manufacturing sector and loans is 105,000. It's up 40% over the past two decades. And what that does Denis, it limits our job growth our economic activity, but more importantly, our business investment would be 9% higher were it not for this increase in regulation. So, you know, we have a new Prime Minister in Ottawa, you know, leader of the Liberal Party. We'll see what happens. But you know, as you contemplate putting tariffs against the Americans retaliation, why don't we retaliate by getting rid of these regulation and kickstarting more economic activity in our country by helping a companies. And you know what that doesn't cost so much for governments to reduce regulation when you think about it. So maybe that's the way to go or an option for us to consider.

Yeah. And the timing is perfect right now to do that, you know.

You get an opportunity like an opportunity like this once in a generation. So let's seize that opportunity.

Stéfane, what do we do now? You told us to be very careful many months ago. Now. What's the next message?

You know, I admit Denis that we told clients to be careful maybe a little bit too early. But I think at this point in time, let's – before we go in and decide to buy the market more aggressively – let's be prudent, let's you know, have a balanced portfolio and maybe start thinking about potential geographical, you know, allocation to our diversification to our asset mix. So let's be prudent for the time being. We need to confirm what the new policies will be and the tariff war, if it continues, it won't be pretty in the second half of the year. There might be more downside to equity markets.

Well, on those not so good words. Thank you Stéfane. Thank you for being with us. Hopefully you're gonna be there next month, April, and until then, be safe, be careful, and hopefully things will go better. Thank you.

Hello everyone, Welcome to Economic Impact. Today is Feb 11th, 2025 and as usual I am with our chief Economist Stéfane Marion. Stéfane, surprisingly once again, assets are doing well.

All the countries that are in the crosshairs of the US President of Washington on a tariff war are out actually outperforming the S&P 500. But more tellingly, Denis, all-asset classes are up this year so far this year. And as I said, might be surprising to see a stock market behaving so well outside the US on the premise that we understand that there's a global trade war. But whether it will be as punitive as what we think for the global economy is not the baseline scenario at this point in time. So, the market is thinking otherwise versus what the president is saying at this point in time.

At this stage, it seems that Europe and Asia are not too concerned.

Exactly. I mean, again, these are the countries that are facing the biggest threat of US tariffs right now. And yet the market's saying it will be too punitive for the US to proceed with a 25%. Doesn't mean there won't be any tariffs, Denis, but 25% tariffs will be too punitive on US inflation. Therefore, they're not, markets are not buying it right now. I think it's interesting to look at this this way, market expectations. But again, let's not be complacent because you know, something might still happen in the next few years.

Surprisingly, in Canada, we see up 3.1%. But it's not all sectors. In fact, it's only two.

That's the point, because just the sheer threat of these tariffs is fragilizing the Canadian economy. In case in point, most sectors are not behaving so well year to date. But the sector that's carrying the TSX, actually there's two. Well, you know, technology, but that's a small component of the S&P TSX, but mostly it's the materials sector up 13% year to date, really enabling the Canadian stock market to outperform the US, for example.

And with the uncertainty, there's gold and there's materials and gold is in a new high.

Well, if you're going to look at materials, you cannot not speak to gold prices because we're a big producer and that's a large chunk of the S&P TSX and gold price is that new all-time high. In nominal terms, $2900 or so U.S. dollars. Adjusted for inflation, you go back more than 50 years and it's a new all-time high. So, basically some components of financial markets saying while you were not so sure about this tariff war and the way to protect myself is to buy a tangible asset and one of them would be gold. There's probably still upside for that.

And in history gold has been, you know, a safe haven against inflation.

It could be a safe haven against U.S. dollar depreciation, but the US dollar is a new all-time high. But you're absolutely right against inflation. Gold is looking at inflation expectations right now. And this is a poll made at the consumer level and say, Denis, what do you think inflation might be a year from now? It actually has surged more than 100 basis points in the past month or so. And people saying, you know, it might be 4%, Denis, I'm telling you, if we have 4% inflation, there's no way that the Federal Reserve can ease monetary policy. So, this is why gold price is saying if you want to be aggressive on a tariff war, a global tariff war, we might keep you in check because inflation is going to be going to be higher.

Yeah. And at the same time, you know, we have rates staying pretty high in the states and the stock market doesn't go down. Then we have that, you know, what we call the first-time negative equity premium that we haven't seen for a long, long period of time, almost 20 years.

Yeah. So, if you're an investor, you say if I'm willing to take the risk to invest in the stock market, there's a there's a premium I'm willing to cope with. But if at some point the equity risk premium turns negative, that means I'm not necessarily compensated to take that type of risk in the stock market not knowing what whatever tariff war will unfold or not versus what I get to invest in something perceived to be safer. 10 year treasury yield. This is the first negative equity risk premium in a generation. That's a generation. So, this is why the stock market is vulnerable to this global tariff war. This is why we said last month that we don't think 25% users baseline scenario. We know there will be some tariffs on China. Right now, there are some, but whether they can be aggressive, or Washington can be aggressive remains to be seen without fragilizing the stock market and creating a negative wealth effect for US consumers.

And back in Canada, there's a big concern. Uncertainty is at the highest level that we haven't seen.

The Canadian economy is fragilizing. You're absolutely right. We saw it in some certain industries of the S&P TSX that we showed previously. But at the same time, if you want to go put a number on it, if you look at the index of policy, economic policy uncertainty, record high. So, it doesn't matter that we've signed free trade agreements with more than fifty countries. Corporations right now don't know how to manage their business plan because we don't know if these tariffs threats will unfold or not. That we saw this week a 25% tariff on aluminum and steel. That would be a big impact on the Canadian economy. But the tariffs are not to be applied. well, might come into effect on March 4. So we'll see what happens over the next three weeks. But clearly, you are fragilizing the Canadian economy right now with tariff uncertainty. You don't need to have the tariffs in place. The uncertainty itself is fragilizing the Canadian economy.

Yeah. And investors in those new factories and, you know, and so on. They're frozen right now. They won't do anything.

You're going to get weak investment and therefore probably weak economic activity in the first half of 2025.

That's why we need the government to be in place and put, you know, stuff that will help those industries to invest and keep the economy going, you know, up and working despite the fact what's going on South of the border.

I think there are discussions on that. Remember when we spoke to interprovincial trade barriers. Now there's more talk about this. People are talking about, you know, energy security is very important for economic sovereignty. So, we're saying, you know, a big change. We could actually aspire to policies that will be, you know, positive for the Canadian economy in the second half of 2025. The first half will be shaky, but the second half, in the meantime, what it means, Denis, is that the Bank of Canada is forced to be more aggressive on monetary policies in which they mentioned just a week ago when they ease monetary policy.

And with that uncertainty, you know, the Loonie the Canadian dollar keeps going down.

Well, since the Bank of Canada is saying that, you know, this uncertainty is fragilizing the Canadian economy. So, they're opening the door to further rate cuts. Therefore, the interest rate differential is driving the value of the Canadian dollar, which early in February when we thought that the tariffs would be imposed at the beginning of this month, it's been delayed till March, Canadian dollars went to 147, came back to 143 where we stand right now. But again, you can't forecast an appreciating dollar until we have a better visibility on tariffs or not. But at the same time, having visibility on Canadian policies will be very important to support the currency. And Denis, you know what, we want to put a positive spin on that. We believe that what's going to happen in the second half of this year should be more positive for the Canadian economy, but there's still a few weeks of uncertainty to cope with.

Well, we'll keep the positivism of your comments and thank you once again. Thank you all for joining us. We'll be back early March. Thank you. Have a good day.