Yann Furic
B.B.A., M. Sc., CFA®
Senior Portfolio Manager, Asset Allocation and Alternative Strategies
On April 2, 2025, a day also referred to as Liberation Day by the U.S. administration, President Trump unveiled a long list of new tariff rates to be imposed on exports from a large number of countries a week later. These tariffs were to fund the government, bring manufacturing back to the U.S. and force the countries concerned to lower their trade barriers.
Current global situation: The tariff dance
On April 9, following a significant rise in the yield on 10-year government bonds, the Trump administration declared a 90-day pause on the imposition of tariffs, with the exception of those on China. The purpose of this pause was to negotiate agreements with various countries to reduce the level of tariff and non-tariff barriers. On May 11, a reduction in tariffs and a 90-day pause were negotiated with China.
Since then, markets have been awaiting the outcome of these negotiations. During this period, U.S. companies also began reporting their quarterly earnings which, on the whole, exceeded expectations. However, their comments reflect trade policy uncertainty, and many are giving no guidance on sales and profits going forward.
The high level of indecision is slowing corporate spending, and possibly consumer spending too.
When will consumers feel the impact of the tariffs?
Taking advantage of the delay in imposing the minimum 10% tariff, massive imports of a variety of goods from many countries around the world have enabled companies to increase their inventories. For example, Reuters reported that Apple had chartered a plane to transport over 1.5 million iPhones from India to the United States. This means that, for consumers, the impact will not be felt until late May or early June, according to estimates.
There may be a scenario where the announced tariffs never come into effect. In China, the initial imposition of 145% tariffs had the effect of drastically reducing orders from U.S. companies. Since manufacturing and shipping from China require long lead times, companies like Walmart need to place their orders well in advance if they are to have enough inventory to meet consumer demand at certain critical times of the year, such as back-to-school or the holiday season. The current uncertainty could lead to shortages of goods, resulting in higher prices and inflation, a situation similar to the one we experienced after the pandemic.
Note as well that a slowdown in the logistics supply chain causes job losses for longshoremen, truckers and the rail industry which, in turn, leads to an economic slowdown.
Meanwhile, in the U.S. Congress…
In the meantime, the U.S. Congress continues to discuss the budget and maintaining tax cuts, despite a high deficit. The U.S. administration would like to sign the new budget on July 4, Independence Day. Negotiations are ongoing… For now, the U.S. economy and employment are holding up.
The yield on 10-year U.S. Treasuries plays a watchdog role in managing spending and the resulting deficits. The night before most tariffs were paused for 90 days, this yield exceeded 4.50%, impacting corporate financing, mortgages and long-term U.S. debt financing.
The markets are currently wavering between an economic slowdown and the likelihood of a Fed rate cut in the event of job losses, even though inflation is still above target and the economy is stronger than expected, albeit with a deficit that will have to be addressed before long…
We can reasonably expect markets to navigate between this tariff-induced slowdown and rising inflation, or an economy that manages to hold up but has to limit government spending, or risk triggering high interest rates that would certainly have a dampening effect on the economy.
The Fed’s role
The Fed has a dual mandate: to achieve price stability (inflation target around 2%) and full employment. In a high rate environment, it’s hard to imagine inflation returning to target: in fact, it would take a recession accompanied by significant job losses to see the Fed cut rates.
For the world’s other major central banks, inflation is not currently a serious problem; moreover, these banks do not have an explicit mandate to maintain full employment. This means that the Bank of Canada or its European counterpart could continue to cut their rates to stimulate their respective economies.
A scenario to consider
A reduction in tariffs, mainly in the case of China, is likely. The meeting between American and Chinese representatives that was held in Switzerland a few days ago seems to be going in the right direction.
No changes are expected to the 10% minimum tariff, a disguised tax that enables the federal government to finance its budget.
For Canada, any reduction in tariffs will be welcome. The absence of additional tariffs for Canada and Mexico at the time of the famous April 2 announcement may have been interpreted as a pause, pending a quicker-than-expected renegotiation of the tripartite USMCA agreement.
Elsewhere in the world
In the case of emerging economies, a devaluation of the U.S. dollar would be conducive to economic growth. As for China, it announced several months ago measures aimed at stimulating its economy.
In short, countries with the means to boost their economies, whether through fiscal or monetary stimulus, will be able to cope with the protectionist measures in place.
What moved the markets in April:
- Liberation Day”: the world’s new headache.
