The dust is settling after a tumultuous Monday in financial markets. North American equity markets are setting up for a modestly-positive open, benchmark ten-year Treasury yields are pushing above the 4.20-percent mark, and the dollar is edging lower against all of its major trade-sensitive counterparts.
To summarise yesterday’s* insanity: the S&P 500 jumped more than 8 percent on an erroneous headline suggesting that tariffs would be paused for ninety days, then plunged again when this was rebuffed by the White House, only to rise again as investors hedged against the possibility that another, more accurate version of the same headline could come out in the coming days.
A fragile sense of calm is returning. Currency market trading ranges are narrowing as participants anticipate a pivot from the Trump administration, and the VIX volatility index—known as Wall Street’s “fear gauge”—is reverting lower after pushing above the 60 threshold early in yesterday’s session. Movements in Treasury markets are stabilising somewhat, and the futures-implied likelihood of a rate cut at next month’s Federal Reserve meeting are back to just above 30 percent, down from almost 80 percent.
The Canadian dollar continues to inch higher, despite new data showing that businesses and consumers are turning more cautious. According to the Bank of Canada’s latest set of surveys, published yesterday, inflation expectations have risen, but economic sentiment has deteriorated even more sharply, leading businesses to delay investment and hiring decisions, and driving consumers to pull back on buying plans. The share of companies that now expect a recession in the coming year has more than doubled to 32 percent, and the Bank’s measure of labour market confidence shows more Canadians are worried about losing their jobs** than during the peak of the pandemic in 2020. This comes after the US applied 25 percent levies on auto, steel, and aluminum imports from Canada, and vacillated on imposing similar taxes on goods that are part of the Canada-US-Mexico trade agreement.
China’s yuan may be flashing an early sign of the next major macroeconomic aftershock. Tariffs on Chinese imports into the United States now stand somewhere close to 54 percent—with the potential to go much higher yet—and intermediary countries like Vietnam are facing similar levies. Policymakers have announced retaliatory measures against US products, the “national team” of financial institutions has stepped into markets to support equity prices, and the People’s Bank of China has allowed the renminbi to trade below the 7.20-to-the-dollar threshold, helping to lower nominal export prices and increase the relative competitiveness of Chinese manufacturers.
As Bloomberg observes in this excellent piece***, the flood of Chinese exports already being redirected into other economies could increase in the coming months. Regions without high trade barriers in place against Chinese products—like Europe, the United Kingdom, Canada, and Australia—could soon find themselves inundated, forcing policymakers to protect domestic industries by enacting protectionist levies of their own. If this plays out, the global inflation backdrop might shift in an even more extreme direction, complicating central bank policy trajectories, impacting consumer price expectations, and slowing growth on a worldwide basis. A nascent moderation in financial market turbulence could prove extraordinarily short-lived.
*Just to distinguish from other recent episodes.
**I feel obligated to note that downturns in Canadian housing markets have traditionally accompanied significant increases in unemployment, not interest rate increases themselves.
***It’s really annoying when massive, well-resourced media organisations write things before I get a chance to do the same : )