This week saw the US Federal Reserve cut interest rates, putting more weight on trade tensions and global growth concerns than firm domestic data. Seemingly right on cue, President Trump followed the FOMC meeting a day later with a promise to impose a 10% tariff rate on the vast majority of remaining US imports from China not already targeted with 25% tariff rates in previous measures – amounting to tariffs on about another $265 billion of annual imports by our count. The latest tariff threat still doesn’t look large enough to turn ‘tariff man’ into ‘recession man’. They would add about $18 billion in added costs for US purchasers, all-else-equal. That is about half a percent of the annual amount spent by Americans on imports annually, or about 0.1% of the US economy as a whole.
Still, as we discussed in more detail here, cumulative tariff cost increases to-date are adding up more significantly for the 15% of the US economy that makes up the industrial sector. And manufacturing production/sentiment trends have softened as a result. The latest tariffs are more broadly based, targeting a wide swath of consumer as well as industrial goods (though the threatened rate is lower). But the direct tariff costs themselves could be dwarfed by the investment-crushing uncertainty that the unpredictable nature of US trade policy under the Trump administration has created. Even if the US backs away from implementing these latest measures, there is little doubt that tensions will remain at best at a simmer and there is always the possibility that a new target will emerge. At a minimum, the latest re-escalation of tensions should be enough to more than cancel out the near-term growth benefits from the two-year government budget deal working through Congress. We continue to expect US economic growth to slow to a sub-trend rate over the second half of this year.
Like the US Federal Reserve, the Bank of Canada has been more pre-occupied with global growth and trade risks than current economic data. Developments over the last week will only reinforce expectations that the next BoC move on rates is more likely to be a cut than a hike. But Canada’s recent economic data has probably simply been too strong to allow the central bank to immediately follow its US counterpart with lower interest rates. We expect this week’s data reports will show housing starts holding at an above-200k rate in June, with some upside risk if a surge in permit issuance in recent months turns into actual starts more quickly than we’ve been expecting. We have penciled in a 5k July increase in the notoriously unpredictable monthly employment count. Earlier strength – employment was up a whopping 421k year-over-year in June – and ‘normal’ month-over-month volatility means the release of one more month of data isn’t likely to change the narrative that labour markets still look relatively solid. We expect the details of the report to be more important, and particularly whether wage growth shows signs of extending improving Q2 trends into Q3.
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