Tariff Trouble – Impacts and Insights from our Team

Roman Dubczak: Hello, everyone. I’m Roman Dubczak, Deputy Chair of CIBC Capital Markets. Today we’re going to discuss the impact of “Liberation Day”.

On April 2nd, at a press conference in the White House Rose Garden, President Trump announced the barrage of tariffs on US trading partners across the globe. The fallout was almost instantaneous and dramatic. Globally, equity markets tumbled, oil and the US dollar fell, and gold continued its historic rise. And that was before we saw the response from US counterparties. To date, some counterparties have responded. China, for example, have imposed reciprocal tariffs of 34%. Others may and likely will follow. In terms of economic conditions and the impact on our daily lives, volatility and uncertainty are likely to be with us for some time to come.

To help us make sense of how these issues may play out, I have with me today some veterans. And if I may say, this is not our first rodeo in terms of economic crises, but I’m very honoured to have with me The Honorable Lisa Raitt, Vice-Chair of Global Investment Banking, Avery Shenfeld, our Chief Economist, and Ian Pollick, Managing Director and Head, Fixed Income, Currency and Commodities.

So, why don’t we get started? Lisa, Avery, Ian, thanks for joining in the discussion today. And, I know these are fast moving events. And by the time our clients see this video, something will have happened. But, in any case, let’s try to just put a box around what we know so far.

So, Avery, why don’t I start with you, because you have the task, the unenviable task in this situation of making forecasts and, you know, the time frame is obviously been constrained by many levels. So, let’s start with, you know, as in terms of these tariffs they’ve been put out. Do you think they will stick, stick enough so that forecasts are possible? Or do you think there was just be a series of changes along the way?

Avery Shenfeld: You know, we pretty much replaced one uncertainty with a different uncertainty. So, we didn’t know what the Trump administration was going to announce on April 2nd. In fact, they didn’t even decide what they were going to announce until two days before. So, we really couldn’t have known. But now what we don’t know is how long this will last. And I think to some extent, there’s a little bit of a ray of sunshine associated with the fact that what they announced was so dramatically higher than what we were looking for, particularly, not so much on Canada, but on tariffs with the rest of the world, because the chaos that’s likely to create in financial markets that we’re seeing already, the difficulties that businesses will have responding to those tariffs in trying to make sense of what they should do, and ultimately the hit to consumers from higher prices on so many things that buy day-to-day, is going to create the political pushback necessary to bring Donald Trump to the negotiating table.

And our view is that while they’re standing firm now and standing tough, that’s going to be tougher to do as some of these impacts show up in the real economy for everyday Americans, they will be complaining to their Republican congressmen and congresswomen, who in turn will be complaining to the White House, their voices will join the voices of people like the leaders of the major auto companies, for example, and other US businesses.And we think at that point, the Trump administration will itself be seeking an off ramp to this, which will come in the form of negotiating with each major trading partner, finding something that looks like a win and declaring victory, and hopefully rolling back the bulk of these tariffs.

Roman Dubczak: No, thanks. Avery. And Ian, also unenviable, but, and also arguably very exciting because you’re down on the floor. The trading floor, so to speak. what, if anything, would the macro forecast be at this stage of the game?

Ian Pollick: It’s interesting because bond markets are like the express elevator, it’s only after they get to a certain floor they say, well am I actually on the right floor?

Roman Dubczak: Right.

Ian Pollick: And so there’s a very important footprint that the bond market has now kind of imparted. And that is one where you have very strong near-term pricing inflation pressures. By 2 or 3 years out, you’re magically back at this 2% inflation level. Then you actually have a bit of disinflation for the next few years. When it comes to the growth outlook, they’re pricing a very aggressive response from the Federal Reserve, not necessarily aggressive in the magnitude, but the urgency. You know, we had intermediate cuts priced. We have, 100-basis points of cuts price in the next five meetings. And so, these are the types of very kneejerk responses that we’re not necessarily agreeing with just yet.

And so ultimately, to Avery’s point we have to understand, number one, the data has to come in. We’ve seen no data yet of this data cycle. And so, bond markets, like I said, once it registers what floor it’s actually on, it’s gonna start asking whether or not that is the floor it wants to be on. Okay. Very good. Good way of putting it.

Roman Dubczak: Thanks. Lisa, so as Canadians, there is also this Canadian election that happens to be going on of this. And, you know, no need to overstate, the, the drama that these tariffs and Mr. Trump’s presence in general have put on the election. How do you, perceive the response of this tariff noise? Let’s focus on the tariff noise to how each of the leaders, Mr. Carney, Mr. Poilievre, are responding?

The Hon. Lisa Raitt: Yeah. You know, there’s a lot of similarities. First and foremost, any politician worth their salt in this country is going to think about the worker first. So, there’ll be a lot of talk about how to amend the employment insurance and policies, how to work with something we did before called Job-Share. Those are the things that they’re going to, talk about first and foremost, and they agree on them. There’s only so many levers you can pull.

