Well, do you feel liberated yet?

After weeks of back and forth, President Trump finally announced his administration’s plans for global counter tariffs, on a day he coined Liberation Day. While Canada and Mexico were excluded from the reciprocal tariff list, global implications were far more severe, with China and Europe seeing numbers to the tune of 34% and 20%, respectively. Collectively, President Trump’s announcements to date increases the average tariff rate from 2.5% in 2024 to more than 20%, representing the biggest increase since the 1930s. That’s a major burden to put on the American consumer. Even if Trump’s plan is an effort to bring jobs back to America and cut income taxes, we’ve learned from the Covid-era that global supply chains are extraordinarily complex and any disruptions take years to correct. And with companies already announcing plans to increase prices, it will be Americans that will need to pay higher prices. There lies the issue—the strength of the US economy is dependent on the US consumer, and Americans have become addicted to cheap goods produced globally, be it their cars, iPhones, Starbucks coffees and pretty much anything sold at Walmart or Costco.

Overall, American consumers will face the brunt of these tariffs, at least in the near term, and given personal consumption accounts for close to 70% of Gross Domestic Product (GDP), it’s no surprise that markets are reacting negatively. In an effort to quantify this week’s announcement, the new regime increases tariff revenue by more than US$600 billion, which should be reflected as an improvement to the US deficit (last year it was close to US$2 trillion). However, any income tax breaks representing less than US$600 billion would imply consumers are worse off. At the same time, should these actions lead to a recession, as many are now expecting, any increased fiscal spending that leads to further rising deficits would prove these efforts ineffective. 

Economic data

On the economic front, we continue to see data points being skewed by tariffs, and in the US, on average, they’ve missed expectations. Some key data points this week include both the Institute for Supply Management (ISM) services and manufacturing indices, both of which saw continued weakness attributed to declining consumer confidence spilling over to new order and employment expectations. However, the Manufacturing Prices Paid index jumped from 62.4 to 69.4, reflecting concerns of higher prices. Interestingly, Wards Vehicle sales for March exceeded expectations, coming in at 17.8 million, the highest print since April 2021. However, this likely reflects consumers trying to get ahead of any price increases from tariffs. Labour data for March was also mixed, and while the headline non-farm payroll number was strong and exceeded expectations at 228k, revisions from the previous 2 months were -48k, and the unemployment rate rose by 0.1% to 4.2%. Regardless, markets were little focused on these numbers, given they reflected data from Pre-Liberation Day. One soft point was the Year-over-Year (Y/Y) change in hourly wages, which missed expectations coming in at 3.8% vs. expectations of 4.0%. In Canada, employment numbers came in well below expectations with 33k jobs lost. This represents the second consecutive month of negative full-time employment. Additionally, the unemployment rate also ticked higher to 6.7%, while the Y/Y change in hourly wages continued to trend lower, this time by 3.5%.

Global market reaction

Trump’s tariffs have sent shockwaves through global markets. Stocks experienced the steepest declines in Japan (-9%) and Europe (-7%) compared to last week. In contrast, most other markets saw more moderate contractions, with a typical decline of around -4%. Major emerging markets—India, China, and Brazil—demonstrated notable resilience, with declines limited to just 2-3%. Tariffs in India and Brazil should bring limited pain due to their smaller trade exposure with the US. For China, stabilizing sentiment and expectations of stimulus have kept markets resilient and pushed iron ore prices higher. Other cyclical metals declined mirroring weaker global demand prospects. OPEC’s announcement of higher supply magnified the decline of oil prices (-9%). Lower energy prices and weaker growth prospects pushed yields lower overseas, by around 20 basis points (bps) in most cases. The more multipolar and uncertain world we’re in kept gold prices in the green, but not the Greenback, which dropped to its lowest level since October 2024 due to fading US exceptionalism. The euro and yen, the other international currencies, were up despite experiencing the most pronounced equity corrections.

Bond market reaction

No surprise, US and Canadian bond yields moved lower on the week, as the market risk off tone continued to take hold. Both yield curves steepened, as the move in shorter dated bonds was more pronounced than longer dated bond maturities. Futures markets are now pricing in four 0.25% rate cuts by the US Federal Reserve, and three additional rate cuts by the Bank of Canda (BoC) by the end of the year. Corporate bonds continued to underperform, with credit spreads materially widening, and autos notably affected. Primary supply took a pause this week following the tariff announcement. Next week will be interesting, especially as issuers try to come to market, since new issue concessions will need to be large. Ultimately there will be a lot of price discovery.

Stock market reaction

The build up to Liberation Day was months in the making and the culmination of President Trump's tariff talk. However, there was no real liberation to be felt, as markets had their worst day in five years. The US drawdown was mid-single digits, while Canada saw a low-single digit contraction. Consumer discretionary and technology sectors were more negatively impacted with a near double digit pull back in the latter on the back of steep valuations, a soft US consumer and global supply chain challenges. Apple and Nvidia were down high single digits, while Nike was down mid-teens, and high-end home furnishing provider Restoration Hardware was down nearly 40%. The pull backs shocked investors and management teams alike.

ETF strategy

"It’s not about how hard you hit. It’s about how hard you can get hit and keep moving forward." This sentiment continues to resonate as we navigate the current market landscape. After a challenging day yesterday, and with European markets trading at their lows during early hours today, the trends we’ve discussed over the past few weeks remain firmly in place.

Key Trends: value over growth, large-cap over small cap, low volatility over all else. Our machine learning model reaffirms these trends, and our regime model indicates a clear risk-off environment having triggered in early March. This is not a time for complacency, rather a moment for vigilance. With Europe trading near its lows, we anticipate early weakness in North American markets. However, there’s a possibility that the lows may be established early in the session as investors square up risk in the afternoon, hoping for constructive developments in tariff “deals” over the weekend.

The US 10-year yield is nearly 100 bps lower than its peak in January. If one accepts the premise that current market weakness is a strategic maneuver to lower yields and US government borrowing rates, we may not have seen the lows yet. A significant risk remains in the form of prolonged trade wars, which could strengthen market declines while inflationary pressure create a floor under interest rates. This dual threat requires careful consideration and strategic positioning. While the current environment remains challenging, it also offers opportunities for the prudent investor.

What to watch in markets next week

Next week in Canada we’ll get the BoC Business Outlook Survey, building permits for February and the Ivey Purchasing Manager Index for March. In the US, well see the NFIB Small Business Optimism Index, consumer credit, wholesale trade sales, CPI, PPI and the University of Michigan Sentiment Index. And of course there will likely be many tweets by President Trump! 

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Authors: Adam Ditkofsky, Pablo Martinez, Sandor Polgar, Steven Lampert, Craig Jerusalim, Diana Li, Mona Nazir, Mickey Ganguly, Kwaku Apraku, Greg Gipson, Eric Morin, and Michael Sager

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