A six-day improvement in risk appetite appears to be stalling out across the financial markets this morning, bolstering a “mean-reversion”* trade that has seen the dollar creep higher against most of its rivals through the early part of the week. Treasury yields are ticking higher, North American equity indices are poised for losses at the open, and safe-haven currencies are outperforming their risk-sensitive brethren.

The American economy shrank for the first time since 2022 in the first quarter, but the slowdown wasn’t as profound as the headline number would suggest. Inflation-adjusted gross domestic product contracted at an annualised -0.3-percent pace in the first three months of 2025, with a 5 percentage-point drop in net exports doing most of the heavy lifting. Household consumption rose 1.8 percent – its weakest pace since 2023 – but final sales to private domestic purchasers — a measure that captures consumer spending and private investment, but excludes government expenditures, inventory changes, and net exports — increased at a 3 percent annualised rate, rising slightly from 2.9 percent in the final three months of 2024, suggesting that underlying demand remained fairly strong. Underlying inflation accelerated to a 3.5-percent pace over the same period, raising stagflation risks and complicating the outlook for Federal Reserve policy.

The US trade deficit exploded to a record high in March as businesses and consumers rushed to import goods before tariffs took effect. According to data published by the Census Bureau yesterday, the trade deficit surged 9.6 percent to $162.0 billion in March, with a 27.5-percent jump in consumer goods and significant increases in car and capital goods imports offsetting a -13.5-percent decline in industrial supplies – which had been lifted by the gold arbitrage trade in the previous month. Export gains were muted despite the dollar’s decline, suggesting that retaliatory tariffs and changes in global buying activity may have taken a toll.

It is increasingly clear that a deceleration is in the offing. The Conference Board’s consumer confidence index plunged 8 points in April, falling to its lowest levels since May 2020 as respondents turned incredibly pessimistic on the future. Income expectations turned firmly negative for the first time in five years, and the share of households expecting job conditions to worsen over the next six months hit 32.1 percent — nearly as high as in April 2009. According to the Conference Board, “April’s fall in confidence was broad-based across all age groups & most income groups. The decline was sharpest among consumers between 35-55 years old, and consumers in households earning [more than] $125,000 a year. The decline in confidence was shared across all political affiliations”. Mentions of tariffs reached an all-time high, with consumers expressing “concerns about tariffs increasing prices and having negative impacts on the economy”.

Here in Canada, the economy slowed sharply in the first quarter, suggesting that spectacularly-high uncertainty levels are leading to a dramatic drop in overall output. Statistics Canada this morning said gross domestic product contracted -0.2 percent in February – offsetting part of January’s 0.4-percent gain – and was on course to expand just 0.1 percent in March as modest growth in the resource, retail and transportation sectors only partially outweighed losses in manufacturing and trade activity.

With the Liberal Party’s minority position likely to slow fiscal easing and hamper the country’s response to trade threats in the months ahead, options markets are pointing toward a slight depreciation bias against the greenback. We think that a heavy emphasis on downside risks is directionally correct – a slowdown could hit over-indebted Canadian consumers hard, offsetting any fiscal boost in the near term, and convincing the Bank of Canada to cut rates more aggressively than is currently priced in – but it is also important to consider a scenario in which the US economy slows even faster, forcing the Fed to outpace its Canadian counterpart in easing policy. When measured directly against the US dollar, the Canadian dollar has lagged most of its developed-market counterparts this year – excepting the Aussie – but has turned in a more respectable performance on a trade-weighted basis, only trailing the euro and traditional safe havens in the Swiss franc and Japanese yen.

Across the pond, the euro area economy expanded more than expected in the first quarter, although here as well, there may have been a tariff devil in the details. Gross domestic product climbed 0.4 percent in the first three months of the year – nicely doubling the pace set in the prior quarter – but Ireland, with its heavy concentration of US tax structures, saw a 3.6-percent jump in output and contributed 0.1 percent to the bloc-wide total, suggesting a surge in tariff-driven net exports might show up when Eurostat refines its flash estimate. Growth is likely to slow in the months ahead, combining with falling oil prices, lower import costs – particularly from China – and a strong euro, to compel more rate cuts from the European Central Bank. Investors currently expect two moves by year end, but we think the risks are slightly skewed toward a total of three. Absent another tariff-driven leg down in the dollar, the euro could struggle to top the 1.15 threshold again in the near term as rate differentials reassert their traditional influence.