The ‘Sell America’ trade is back in play this morning. The dollar is unwinding last week’s gains and is down against all of its major counterparts, US equity markets are setting up for a bruising open, and the Treasury curve is bear steepening*, with 30-year yields pushing back above the 5-percent threshold on growing concerns surrounding Washington’s fiscal trajectory. Oil prices are up on an unsubstantiated report suggesting that Israel is planning a strike against Iranian nuclear facilities.

Fiscal concerns are growing more acute. Republican lawmakers are reportedly close to approving a bill that would renew President Trump’s 2017 tax cuts, add a slew of additional tax breaks, raise the debt ceiling by as much as $5 trillion, and add $3.3 trillion to the federal debt over the next decade – or $5.2 trillion if temporary provisions are made permanent. This comes after Moody’s downgraded the US’s triple-A sovereign credit rating on Friday evening, and amid fears of a slow-motion bond-buyer strike. A serious sovereign-debt crisis remains deeply unlikely, but there is no doubt that the “risk discount” embedded in US assets has increased as a function of higher policy and economic uncertainty, and that the flow of foreign capital into American financial markets could slow over time, threatening their long-run outperformance.

Across the pond, the British pound is trading near a three-year high against the dollar after inflation climbed more quickly than expected last month, dramatically reducing the likelihood of another rate cut this summer. According to the Office for National Statistics, headline consumer prices rose 3.5 percent in the year to April, up sharply from 2.6 percent in the prior month, and above market expectations for a print closer to the 3.3-percent mark. Services inflation – closely watched by policymakers as an indicator of underlying pressures – hit 5.4 percent, blowing past the 4.7-percent reading from March. Economists suspect that this is largely down to one-off effects related to road tax increases and the timing of last year’s Easter holiday – which skewed airfare and package holiday prices in comparative terms – but market-implied easing expectations have shifted nonetheless, with just a single move forecast over the next year, down from two prior to the release.

Here in Canada, the loonie is trading on a firmer footing after data released yesterday showed underlying inflation accelerating in April, potentially forcing the Bank of Canada to move more cautiously in the coming months. The central bank’s preferred “core” consumer price measures — trim and median — both climbed 0.4 percent last month, rising 3.1 and 3.2 percent in year-over-year terms respectively, rising at the fastest pace since early 2024. Tariff effects may have driven imported food and auto costs higher, but a range of services-sector categories also saw larger-than-anticipated increases, pointing to still-resilient demand among Canadian consumers. Investors have pushed expectations for the next rate cut out to September from July, and rate differentials have narrowed in the Canadian dollar’s favour.

The outlook is cloudy. On one hand, Canada is now one of the countries with the lowest US tariff rates — no “reciprocal” or “baseline” levies are in effect — Mark Carney’s government looks set to deliver a heavy dollop of fiscal stimulus in the years ahead, and the lagging impact of last year’s easing cycle is percolating through the economy. Growth could surprise to the upside in the coming months. But on the other, policy uncertainty is spectacularly high, business and consumer confidence levels are very weak, and net immigration flows are becoming less supportive of nominal growth. Perhaps most importantly, the real estate market – which outpaced real income growth and helped provide the foundation for debt-fuelled household consumption for decades – is showing clear signs of exhaustion, with homebuilding activity slowing, sales activity suffering, and prices coming down. We suspect more easing is on its way, even if the central bank chooses to proceed cautiously.

*When long-term yields rise more quickly than their short-term equivalents. This is typically suggestive of a rise in inflation expectations, but can also reflect worries about sovereign credit strength.