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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.