The dollar is strengthening, yields are edging lower, and North American equity markets are barrelling toward a second day of gains after the Trump administration appeared to soften its stance on several policy fronts.

Risk sentiment improved early in yesterday’s session on signs that the administration intends to retreat from its maximalist positions on China. In a closed-door meeting with investors, Treasury Secretary Scott Bessent reportedly said “No one thinks the current status quo is sustainable at 145 and 125 percent” tariffs, “So, I would posit that over the very near future, there will be a de-escalation. And I think that should give the world, the markets, a sigh of relief”. “The goal,” he said “isn’t to decouple”. President Trump later suggested that trade levies could be cut “substantially” if a deal is reached with Beijing.

The president also appeared to back down from his threats against Federal Reserve chair Jerome Powell. Only six days after saying “Powell’s termination cannot come fast enough!” Trump told reporters “I have no intention of firing him,” although “I would like to see him be a little more active in terms of his idea to lower interest rates”. Treasury yields promptly plunged, equity futures climbed, and safe haven currencies like the Swiss franc and Japanese yen reversed lower against the greenback. The VIX volatility index – known as Wall Street’s “fear gauge” accelerated its decline as investors took a more optimistic view on policy developments going forward.

But whiplash effects could show up in today’s sentiment measures. After this morning’s purchasing manager indices, we expect the Fed’s Beige Book survey – composed of anecdotes collected by the twelve regional banks – will show businesses expressing deep concern about the pace and direction of policy changes, with many saying that they have put hiring and investment plans on hold. The National Federation of Independent Business’ Small Business Uncertainty Index, released a week ago, showed confusion levels remaining extremely elevated in March – almost five months after the November election – and from what we can tell, this is historically unique: small businesses typically report a swift drop in uncertainty in the aftermath of elections (to the extent that the index is often a better proxy for political views than a measure of underlying economic strength).

Purchasing manager indices in the euro area and United Kingdom fell by more than expected last month, suggesting that a sharp escalation in global trade tensions could snuff out a nascent recovery in both economies. With both Germany and France retreating into negative territory, S&P Global’s composite measure of private sector activity tumbled to 50.1 in April from 50.9 in the prior month, narrowly missing the 50 threshold that separates expansion from contraction. In the UK, the index plunged to 48.1, down dramatically from 51.5 in March, marking its worst performance since Liz Truss’ short-lived premiership in 2022.

The International Monetary Fund expects growth to slow sharply this year and next, with world output weakening by the most since the pandemic and the aftermath of the global financial crisis in 2009. In its updated World Economic Outlook, released yesterday, the Fund – which admittedly has a spotty forecasting record* – said it sees the global economy expanding 2.8 percent this year, down from the 3.3 percent previously estimated, with the US suffering the biggest downward adjustment in its growth trajectory. As demand weakens, wide current account imbalances between English-speaking countries and their global counterparts – ostensibly one of the motivating factors behind the Trump administration’s trade war – are seen shrinking slightly over the coming years.

Here in Canada, both the Conservative and the Liberal parties have now released platforms outlining their fiscal priorities ahead of next week’s election. Pierre Poilievre’s Conservatives expect to unleash an economic growth cycle through a combination of tax cuts and deregulation, while Mark Carney’s Liberals are bracing for a downturn, partially alleviated through increased spending on infrastructure and housing. Under Poilievre’s plan, the government deficit would shrink to $31 billion in the 2025-26 fiscal year, while Carney’s would see it increase to $62 billion – but both parties have relied upon what might be described as “heroic” assumptions that might not pass muster once reviewed by the Parliamentary Budget Officer, which had previously estimated the deficit at around $46 billion. We suspect that public sector indebtedness will rise quite substantially under either party, given that governments typically absorb a share of private sector imbalances during economic shocks – and when debt is measured as a share of gross domestic product, Canada’s private sector remains deeply, deeply overleveraged.

*The IMF in 2007: “Notwithstanding the recent bout of financial volatility, the world economy still looks well set for continued robust growth in 2007 and 2008”.