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.