Market sentiment is holding firm this morning as earnings reports come in, the cadence of data releases increases, and trade tensions show further signs of easing. Treasury yields are holding steady, S&P 500 and Nasdaq futures are up incrementally, and foreign exchange markets are trading on a mixed basis with the dollar up against most of its major rivals including the euro and yen.
The Canadian dollar is modestly lower after Mark Carney’s Liberal Party achieved a thinner-than-expected margin of victory in yesterday’s close-fought Canadian election, driving whiplash price action within an incredibly-tight trading range.
As we go to print, the race is still too close to call in many ridings, meaning that it’s difficult to know with certainty whether the Liberals will win a majority of seats in the next House of Commons. If – as currently appears likely – the Prime Minister is forced to rely on smaller parties like the nominally-separatist Bloc Québécois or leftist New Democrats for support, key aspects of his policy platform could be significantly watered down. The country could face years of uncertainty as the government deals with repeated confidence challenges, proves unable to present a united front in negotiations with Donald Trump, confronts opposition in its attempts to break down interprovincial trade barriers, and struggles to pass major spending and tax reform initiatives. On the margins, this could contribute to a more rapid rise in indebtedness than previously anticipated — especially when combined with steady increases in provincial leverage – and to a weaker growth trajectory for the country as a whole.
The loonie looks vulnerable to further downside, but losses could be limited by good news on the trade front. According to a piece published by the Wall Street Journal late yesterday, the Trump administration is considering reducing tariffs and eliminating secondary levies on foreign-made auto parts and finished vehicles in an attempt to ease the strain on a sector that would otherwise struggle to reorient supply chains. This wouldn’t eliminate long-term headwinds entirely, but could dull the short-term shock to Canadian auto plants and reduce disruption in tightly-integrated cross-border trading networks over the coming months – provided, of course, that the article isn’t rebutted on social media in the coming hours.
Ahead today, two major US data releases could add to the confusion surrounding prevailing economic conditions. The closely-watched Job Openings and Labor Turnover report is expected to show the layoff rate staying low and vacancies continuing to edge down, suggesting that labour markets remained relatively healthy in March. The Conference Board’s April consumer confidence report, in contrast, is likely to exhibit serious trade war scarring, with households reporting a sharp erosion in views on the future. Policy uncertainty soared during the survey period, and could be reflected in a greater-than-4-point drop in the headline print from the prior month’s 92.9 level. Overall growth expectations for 2025 have fallen dramatically in the last two months.
Across the Pacific, selling pressure on the Chinese yuan is fading as market participants become more confident in the government’s commitment to maintaining stability in currency markets. Tariffs on trade between the Asian giant and its American customer are now at embargo-esque levels, and it seems that the two sides are girding for a prolonged conflict. Leaders in Washington expect Chinese exporters – still an extremely powerful political bloc – to pressure Beijing into making a deal, while China thinks US consumers will rebel against the Republicans once price increases and supply shortages begin to impact living conditions.
History might be on China’s side. Xi Jinping enjoys enormous domestic support, and as Dan Rather once put it, “Americans will put up with anything provided it doesn’t block traffic” – but Beijing’s staying power could depend on the extent to which the government abandons its long-standing shibboleths and takes steps to prioritise domestic consumption. The domestic economy is still caught in a deflationary spiral as property prices languish and the manufacturing sector struggles with overcapacity problems, and household confidence remains near post 1978-lows. Last week’s Politburo meeting saw a pullback in the full-throated support for the industrial sector that often characterised previous meetings, and resulted in pledges to speed up the pace of stimulus delivery to poor and middle class consumers, suggesting that a pivot is underway.
Taken in sum, it seems that the Trump administration is successfully bringing balance to the world economy: in slowing the American economy, forcing Germany to invest more, compelling China to ramp up long-needed consumption-boosting efforts, and pushing Canadian voters toward the centre, Washington’s moves may be reducing policy extremes on a global basis. It may not be five-dimensional chess, but some positive outcomes could arise from this game of checkers.