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Welcome everyone, today, April 15th, 2025 Economic impact videos. We've been reaching out to you for the past five years. Today's a special day, marks our five-year anniversary. We started these in April of 2020, just at the beginning of the pandemic and today we're in the middle of a tariff war. It's important. We are a financial institution. We reach out close to 8000 of our clients on a monthly basis. We have a responsibility. We need to share our opinions, our views on the economy. Today are unprecedented times. We are facing an American administration that is trying to change the world, which brings all sorts of challenges and concerns over the world. So, these are a way for us to reach out to you to tell you what we're seeing, our opinions. So, we're going to keep doing these. But today's a special day, five-year anniversary. And I'm going to pass the mic to Denis Girouard, who's been doing this for the past couple of years, and our Chief Economist, Stéfane Marion.

Thank you, Laurent. So Stéfane, where are we on those tariffs now?

And by the way, I need to thank Laurent too, you know, remind us that we're five years older after all of this. It's action-packed Denis, just like it was five years ago for different reasons. So, tariff structure on its way up, way up, way, way, way up. So.

They keep moving though.

They move all the time. It moves all the time. So, we went from 2 to 5 to 10 to 36 to 32. Now we're at 26 as of April 15th. If you want me to give you some historical perspective on this, you have to go back to 1901 to see 26% effective tariffs on U.S. imports.

Well, with those tariffs, there's an impact on an inflation expectation.

Oh the U.S. consumer is so much bigger than it was in 1901. So therefore 2/3 of the economy, tariff structure 26%, while consumers are concerned, and it clearly shows in the numbers, inflation expectations. It doesn't mean it will be realized, Denis, but consumers are potentially fearing the worst inflation since the 1980's, 6.7%.

Yeah. And because of that, the consumer sentiment is way, way low.

There's one thing you can do to really make consumers feel mad is it's inflation. We've seen it during the pandemic, right? Case and point. We have consumer sentiment right now as low as it was during the pandemic. Again, this inflation thing really is annoying to consumers. So that does not necessarily bode well for the US economy in the months ahead.

Consumers are not happy, but also the equity market.

Well, yeah, if you're, if you're going to hit 2/3 of U.S. economy, you're going to hit financial markets, and U.S. equities are being hit big time. The S&P 500 went as low as 19%, so we did not enter a bear market territory, which would mean reaching- Pardon me?

-20%?

Yeah -20%. So we went to -19%, we're at -12%.

Technically, we're not there.

We're not there, but we're still, you know, in correction territory in a sense. We're still below -10%. Denis, surprisingly, people have been asking, you know, how's the Canadian stock market going to behave? We had lower valuation to start off with. So, we've been hit less hard than other places. And right now we're down 8%. So, some relative resilience if you want. Everyone's down, but some countries are down less than others.

Yeah. At the same time, the U.S. dollar also is getting hammered.

Well, that's part of the reason that Canadian sector is more resilient. People are buying into Canadian assets. We can speak to that in the next few minutes, but clearly the U.S. dollar is not very popular right now. It's not popular within central banks. It's not popular with foreign, foreign pension funds. So, there's been a shunning of the U.S. dollar. And this is very unusual. Historically, when the stock market goes down, U.S. dollar should be going up, not down. This is really a change in correlation that reflects the uncertainty created by the tariff war.

Yeah, we have the stock market being quite volatile, but also the bond market, but also the spread on the corporate credit. It's widening quite a lot in that period of time.

Yeah. So, people are shunning the U.S. dollar. They're not very happy about U.S. treasuries. But one thing they don't like right now is the corporate debt market, which is very important to, as a source of liquidity, for U.S. corporations. So right now, corporate spreads 148 basis points. Right now it's way up 150 basis points up since the start of the year. Denis that's a big deal because if you're a high-yield corporation right now, your financing costs, your effective yield. If you're going to issue bonds, you got to pay 8%.

That's a lot. OK, there's a lot of people talking about stagflation. Are we going in a recession right now?

