Daily Points

ON DECK FOR MONDAY, FEBRUARY 3

KEY POINTS:

• Equities, CAD, MXN, CNH plunge as US starts a trade war
• What happened over the weekend and next steps
• Trump just doesn’t get the trade and dollar connections
• Fentanyl? Oh please. Tariffs have nothing to do with that
• Canadian tariffs were not ‘dollar for dollar’…
• ...likely giving the BoC room to ease near-term…
• ...amid a highly uncertain inflation outlook that risks whipsawing them again
• US ISM-mfrg to be stale on arrival
• Fed-speak, ECB-speak on tap
• See the Global Week Ahead — Tithes to the King, here

Trump—allegedly elected as a better steward of the economy—thought his first major act should be to pick a trade war with allies. Duh-duyyyy! Putin’s loving the fact that all of his western foes are now fighting each other. Markets aren’t so impressed. Stocks are broadly lower by either side of -1½% declines in NA futures and European cash markets. Asian equities have more catching up to do after the Lunar New Year holiday and so they fell by more; Tokyo and Seoul dropped 2½%, Taipei was down 3½%, mainland China is still off. Markets are functioning through price discovery.

The dollar is stronger across the board. Trump just doesn’t get it. US tariffs on net reduce demand for foreign currencies through the harm to imports and raise safe haven appeal for the dollar which is benefitting the yen as well. What happens when you raise appetite on net for dollars? The lagging effects drive a bigger trade deficit which worsens Trump’s concerns, so he’ll do more to strengthen the dollar, and on we keep going with the usual lagging effects (chart 1). Duh-duyyy! All major crosses are weaker to the dollar with MXN’s 2% drop leading the way.

US Treasuries are underperforming everywhere else with 2s mildly cheaper in a bear flattener move. Canadian government bonds are outperforming all comers with the whole curve down by double digits in yield terms. EGBs and gilts are also rallying as were Antipodean rates overnight.

As a reminder, I put out this piece titled The Saturday Night Tariff Thrashing yesterday morning after providing coverage to clients and staff via chat rooms etc throughout Saturday evening. It summarizes what the US did, how Canada, Mexico, China and Canadian provinces are responding, and next steps.

There isn’t much to update since I put that out. Since the note was put out we got the list of what Canada is targeting with 25% tariffs on $30B of imports from the US this Tuesday and guidance that the target list for the other $125B of targeted imports would be provided “in the coming days” with a 21-day public comment period. The first tranche of retaliatory tariffs is similar in nature to the goals of the 2018–19 tariffs that aim for red states (Harleys, OJ, booze et). The guidance for the second list is that “It will include products such as passenger vehicles, trucks and buses, steel and aluminum products, certain fruits and vegetables, aerospace products, beef, pork, dairy products, and more.” That’s the list that possibly includes Teslas.

This may be relevant to your clients in terms of seeking relief from Canada’s tariffs or refunds. Share and advise as suitable across clients and Scotiabankers especially their commercial and investment banking and equity clients.

Trump is to hold calls with PM Trudeau (it isn’t known who asked for the call) and President Sheinbaum this morning. Monitor remarks afterward including ones that inform potential appetite for further retaliatory measures. Plus watch for company remarks especially in autos that are on the front line of all of this.

There have been some additional provincial developments since the summary note was released that are relatively minor, like more provinces pulling US alcohol from stores. You’re also hearing more warnings from some of the most heavily affected industries, like autos and steel, so watch the developments closely amid dire warnings of near-term plant shutdowns and cancelled contracts.

And as a reminder, it’s a full-on lie that Trump’s tariffs against Canada have anything whatsoever to do with fentanyl despite the way the executive order was crafted. The only reason for that reference in defiance of the facts is so that Trump can fabricate a national security crisis so that he can bypass Congress and exploit the past pieces of legislation that were not intended to be used for such purposes. Full stop, don’t buy into the misleading US propaganda that I see some gullible media personalities falling for.

My Global Week Ahead article went over the real underlying reasons for Trump’s tariffs.

Light Data Shouldn’t Matter

Data doesn’t matter except for the diehards. The main release was that Eurozone CPI was a touch firmer than consensus expected (-0.3% m/m NSA, -0.4% consensus) and in y/y terms as well (2.5%, 2.4% prior and consensus). Chart 2. Part of the reason is that Italy’s CPI fell -0.7% m/m NSA (-1.1% consensus). Markets didn’t care because trade wars reset the risks as Trump escalated his tariff threats to Europe.

We’ll get some US data this morning at 10amET. It won’t matter either. ISM-manufacturing for January might inform supply chain preparedness effects for the lunacy, but it’s a lagging reading in the face of Trump’s weekend sucker punch.

Limited Fed-speak is on tap (Bostic 12:30pmET, Musalem 6:30pmET) and we may hear initial takes on the effects of trade wars now that the Fed can no longer say they won’t incorporate anything until its fact. Well, it’s fact now.

BoC Implications

As previously noted, not matching with dollar-for-dollar tariffs lessens inflation risk of Canadian tariffs and CAD depreciation and makes a cut—perhaps an upsized one—more likely. They said dollar for dollar but that's not what they've done. Not even close.

But as long as markets are functioning, which they likely will, then wait. I don’t see emergency pressure at this point to contemplate an intermeeting move. CAD and market rates can do their work at first. It's a risk but I think there is a very high bar for going inter-meeting.

One reason is that the BoC will want to see next steps and evaluate the longevity of the shock. Who knows exactly where this is going. The players are far too erratic.

Another reason is that tariffs will have slower lagging effects than at other times when the crisis was instant in financial markets or with complete shutdowns. Monitor this in terms of industry guidance on specific sectors.

Another reason is to evaluate early evidence on the supply shock.

What also matters is the fiscal response that is pending. I can see coordinated announcements by the Feds and provinces and BoC again, like early in the pandemic. That’s possible soon, but it can't pass it until >March 24th unless prorogation is temporarily suspended. So wait to coordinate.

The key question is how the rest of the curve responds. Yields move lower in the short term, but if we're heaping on fiscal stimulus amid supply chain shocks that may include plant closures and CAD is unmoored then inflation risk further out repeats the pandemic and then the BoC is whipsawed again.