Mallender Insights

Hello everyone. Welcome to Economic Impact. Today is May 2nd, 2025 and as usual, I am with our Chief Economist, Stéfane Marion. Hello, Stéfane.

Hello, Denis. It's been only two weeks since we saw each other, but it's been volatile in markets and actually, outside the U.S., people remain pretty confident. So every asset class, pretty much every asset class is up year to date now. It's a big change from early April, except one.

Except one.

Except one, which one?

South of the border.

It's U.S. equities, are still down 8% year to date. Still the uncertainty about the global economy, and particularly what the White House wants to do with this whole tariff structure.

And talking about tariffs, where are they now because they move quite a lot. The last time we were around 32% and now I think we're a little bit down, but not as much as probably we would hope.

I can tell you that, in my entire career, I've never seen tariffs move like that or moves like that. We went from 2 to 5 to 10 to 7 to 36 to 24. Now we stand at 23% as of today. So down from 26%, which was where we were just two weeks ago, but still overly punitive for the U.S. economy. So, I think that this needs to be settled. Everybody thinks it will come down, but how soon will they come down will dictate the U.S. economic performance and the performance of U.S. profits.

Yeah, because those tariffs are still pretty high, now we're starting to talk more about stagflation. And the ISM showed that inflation expected is high, but productivity is down too at the same time, which is not good.

Yeah, many corporations don't even provide guidance right now because they don't know what the tariff structure will be just in the next few weeks. So, what you see in the U.S., GDP was negative in Q1 for the first time in over three years. In manufacturing, production is down, which echoes what we saw on GDP. But notice Denis, the red line, prices are up. That could squeeze your profit margins. You're selling less and your input prices are rising. So, will you be able to sustain your earnings guidance under these circumstances? People don't know. Corporations don't know, they're dropping earnings guidance. And unlike the pandemic episode, if you want, the government is not sending cheques to households to allow prices to be fully reflected on the CPI. So, this means uncertainty about profit margins and profit growth and obviously the performance of the S&P 500.

Yeah, today we had the employment numbers in the United States. Quite stable, despite everything we saw the past few weeks.
And the White House was complacent and they're saying that this is the proof that tariffs are not hurting the U.S. economy. I think we have to be careful with that assessment Denis because historically, corporations don't layoff people as soon as production comes down. They wait a few months to say, is it improving or not? So, what we're seeing in the U.S. is, yes, the unemployment rate has been stable since the second half of last year, but will it be the same in the next few months? I would venture to say that, if production does not pick up, and I'm not so sure it will pick up, the unemployment rate is likely to go up in the second half of this year. Now, from the Federal Reserve perspective, can you really cut interest rates if inflation is still rising? That's a big unknown. The market is very aggressive right now, pricing in four rate cuts for the Federal Reserve. But if it's a stagflationary component to U.S. economic growth they won't be able to cut rates as aggressively, and that could fragilize the stock market. So, this is very important. In the next few months, will the U.S. see rising unemployment rates? And that will be the critical element that will allow the president to be a lot less aggressive on tariffs.

Yeah, but he was happy this morning for sure.

Yes, but that means he can remain aggressive on tariffs, so I want him to be less aggressive.

Which is bad for that number.

So, exactly. So, the unemployment rate will be critical in the next few months.

If we come back in Canada. In Canada, you know, we had also the GDP number. GDP number is positive, you know, compared to the U.S., which was negative, but it has a bad trend right now.

So, yes. So, we're not going to be down on growth in Q1. So that's great news when you consider that. However, so we have positive growth, lackluster growth, you know, maybe 1.5%. But notice Denis that population is going at 2.8%. And this is the issue from a Canadian perspective: the blue line is supposed to grow faster than the red line, not the other way around. So, this is a critical development that needs to be addressed by our politician. We just had an election in Canada. We have a new Prime Minister that said that, you know the economy is a priority for him, so we need to fix this. Absolutely. This is not normal. We need to put policies in place that will foster an environment where the blue line grows faster than the red line.

And then, you know, talking about that, we need to talk about investment because at some point, you know, we still have that lag between the U.S. and Canada in terms of business investment, and that has to change.

So we need.

Mr. Carney has to tackle that one.

So basically, what you're telling me, we need to improve productivity and we can't just grow on population growth. And that means we need to bring business investment. I think you're right on that one. You're absolutely right on that one. And we haven't had, you know, business investment that has been stable or stagnant for the past decade. And that's unprecedented in Canadian history. So, the U.S., you know, business investment is more than doubled over in the U.S. over that period. So, this is the critical element. This needs to be, this has to be a priority for Mr. Carney. So he won't be staying home very long. So, this is a priority.

He's going to the White House next week.

You're right. So that's number one. So, in order to grow business investment, you need to attract or retain investment in this country or attract foreign direct investment in Canada. So, I need visibility on my access to the U.S. market. So that's point number one. You're absolutely right. The other one that we spoke too often is domestically, we need to abolish these interprovincial trade barriers in order to foster East-West production or trade.

Yeah, and we have to react on that because we keep talking about it, but we haven't seen anything yet that is coming and saying we drop that. We drop that. No, it's just words right now. And election.

You're right. And with the currency that continues to appreciate. So basically the Canadian dollar is appreciated more than tariffs have increased on Canada. So it doesn't really help our businesses. So not only do we not know if we have market access to U.S., the currency is appreciating, which is not necessarily great for earnings. So, this needs to be settled, and if the currency appreciates, why don't we show a little bit more, let's be a little bit more pragmatic. Let's reduce the regulatory environment because, you know, the Prime Minister says we need to spend more to invest more in the country, but it won't help if you have this very prohibitive regulatory environment that needs to be tackled. And, corporate income taxes as well as energy policies is a big unknown. So, these are all priorities that need to be addressed. Unfortunately, you don't have much time. So that needs to be addressed over the next three to six months.

Yeah. And we know that corporations will probably go South of the border because of everything going on right now. They want to produce product there to get access to that big market. Then having those foreigners coming to Canada, we're going to be, or we're going to need to be very, very attractive. Then he mentioned it, fiscality, you know, regulation, we need to do that fast. And you said it, Mr. Carney, will have a big agenda in the coming weeks if we want to see that curve moving up for the first time since a long period of time.

You're right that you can't coast just business investment. You know, the private sector just with government spending. It's more than that. It's the overall environment, the business environment. Are you business-friendly? Are you open for business or only so? So, yes, the priority is, as you said, renegotiate USMCA and tackle all the regulatory environment that reduces business investment in this country. And who knows Denis, if you do all this, I'm optimistic that they would reduce the valuation gap between the S&P TSX and the S&P 500. I think there's hope to be optimistic provided that the Prime Minister acts swiftly on all of these fronts.

So what do we do as investors? You know, we've been very prudent. We ask people to be very prudent, rightly so. Now we're seeing in some assets are doing better except the U.S., but we know that never good to short U.S. because that economy is very resilient.

You're absolutely right. However, I would say that there's probably a, you know, investors are probably looking at, is it normal to deploy so much capital in the U.S. if I have alternatives elsewhere? So, I think Europe is starting to provide an alternative. I want Canada to provide an alternative. So, from a relative performance standpoint, I still think that the U.S. is likely to underperform unless Mr. Trump backs down very aggressively on tariffs. So, but having said this, Denis, we have yet to see this happen. So, for that reason, still prudent in terms of our asset mix at this point in time.

Good. Thank you, Stéfane. Thank you to all of you to listening to us. And above all, don't miss our next meeting next June. Thank you.

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.