By Douglas Porter

January 24, 2025

“A week is a long time in politics.” — Harold Wilson, UK Prime Minister during the sterling crisis of 1964.

“Tell me about it.” — Every market or economic analyst in January 2025.

At time of writing, in the past 100 hours we have had the freshly-minted President of the United States threaten to impose tariffs for various ‘transgressions’ on the EU, China, Russia, and of course Canada and Mexico, as well as any other country that sells into the U.S. market; demand that the Fed and every other central bank bring down interest rates forthwith; cajole OPEC to lower oil prices with haste; pull the U.S. out of the Paris Agreement; yank U.S. funding for the WHO; axe the EV mandate; curtail immigration; and introduce the $500 billion Stargate plan. And how have markets responded to this whirlwind of news?

• Bonds: “We’re not quite sure what to make of this, but are still quite concerned about the possibility of upside inflation risks and towering U.S. budget deficits.” Long-term Treasury yields were about flat on net, after dropping heavily the prior week on the decent U.S. CPI.
• Currencies: “The on-off tariff threats are annoying, but Trump’s comment that he would ‘rather not’ impose tariffs on China may be a tell.” The euro rose more than 2% on the week, and even the bedraggled Canadian dollar recovered 1%. Notably, the yen was little-changed, even with the BoJ hiking rates 25 bps on Friday.
• Commodities: “Well, a bit more inflation and growth are probably good for industrial commodities, but OPEC is probably not going to respond to Trump’s demands.” Even so, oil prices receded further this week by nearly $4 to around $74, while gold rose 3% on the weaker USD.
• Stocks: “Tariffs? Inflation risk? La, la, la, la… all just noise, rally on.” The S&P 500 rose 2% to a record high on Thursday, and even the TSX knocked down an 8-day winning streak to rise by more than 1%.

As much as markets would prefer to look past the President’s pronouncements, at least until proposals are actually enacted, it seems they have little choice but to follow the bouncing ball. For example, the U.S. dollar fell heavily on Inauguration Day, as tariffs received only light mention in the speech, while Canada and Mexico were initially spared. However, before the day was out, the President said that “maybe” those 25% tariffs would be in place for the NAFTA partners by February 1—and down went the loonie. Meanwhile, broader tariffs on others will be studied until April 1 (yes, April Fool’s day). In the middle of this, Russia was threatened with additional sanctions, as well as tariffs, if it didn’t soon end the Ukraine conflict. In other words, and just to be clear, Russia could very well face the same harsh trade treatment as Canada. Note that U.S. imports from Russia totalled all of $3 billion in the past 12 months (down 90% from 2021), while imports from Canada were $410 billion over the same period—none of which the U.S. apparently needs, per the President to Davos.

We suggested last week that there is a great deal of debate among analysts over the degree of inflationary risk for the U.S. economy from tariffs. But there is little debate over the direction of risk, with at least some of the tariff impact likely to seep into consumer prices. And that increased risk, at a time when U.S. core inflation has proved sticky at just above 3% and growth has stayed solid, is expected to push the Fed to the sidelines at next Wednesday’s FOMC decision. Despite the President’s considered advice, rates are expected to stay on hold for some time—we now expect the next trim in June, and markets are still only looking for 1-2 cuts for all of 2025. This week’s thin slate of economic data did little to move the needle, with home sales defrosting, but jobless claims rising and consumer sentiment softening somewhat in January.

It’s a very, very different set of calculations confronting the Bank of Canada, as they too will decide on rates on Wednesday. (Repeating, this overlap of BoC and Fed rate decisions will happen five times this year; the other four are all the dates in the second half of 2025.) While the tariff threat is of some academic interest in the U.S., it is an existential risk to Canada. Thus, in direct contrast to the Fed, the BoC is widely expected to trim rates again by 25 bps to 3.0%. True, it’s not a total lock, especially since underlying inflation has moved higher again in recent months, and job growth has somehow sprung back to life. This week’s CPI was mostly as expected, with the headline 1.8% inflation rate among the lowest in the industrialized world—Japan’s rate is now double that! But the three-month trend in the two major core measures has perked up to just above 3.5% annualized.

If these were normal times, we would be calling for the Bank to stand aside. With the Fed on hold, the Canadian dollar on its heels, core inflation turning back up, and plenty of signs of life in domestic spending, there are reasons to take a pause. This week’s other major economic release revealed that after a flat November reading, retail sales jumped 1.6% last month (juiced by the GST holiday, and a late Black Friday). But these are clearly not normal times. With the Canadian economy facing a possible massive shock from U.S. tariffs, the Bank should likely be cutting simply from a risk-management perspective. Even if the tariff threat is hollow—which may indeed be the case—the now deep uncertainty of U.S./Canada trade relations will likely put an icy chill into business capital spending plans, at least for any firm that exports.

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Friday factoid: The TSX close on November 25, just prior to the first threat of 25% tariffs: 25410. Two months later, at Thursday’s close? 25434 (up 0.1%, or essentially unchanged). This resiliency in the face of the tariff threat reflects the following: a) global markets have rebounded mightily; b) the TSX is not a good reflection of the Canadian economy, given its massive weightings in financials, energy and materials; and c) investors may just not take the tariff threat as anything more than a negotiating stance. A Wall Street Journal article this week suggested as much, citing the threat as a way to quickly re-open USMCA negotiations… since denied by the President.

But while stocks are whistling past the trade graveyard, almost no one else in Canada is downplaying the risk. From first-hand experience in recent presentations and client meetings, concerns about recession risks have gone from “not on the radar” three months ago, to the forefront now. The BoC’s survey of consumer expectations finds that 15.3% of Canadians fear losing their job this year—aside from the pandemic, when the jobless rate was in the double digits, that’s the highest such reading in the ten years of the survey. The uncertain domestic political backdrop certainly isn’t helping matters; if this week wasn’t long enough, we now learn today that Ontario will be going to the polls in little over a month, 17 months ahead of schedule.

Douglas Porter is chief economist and managing director, BMO Financial Group. His weekly Talking Points memo is published by Policy Online with permission from BMO.