- Canadian elections: a minority Liberal government takes power.
|
OVERVIEW OF GLOBAL EQUITY MARKETS |
||||
|
Country |
Index |
Return |
Change |
Year-to-date |
|
Canada |
S&P/TSX |
-0.10% |
|
1.41% |
|
United States |
S&P 500 |
-4.68% |
|
-8.68% |
|
|
Nasdaq |
-3.18% |
|
-13.06% |
|
International stock markets |
EAFE |
-0.37% |
|
7.34% |
|
Emerging markets |
|
-2.77% |
|
0.15% |
|
China |
MSCI China |
-8.12% |
|
5.76% |
The return shown is the total return, which includes the reinvestment of income and capital gains distributions.
Source: Morningstar Direct.
Results – Canadian bonds
The FTSE Canada Universe Bond Index, which includes Canadian government and corporate bonds, has posted a positive return of 1.36% year to date (at April 30, 2025).
Source : Morningstar Direct.
Our analysis of events
Policy rates
- On May 7, the U.S. Federal Reserve kept its rates at their current level. U.S. tariff policy, which will have an inflationary impact, could also limit rate cuts in 2025. In his comments, Fed Chair Jerome Powell indicated that inflation and employment uncertainty is higher than it was at their last meeting.
- The Bank of Canada (BoC) kept its policy rate unchanged at 2.75% on April 16, as inflation remained within its target range. Uncertainty regarding the imposition of tariffs by the U.S. could alter monetary policy and lead to further rate cuts. Currently, markets are anticipating two cuts in 2025.
Employment situation
- U.S. job creation was stronger than expected in April, with 177,000 jobs added versus expectations of 138,000. Note that once again, last month’s data were revised downwards. Wage inflation is still too high, at 3.8% year-over-year. The unemployment rate is stable at 4.2%, while the average number of hours worked rose.
- In Canada, 7,400 jobs were added in April, exceeded forecasts of 5,000. Despite this increase, the unemployment rate rose by 0.2% to 6.9%. Year-on-year wage growth was 3.5%, in line with the previous month.
Inflation
- In Canada, the annual inflation rate was 2.3% in March, down 0.3% from the previous month (2.6%), the GST holiday period making the data less reliable. In the United States, the annual inflation rate fell by 0.4% to 2.4% in March, mainly due to lower energy prices. These data reflect the situation prior to the tariff announcement.
Factors to consider for the coming months
- The reduction of regulations in various sectors of the U.S. economy should help maintain economic growth and encourage business investment. Other countries, such as Canada, will have to follow this trend towards deregulation at the risk of losing competitiveness.
- A trade war supported by the use of indiscriminate tariffs could cause an economic slowdown and a resurgence in inflation, that is, an episode of stagflation, the most negative economic scenario.
- Inflationary scenarios that would keep yields on 5-to-10-year maturities at high levels should be avoided, since they would curb business investment and the reshoring of production lines to the U.S.
- Geopolitical uncertainty will continue with the Russia-Ukraine war, regional conflicts in the Middle East, tensions between the U.S. and China, the possible annexation of Taiwan by the Chinese government and tensions between India and Pakistan.
Economic Indicators
Global Purchasing Managers’ Index 
Indicators for the manufacturing segment were down, with almost two-thirds of the thirty countries in the index posting a reading below 50 (contraction). The services segment continues to hold up well and remains robust.
Inflation rate 
Overall, inflation is falling and continuing to move in the right direction, but its speed of deceleration is slowing. Central banks are likely to make fewer rate cuts than anticipated a few months ago. The indiscriminate imposition of tariffs worldwide by the new U.S. administration could create inflationary pressures in 2025.
Benchmark rates in Canada, Europe and the United States
Interest rates have been falling for several months now. Fears of renewed inflation in the U.S. should limit further rate cuts. In contrast, Canada and Europe are facing tariff threats, and their weaker inflation is enabling their central banks to lower rates further.
Our tactical views
In April, we reduced the weighting of equities in the tactical allocation strategy. We lowered our investments in Canada, Japan and emerging economies, and reinvested in continental Europe.
In the United States, we maintained our equity weighting and our position in large cap growth stocks, which react positively to stabilizing interest rates, as well as in stocks with a track record of dividend growth which are more defensive.
In the fixed-income component, we increased the weighting of bonds and maintained their quality by holding only Canadian and U.S. government bonds.
We continue to favour stocks in developed countries and focus on risk management.
To learn how our funds performed:
Senior Manager, Asset Allocation and Alternative Strategies
Data source : Bloomberg
The opinions expressed here and on the next page do not necessarily represent the views of Professionals’ Financial. The information contained herein has been obtained from sources deemed reliable, but we do not guarantee the accuracy of this information, and it may be incomplete. The opinions expressed are based upon our analysis and interpretation of this information and are not to be construed as a recommendation. Please consult your Wealth Management Advisor.
