Does Trump Really Mean it This Time?
February 27, 2025
Following Nvidia’s earnings and revenues beat, markets are taking things in stride as forward guidance was somewhat mixed. European markets were mostly on the defensive due to the latest tariff salvo from the White House.
In bond-land, US rates are underperforming are core sovereigns to start (yields are higher). That follows several sessions of lower yields across the curve, so the feel here is that the move so far is mostly about short-term profit-taking.
1.) All about tariffs
a.) In true unpredictable fashion – the US president may or may not have delayed implementation of the 25% comprehensive tariffs on goods imported from Canada and Mexico to April 2nd.
What’s more is that he indicated that prior demands on curbing fentanyl supply into the US will be “hard to satisfy”.
Also, the President has now (officially) threatened to slap 25% tariffs on EU imports.
b.) If he is actually looking to delay things again, Trump will have now delayed the comprehensive Canada/Mexico tariffs four times now (January 20th initially, then February 1st, then February 4th, then March 5th, and now potentially April 2nd).
Out of all the tariff threats made so far, only those against China have taken effect.
The whole “I really mean it this time!” approach to tariffs is the main reason why we suspect the market are so complacent on the issue.
It also leans further in the direction of a pause from the BoC at its March meeting.
2.) Like it or not, there’s a greater sense of permanency when it comes to tariff threats now.
- Trump needs them as part of transactional approach to trade and foreign affairs.
- Trump and congress will likely need them as a revenue source to offset the impact of an extension to the 2017 tax cuts and to mitigate the degree of expenditure curbs going forward.
The last point is particularly salient. True, the House GOP did pass its budget blueprint earlier this week, but the details on how the $4.5trln tax cut will be offset (namely, where the $2trln in spending cuts will be found) is still yet to be sorted. What’s more is that as part of the House GOP plan, any shortfalls in the planned $2trln spending cuts will be offset by an equal shortfall in projected tax cuts.
For example, if Republicans can only find $1trln worth of cuts, then the bill will have to change the size of the tax cut to be $3.5trln over the next ten years. By most accounts, that is not enough to extend the 2017 tax cuts – let alone the other promises that Trump has campaigned on.
Tariff revenues are likely to be an offset in that scenario.
3.) What it means for the US
In short, we’re becoming of the mind that tariffs aren’t the means to Trump’s ends. They simply are the end.
If that is the case, then the following applies for the US market:
- First, the passthrough will be felt in the price of goods mostly – where the contribution to inflation has drifted to zero over past year.
- Second, the Fed likely remains on hold for longer.
- Third, the risks to real activity in the US economy shift even more to the downside. Business investments and plans to hire are put on hold while households pull back on discretionary spending.
- Fourth, the markets go even further into defense mode. Particularly those sectors where revenues outside of the US make up a larger percentage (Tech, materials, and energy).
Amidst that backdrop, there are several strategies that we like. In our note (published earlier this week), we highlighted ZEA (BMO MSCI EAFE Index ETF), ZGLD (BMO Gold Bullion ETF), ZXLV (BMO SPDR Health Care Select Sector Index ETF) and possibly ZXLU (BMO SPDR Utilities Select Sector Index ETF) amongst others worth keeping an eye on.
The latter two are more domestic-oriented sectors when it comes to revenues.
Chart 1 - Percentage of Non-US Revenues by Sector
Source: BMO GAM
4.) On deck for today/tomorrow
a.) In the US
- The second estimate of US Q4 GDP should come in-line with the first (around 2.3% q/q SAAR). I don’t see that release mattering given that most sentiment gauges began to fall in the new year once Trump took office.
- With that in mind, the release of US durables for January could be telling – especially if there was notable front-loading in orders to get ahead of potential tariffs.
- For PCE (Friday), expectations have adjusted following the release of PPI a few weeks back. The street is now expecting a +2.5% y/y result.
b.) In Canada
- The SEPH payrolls number for December is out this morning, alongside the current account balance for Q4 and the CFIB business barometer reading (an underrated gauge as far as we’re concerned).
- We’re also typing this out before we’ve seen earnings from three of the big six Canadian banks (CIBC, RBC and TD report today).
- On Friday, we’ll get December GDP (at the industry level) and Q4 GDP. For the latter, consensus is at +1.7% q/q SAAR – which is a smidge below where the Bank projects it as of the January MPR. Our own “super rudimentary” GDP model is at 1.74% for those that care.
Also, as mentioned above, the delay in tariff implementation means the Bank of Canada is likely on hold at the March meeting.
c.) Outside of North America
- I doubt we get anything new or meaningful from the release of the ECB minutes (for the January meeting). A 25bps cut is already in the price for the March meeting while several speakers have alluded to the neutral rate being in the 2.00-2.50% range.
- In Japan, the release of Tokyo CPI should come with some degree of fanfare given its utility as a lead for national CPI. Markets aren’t placing much weight in a possible hike next month (or in April), but it does feel like that could shift in the near-term.
5.) On US duration:
Earlier this week, we laid out the reasons why US duration should catch a bid (there were 5 of them). Since then, the 10-year UST yield has fallen by 13bps.
Look, we got lucky with the timing. But we’re certainly of the mind that the risks still remain to the downside for the same reasons. We’d rather wait for a pullback before legging back into long duration or flattener trades from here.
Of the focus funds we mentioned this week…
- ZTM is up 1.5%
- ZGLD is flat
- ZEB is up 0.5%
- ZEA is up 1.7%
In the near-term, we’d expect to see some degree of pullback for ZTM and ZGLD. Our bias would be to look at adding on those dips.
6.) Important data releases for the rest of this week…
Thurs Feb 27
- US: Q4 GDP (second estimate), Durable goods (Jan), Initial jobless claims
- Canada: SEPH employment data (Dec), Current account (Q4), CFIB business barometer (Feb)
- Eurozone: ECB minutes
- Mexico: Trade balance
- Japan: Tokyo CPI (Feb)
Fri Feb 28
- Canada: Q4 GDP
- US: PCE (Jan), Personal income + outlays (Jan)
- Germany/France/Italy: CPI (Feb – prelim)
7.) Central Bank Expectations
Source: BMO GAM
8.) Markets