Trump vs Powell + Thoughts on the BoC

1.) In the US

a.) Earlier this morning, Trump delivered another broadside to Chair Powell (“Too Late” Jerome Powell) for not easing as aggressively as the ECB has done over the past year. 

Our take: One of the more significant long-term risks for markets is the erosion of central bank independence. In Trump’s first term, this became a more acute risk as he repeatedly levied criticism at Chair Powell (someone he appointed to the role, by the way).

Trump’s earlier firing of two Democrat FTC commissioners does open a path for him to do the same at the Fed. But the process is very complicated given that Powell holds three roles – as a member of the Board of Governors (Powell could easily challenge Trump’s attempts to remove him from this role), chair of the Board of Governors (Powell could counter-sue), and chair of the FOMC (decided by the FOMC – who could dismiss Trump’s attempts).

Powell’s term ends just over a year from now and the general feeling has been that Trump would wait him out. But if markets don’t recover, Trump is more likely to start maneuvering here. And remember, political encroachment on Fed decision-making represents another major downside risk for markets.

b.) Powell’s comments yesterday were in-keeping with recent messaging. Namely, that tariffs make the growth-inflation trade-off worse but the current configuration favours keeping things steady. 

One other notable bit – that the Fed stands ready to supply USD to other central banks via swap lines. That’s been a point of concern of late given that the Trump administration has said otherwise. Chair Powell didn’t specify, but we’d assume those swap lines would be open to the narrower group of central banks as opposed to the broader set it was open to around Covid-time.

c.) The TICs data for February saw a huge uptick in foreign buying of UST to the tune of a US$290bln increase from the month prior. Most notably, there was heavy buying from Canadian, Japanese and Chinese investors.

Our take: The big caveat is that the data is from February and duration rallied aggressively towards the end of the month. So yes, there are valuation effects potentially at play.

Nevertheless, we’ve had 10y, 20y, and 30y auctions over the past few weeks and all of them saw a large percentage allocated to indirects. At the least, that tells us that foreign appetite for UST isn’t declining in the near-term as much as the media is playing up.

d.) Yesterday was tax day in the US – and the Treasury’s daily statement pointed to US$185bln in net inflows on the day which leaves the Treasury General Account (the US Treasury’s checking account at the Fed) at just over US$600bln. For context, it was at US$300bln just a week ago. 

Our take: That US$185bln figure is MASSIVE and it tells us that tax deadline receipts were the highest they’ve been since 2022.

Recall, that this money comes out of the banking system. However, we only saw modest tightening in funding markets – with overnight general collateral up 6bps while the Sofr-fed funds spread widening looks relatively tame compared to levels we saw last week. 

I suppose the Fed is right – reserve levels are still ​‘abundant’.

2.) Bank of Canada Thoughts

There are signs that the BoC’s confidence in its own decision-making process is waning at the moment. Of course, that’s for good reason as so much hinges on US trade policy – which is the most unpredictable its been in generations.

Still, its curious that the Bank has elected to switch to no guidance and go on to publish a 52 page MPR. Furthermore, it spent the bulk of the MPR describing two scenarios that are not comprehensive while admitting that the current situation is likely somewhere between the two.

Why not just take the current tariff settings and work from there?

Anyhow – rant aside - here are my takeaways:

a.) Tonally, the main message is consistent with March. In the meetings ahead, the BoC will have to arbitrate between the following:

• The price elasticity of demand for #CAD goods outside of the country – and whether that is large enough to impact domestic business investment, household spending and employment.
• How much and how quickly the impact of #tariffs are passing through to goods prices and what that means for #inflation expectations.

The decision on whether to cut further, or to hold, will depend upon which of the above dashes are more prominent.

For now, the upside risks to prices are a bit more prominent. That’s part of the reason why the Bank left rates on hold yesterday.

b.) Of the two scenarios – we’re likely not too far off from ​‘Scenario 1’ – which to me feels like the de facto base that we ought to be operating on from here. In that case, there’s only a modest build in economic slack over the coming years. That suggests that the current market pricing for terminal (~220bps) is fair.

c.) So much of what the BoC does from here will also hinge on how much and what kind of fiscal stimulus we can expect in the coming quarters. To that extent, we’re not priced for disappointment in markets like forward OIS or Corra futures. For the latter, the Z5 contract is now implying two more cuts for this year.

A combination of weaker than expected incoming data and disappointment on the fiscal policy front will surely mean there’s room for the Bank to get stimulative.

For now, there’s not much here to say from an investing lens. We’re really beholden to incoming data and headline risk in Canada more than anything.

3.) Other Canada Notes:

a.) The French-language debate was last night, and you can read a quick assessment of it here. To summarize, no haymakers were landed and PM Carney earned a passing grade for his performance.

The English-language debate is tonight.

b.) In case you missed it – Ontario is tabling legislation to loosen interprovincial trade to loosen all current exceptions to interprovincial trade while also signing MOUs with Nova Scotia and New Brunswick to ensure common recognition of goods, services and worker requirements. At the same time, Ontario will be launching a $50mln fund to help businesses make the necessary investments to boost interprovincial trade, source new markets and re-shore critical supply chains.

Our take: Inter-provincial trade is the ​‘low hanging fruit’ here but not a panacea for what Canada needs.

We are over-taxed relatively to our productivity. That still needs to be fixed.

4.) In the Eurozone…

The ECB is up later this morning. The general feel is that a 25bps cut is almost certain at this point – which would take the deposit rate to 225bps, the main refi rate to 240bps and the MLF rate to 265bps.

The decision won’t be accompanied by new forecasts from the central bank. There are a lot of questions as to whether the ECB will remove references to extant policy settings being ​“restrictive” today. If so, we’d surmise that the ECB is implicitly acknowledging that neutral policy settings (which we’d estimate to be around 2.00%) is close at hand.