Key Investment Themes to Watch in the US

1.) US News and Notes

a.) The expanded Section 232 steel/​aluminum tariffs (from 25% to 50%) will go into effect this Wednesday. 

Keep in mind that parallel Section 232 investigations by the Commerce Department into other sectors (lumber and copper) have been open now for close to 90 days. We’d expect to hear something about those sectors in the coming days.

b.) The US Senate returns from break this week. The immediate focus is on Senate GOP re-writes to the House-passed tax and spending bill.

c.) Comments over the weekend from Fed speakers Waller and Daly still point to the need for rate cuts in the coming months.

d.) Just weeks after both sides declared a temporary truce, both the US and China are now accusing each other of violating the agreement.

2.) Key investment themes in the US

Below, we’ve highlighted some of the important longer-term investment themes to watch for in the US.

a.) Where do we go from here on IEEPA tariffs.

On Thursday, the Court of Appeals ruled that the US could continue to collect the tariffs under the emergency powers law while the appeals process for Wednesday CIT ruling continues. Recall, that the affected tariffs include:

• The 10% baseline tariff
• The country-specific reciprocal tariffs that are scheduled to go into effect on July 9^th
• The 20% ​‘fentanyl’ tariff on Chinese imports (that goes back to 135% on August 9^th)
• The 25% tariffs on non-USMCA compliant goods

To us, there are three implications if the original CIT ruling is upheld:

First (and most obvious), the worst-case scenario of extremely high and broad tariffs is curtailed at the margin. On its own, this is a constructive development but one we fear will get crowded out amidst the other implications.

Second, given the loss of projected revenues from IEEPA, the Trump team is likely to double down in other ways. For instance, raising the tariffs on steel/​aluminum to 50% feels (in part) like a response to the possibility that tariff collection under IEEPA would have to be permanently shuttered. Other possibilities include expansion of scope for Section 232 (sector-based tariffs on national grounds), implementation of Section 122 (15% tariffs for 150 days) or 301 (used previously on Chinese imports). 

Another possibility is that Trump looks to expand applicable foreign taxes under the Section 899 from digital services tax (and other OECD Pillar II) to include value-added taxes.

All told, it feels like the markets are placing a greater weight on the second implication – which means we’ve likely moved on from the initial optimism from Wednesday’s CIT ruling. At least in the near-term.

b.) Where are we on the ​‘One Big, Beautiful Bill’ + Section 899 of the House bill.

We expect that edits made by the Senate will err towards curbing some tax deductions (SALT) and also towards additional spending cuts. But even before we consider these measures, the House bill doesn’t really look as stimulatory for US growth as you’d expect. 

For instance, as per the House bill, the primary deficit is expected to be $614bln by the end of 2026. But the majority of the revenue shortfall is to be driven by a US$346bln extension of the existing TCJA tax cuts. Without that extension, the US would face the largest tax increase in history anyway. 

As such, we’re not convinced that the bill (in its current form) will add enough stimulus to imply that the Fed will need to delay the next leg of rate cuts to 2026 – as some are now noting. Indeed, two Fed rate cuts feels like a solid starting point for projections this year.

On Section 899, our own feel is that there is enough support for it in Congress. As such, we expect it to be in the final bill – not least as revenue sourcing is becoming more of an issue post-CIT ruling. As we wrote last week, this is a bearish development for US markets given the status of the United States as the world’s largest net debtor. Foreign investors will absolutely demand a higher premium to invest in US assets if the trade war metastasizes into a capital war.

c.) What is the data telling us?

There were a few notable developments from last week. 

• Personal incomes rose by +0.8% m/​m in April, but most of that was driven by transfers (mainly social security). Spending didn’t keep up as it only grew by +0.2% m/​m which left the savings rate (at 4.9%) at its highest level in a year.
• At the same time, core PCE is now at 2.5% y/​y – from 2.9% a few months back and now at its lowest level since early 2021.

In a world without tariffs and budget bills, the marked slowdown in core PCE would have people talking up a possible cut at the June FOMC. Unfortunately, we’re not trading/​investing in that world – and the most likely scenario is for the next cut to come in the fall.

This week, we’ll get some meaningful information on the employment side of the Fed’s mandate. This will come via JOLTS (Tuesday), ADP (Wednesday) and Nonfarms (Friday).

d.) Also, there is the matter of the US dollar. 

The FT had an article on this topic over the weekend (link here), but the breakdown in the traditional correlations between the USD and UST/​equities is a massive issue for foreign investors. 

Indeed, exposure to the USD had meant some degree of stability in years past. But it’s increased positive correlation to equities (and inverse correlation to UST yields) over the past quarter implies the diversification benefit of USD exposure isn’t there. That suggests that hedge ratios are likely to rise, which should mean additional USD selling at the margin.

For what its worth, market proxies for USD positioning in the futures market show net shorts close to their largest levels in years.

2.) Canada News and Notes

a.) The Q1 GDP number came in at +2.2% q/​q annualized relative to the street’s expectation of a +1.7% print. That surprise was really all about the strong contribution from net trade – with exports of autos, and industrial machinery leading the way. 

However, if you strip the contribution from net exports and inventory out, final domestic demand came in at -0.1% q/​q annualized – which is the weakest it’s been in a while. 

Q2 is the quarter where weakness will be felt - but the handoff from Q1 is a bit better than expected given the stronger reading here.

b.) What does this mean for the BoC meeting this Wednesday?

Markets have now priced out a cut for this week – even as consensus expectations from economists (via Bloomberg) is for a cut. That’s the first time in a while that this has happened.

However, we’re of the mind that the recent data points (April CPI, Q1 GDP) will tip the scales in favour of a hold. Of course, you could easily point to the recent labour data (April LFS and March SEPH) as justification for another cut, but the Bank will likely maintain language to imply that further rate cuts could be on the horizon if labour market slack continues to build.

Indeed, CAD OIS markets are pricing close to 50% odds of a cut for the July/​Sept BoC meetings. Given what we know now, we feel that’s fair.

3.) OPEC+ to Increase Supply

In case you missed it, OPEC+ announced on Saturday that it will continue to accelerate production increases for the third consecutive month (July). The increase will be 411k bpd – which will mean that the Saudis will be increasing its output to 9.5mln bpd, while Russia increases theirs to 9.2mln bpd.

The implicit message being sent here is that there is a shift in policy. Namely, that the larger members of the group will not curtail production if others don’t adhere to their ceilings. 

The prompt contracts for WTI/​Brent were both higher to start this week – which implies that some of the increase was in the price.

4.) Portfolio Strategy

a.) Ahead of a very busy week filled with meaningful data and central bank decisions, we’re electing to stay the course with our calls. 

To reiterate our points from last week, we continue to see value in US duration (mainly 10s). That will become especially apparent if US data this week (JOLTS, ADP and Nonfarms) under deliver relative to expectations. However, our choice to express this has shifted from ZTL to ZUAG (the latter representing more broader exposure to US rates). Both performed reasonably well last week and we still see near-term risks to the upside.

Current core holdings include: ZDB, ZBI, ZUQ, ZLB, ZDI, ZGLD, ZGI and ZLSU.

b.) Asset Views

c.) Regional Views