Slow down? Definitely. So much so that we have brought back to life our Recession Risk Monthly Monitor, which is available on the website for people interested. I'll spare you the details of all of these numbers. Suffice is to say, there's a lot of yellow in here, some red. If you put it all together, odds of a recession right now is 40%. Not the baseline scenario, but clearly there are some concerns that, in the months ahead, if you don't reduce tariffs, while I think these probabilities are likely to increase. So let's be careful right now. Financial markets rebound, equity rebounds, a lot of volatility, but these odds are likely to continue to rise unless Washington decides to lower tariffs. Not the case right now on a substantial level.

And there's maybe a pleasant surprise and all those news, Canadian dollar, which is bizarrely up.

So historically, if I get these probabilities to rise, you don't want to own the Canadian dollar. But, a lot of things are different this time around and Canadian dollar is actually behaving quite well, 5%. Our model says you should be 5 to 10% cheaper than what we are right now. But there seems to be some interest in the Canadian dollar or Canadian dollar assets.

Yeah. And what's really the effective rate, you know, on those tariffs in Canada? Because, you know, we have that that agreement between Mexico, United States and us, which is supposed to be at 20 something percent. And but we're all mixed up here, OK, because it's tough to follow and understand where we are.

So, there's a lot of confusion. So people are buying Canadian dollar assets because foreign investors believe that we're less impacted. Well, less impacted negatively versus other countries. So let me illustrate this and, and the confusion to try to help with the confusion. If we had no free trade agreements with the Americans, given what they have in place, we would be facing an effective tariff rate of 24%. But we do have a free trade agreement called USMCA and a lot of Canadian corporations are USMCA compliant. All the energy producers are now USMCA compliant. Put it all together right now Denis, so the effective tariff rate on Canada is 5.7%. The confusion out there is to say, well, everyone is a minimum 10%. No, not the case. If you are USMCA compliant, particularly if you're an energy producer, 5.7%. Now if more firms become, Canadian corporations become USMCA compliant, between now and the year end, we could be at 4.2% or even lower if Washington reduces tariffs on aluminum software lumber. So right now, 5.7%, you can understand that foreign players or foreign investors saying, well, I'm going to invest in the place where the tariff structure is less punitive. We are part of that group.

Then don't show that to President Trump because he wants everybody at 10%.

I think he's aware of that because he's calling the exception that he knows that if taxing Canadian energy would just make inflation expectations worse in U.S., so that's why we are where we are.

And we showed that Canadian dollars earlier that is going up, but not only the Canadian dollar is going up, but also the reserve for the Central bank are going up in Canadian dollar.

I think the central banks are partly to blame. You've got that right, Denis. And people forget that we are the 5th largest foreign currency held by central banks. We're at 3% of the total right now. We started from nothing in 2012. We're at 3%. There's more people, foreign banks or you know, investing in Canadian dollar than in, you know, in the Chinese renminbi or the Swiss franc or the Australian dollar. So at 3%. Now you might say 3% is still small Stéfane, but the dollar amount is huge to need $450 billion. It's never happened in Canadian history that central banks own such a large part of Canadian assets or the bond market if you want. So that keeps a bid on the Canadian dollar, it explains why we are stronger than we would otherwise be. But that reflects the tremendous uncertainty facing the global economy in this punitive tariff structure that could undermine the U.S. economy in the months ahead. So.

So Stéfane, you've been telling us for many months that we need to be prudent. What do we do now?

At 26%, you're still prudent. And these tariffs got to go down. They need to go down to 10%. Seriously, Denis. So, let's be careful out there. I can't justify a stock market valuation or U.S. equities that are trading at, you know, 18 times forward earnings. I think the surprise will come from a significant deterioration in corporate earnings in the months ahead. Financing costs are up. You're selling less to the rest of the world. Clearly, that's not good for profits. So again, it will be volatile again for the next few months. So, let's be prudent out there.

Thank you, Laurent. Thank you, Stéfane. Thank you to all of you for following us for all those years. Hopefully, it's going to last many months or many years. Until then, we'll see you beginning of May. Thank you.

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.