Trump’s Tariff Threats Impact Financial Markets
President-elect Trump’s unexpected announcement of a potential 25% tariff on Canadian and Mexican goods sent shockwaves through financial markets this week. The Canadian dollar dipped by 1.5% to 71 cents U.S. following the news, with equities and bond yields also taking a hit. The threat of these tariffs looms large over the Canadian economy, with potential significant negative consequences if implemented.
Implications of Tariffs on Canada’s Economy
The proposed tariffs by President-elect Trump could have a dire impact on Canada’s economic growth. If a 10% tariff was previously analyzed to slow down the economy, a 25% tariff would exacerbate these effects even further. Various provinces, such as Alberta, New Brunswick, and Ontario, would likely feel the brunt of the impact due to their close trade relationships with nearby U.S. states. However, there is a glimmer of hope that these threats may be a negotiating tactic rather than a concrete policy.
Federal Reserve’s Response and Economic Outlook
In the U.S., the Federal Reserve’s preferred inflation metric, core PCE, rose to a six-month high in October. Despite the uncertainty surrounding President-elect Trump’s tariff announcements, financial markets remained relatively stable. The Fed’s minutes from the November meeting indicated a gradual return to a more neutral policy stance. Overall, the U.S. economy remains robust, with sticky inflation and trade uncertainties influencing the Federal Reserve’s patient approach to monetary policy.
Market Reaction and Future Outlook
Financial markets seemed unfazed by the tariff threats, with the S&P 500 rising by 1.0% during the Thanksgiving holiday-shortened week. However, the uncertainty surrounding the implementation of tariffs on major trading partners remains a concern. While inflation showed signs of acceleration in October, the economy continues to show steady growth. The upcoming employment report will provide further insights into the economic landscape, with market expectations leaning towards another 25bps cut by the Federal Reserve in December.
