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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.

Hello everyone, Welcome to Economic Impact. Today is December 10th, 2024 and as usual I am with our Chief Economist, Stefane Marion. Stefane, once again stock market is going up.

Hi, good morning, Denis. It's been a great wealth effect for most households. We know that most portfolios are composed of equities new all-time high on the MSI all country index. So, yeah, it's striking how well the stock market is doing globally.

And is it worldwide or it's only North America phenomenon?

Well, you might not suspect this thing, but if I was to tell you who's what's the best stock market perform where? Where's the country, where the stock markets performing the best so far in Q4?

I saw the slide.

Yeah. OK.

So Canada we're up almost 8% quarter to date, outperforming the rest of the world. Year to date, we have a 24% gain exceeded only by the US at 28%. I can bet you that not many people thought Canada would follow the US as well as it has in 2024.

Stefane, are we catching up in Canada versus the US because our price earning ratio are lower?

Yeah, we spoke to that a few quarters ago saying that it was abnormal to see this discount on Canada versus US on the stock market perspective. So you're absolutely right that there's a catch up phase here. Half of the gains on the S&P TSX this year were accounted by P/E expansion. Yet Denis, despite this catch up, we're still trading at historical discount to the US. So if I was to qualify the Canadian stock market right now, I would not call it overvalued. It's fairly valued, not overvalued for the US it's probably a different connotation.

OK. And now if we go back to economy, the exportation, I think we need to talk about that.

Well, people thought that stock market would be under pressure this quarter because of the potential threats of tariff coming from the US. I know the president-elect spoke to 25%. 25% would be a massive deal on Canada, Denis. Because we have $600 billion of exports going to the US, that's 20% of GDP. So I mean, you know, putting these slapping 25% tariffs on that would seriously fragilized any economy and probably the stock market.

And we can talk about crude oil because people, I don't think they know how much exportation we're doing to the State.

So the reason the market is not buying into the 25% tariff structure is because they know full well that the president-elect has promised the Americans that they would get affordable energy going forward. So if you impose a 25% tariff on Canada, which accounts for 62% of US imports of crude oil, we are now shipping 4 million barrels a day to the US right now. You would certainly ignite inflationary pressures in the US. So that's why the, you know, the components of the Canadian stock market that's performing so well in Q4, aside from the IT sector is the energy sector because the market is saying no, no, no, there's no way Washington could put 25% of tariff without fragilized its own economy.

OK, Stefane, but there's something doesn't add up here, why the Canadian dollar is so low compared to the US dollar despite that.

Well, for some people it's a conundrum because the models are broken because normally you have an historical relationship between the Canadian dollar and the price of oil. We also include, you know, interest rate spreads on that one. So what is striking this time is that the Canadian dollar is so cheap... well, you know, 1.40$ more than 1.40$ versus U.S. dollar and oil is trading at $70.00. We've never seen this combination in the past whenever the Canadian dollar traded at current levels, oil was trading at no more than $30.00. So obviously it's a revenue boon for the energy producers, but from a purchasing power it's quite frustrating. So a lot of people are saying why is the relationship broken between oil prices and the exchange rate?

OK, but how are you explaining that? Is it because of the employment?

Interest rate spread. So economic performance, the relative economic performance in Canada vs US. We're not doing very well right now. The unemployment rate at 6.8% last month versus US at 4.2%. So the markets have jumped on this and they are now saying that we can justify the divergence in monetary policy between the two countries.

OK, what's your call on the next Bank of Canada rate cut or not?

Well, the market is calling 90% odds that they'll be cutting rates 50 points. Yeah, 50 basis points. So we gotta get closer to 3% as quickly as possible. Denis, I want to bring your attention to the fact that this gap in the unemployment rate is the widest we've seen since 2001, so over 20 years. So yes, you can justify this. And so the Canadian dollar is trading on rate differential between Canada and US as opposed to oil prices.

Well, it's the end of the year and now we need to look at 2025. How does it look?

More uncertainty Denis. So uncertainty can bring positive surprises, but also can be challenging for markets or the economy. The reality, if we look at economic policy uncertainty in US right now, it has surged. The president-elect is not yet sitting in the White House and there's a whole bunch of policies that been rolled out there. We know that there might be a tariff war between China and the US, not just Canada and Mexico. So we're reinventing the global supply chain. It's uncertain what it means to inflation and expectations down the road. The president wants to avoid inflation expectations to rise. But this is pretty acute in terms of policy uncertainty right now. And this is a fairly high level, even if you compare to 2016 when he was first elected.

Well, we've never seen. Outside COVID, you have to go back to 2012 where it was the debt crisis in Eurozone, US was downgraded back then also, don't forget that... And there was also the beginning of a war in Syria, which is reigniting again. So we'll see what happened.

Syria is back again.

Yeah. So that can bring more challenges for markets. So again, this is not everything is so calm looking into 2025.

And we had two really spectacular year in terms of performance.

Yeah. So the message is don't be greedy when we've had two exceptional years of market returns, doesn't matter which asset classes, 2024 is just as good as 2023. It's exceptional to see back-to-back years like that. So again, looking into 2025, there are still uncertainties. So just be comfortable with your current asset mix and whether it respects your investment horizon. If not, then just give you know the calls that need to be made. But again, I can't promise you a third year of exceptional returns given the uncertainty that we see out there.

Well, on that, Stefane, thank you very much. Thank you for all of you to participate and to listen to our monthly Economic Impact. On behalf of the technical team of Economic Impact, on behalf of Stefane and myself, we wish you a happy holidays and hopefully we'll see you back in 2025.