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.