I think where the difference will come down to is, how are you going to treat individual Canadian companies as they come to you with problems? And in the case of Mr. Poilievre, he’s going to say, “I’m going to cut your taxes.” And he’s already said that, “We’re going to give you a corporate tax rate. We’re going to incent you to do more stuff here. We’re going to make it the most competitive place in the world to do so.” Mr. Carney has been quiet on it, but I would assume that they’ll take a page from what they did during Covid, and they’ll have a large fund available for companies to do the paperwork around in order to get some help. So, there’s going to be two different ways of doing it. One will be, a top down approach of handing out money. The other one is going to be, “Tell us what it is that you need.” We’re going to give you a tax cut, but also tell us what else it is that you’re going to need. One will write checks, the other one will cut taxes.

Roman Dubczak: Okay. Do you think, just as we tape today, there’s three weeks, maybe less, between now and the election, do you think they’ll have the opportunity to differentiate themselves between now and then?

The Hon. Lisa Raitt: I think they’re going to have to.

Roman Dubczak: Yeah.

The Hon. Lisa Raitt: And you’re hearing a little bit of a rumbling about it, but certainly by the time we roll into the debates next week, you’re going to have to show that you have a plan for dealing with Mr. Trump and the tariffs, because things are settling now. You’re beginning to understand what it is. Are we going to do reciprocal tariffs? I don’t know yet. I don’t know whether or not people have landed on how much harm you want to inflict on the Canadian purchaser,

Roman Dubczak: Right.

The Hon. Lisa Raitt: … and whether or not that’s something that’s going to fly in a world where affordability is …

Roman Dubczak: – Yeah.

The Hon. Lisa Raitt: … just by a little bit, the number two issue.

Roman Dubczak: For sure. Okay. Thanks, Avery. Seems like Canada to use the phrase, it ended up being ‘the best of a bad lot’ as it relates to, you know, the imposition of these tariffs. Does it give us an advantage, in the grand scheme of things?

Avery Shenfeld: So, there are some industries where Canadian products compete in the US market more with other imports than they do with American firms. So in those industries, we do have a bit of an edge that our products will face no higher tariffs, in the case of autos, a bit lower because we have some US content that gets stripped out. And in other cases, of course, no tariff against products that will have a high tariff.

There’s also, however, many industries where the main competition is the US and where it’s not going to really make much of a difference, that there’s another 10% market share for other countries with a higher tariff than us, because the real force will be on the US. And as well, I don’t think we want to sigh relief too much that we got away with something. Because the reality is, if you look at energy, for example, maybe there was millisecond of relief that there was no 10% tariff put on oil. But oil prices are down more than 10% since the tariffs were announced.

So, the problem is, many of the things we sell to the US trade in the global economy, the downward pressure on global economic sentiment has pushed prices lower. And we do export to the rest of the world as well, to some extent, about a quarter of our exports. That’s not looking very promising. So, we walked away from that April 2nd announcement saying, “you know, we may have escaped the worst of our fears, but it was hardly good news.”

Roman Dubczak: Yeah. No doubt. Ian, I’m going to extend that theme as it relates to the markets CAD FX, yield curve, spreads, etc.. in the near term, as this kind of settles, how do you think Canada shows in terms of, you know, like I said, currencies, interest rates, spreads, etc.?

Ian Pollick: Sure. So, Canada had a tariff premium. You, kind of, rewind two months ago, Canada was the odd person out with Mexico, relative to the rest of the world.

Roman Dubczak: – Sure.

Ian Pollick: And so, our interest rates fell very, very quickly. They richened very aggressively versus the United States and the currency cheapened too. But you’re at a point now where to Avery’s point, ‘you’re the best of a bad lot.’ And so, the question is, “What do we expect from overall interest rates globally?” There was this idea six months ago that the US economy was exceptional and that growth exceptionalism had a lot of leverage built off that idea, that leverage went into public assets, private assets.

And so, as that idea is tested, you’re seeing a deleveraging event classically, you know, risk-off, bonds go bid. And so, interest rates have fallen as the capital moves from one asset class to another. For Canada, the starting point matters. And so, I do believe you’re in a world where there are some off ramp presented in the United States. There’s a mispricing of overall global inflation. And Canada is starting from such a low level of interest rates, there’s, ‘better footprint matters.’

And so, we do expect higher interest rates in Canada. And we expect a broader underperformance, meaning yields can probably rise a little bit faster than in the United States, but still stay relatively lower on a level basis. When it comes to the currency, remember, the Canadian dollar was the most shorted currency in the world.

Roman Dubczak: – Right.

Ian Pollick: That is not the case anymore. And so, what I actually worry about is the opposite, where people were so scared of being long on the US dollar, that people could get stopped-in into a long dollar position that could come at the expense of other currencies. But dollar Canada, let’s call it $1.35 before $1.50.

Avery Shenfeld: And just in terms of interest rates …

Roman Dubczak: – I’m going to write, this is being taped Ian.

Avery Shenfeld: – It is the longer-term … That is the longer-term rates Ian was talking about.

Ian Pollick: – Exactly.

Avery Shenfeld: We still think the Bank of Canada has room to cut short rates. But, you know, ten year rates have built in so much of that now at this point probably more than we’re going to get.

Ian Pollick: Correct.

Roman Dubczak: – Yeah. At the time of taping let the record show was exactly halfway between $1.35 and $1.50. Exactly.

Ian Pollick: – Heroic.

Roman Dubczak: Exactly, we’ll see. Lisa, so, tariffs… one thing. Are there any other non-tariff barriers Canada… Like, are we swimming upstream on other levels so to speak?

The Hon. Lisa Raitt: We do. We have one barrier with respect to the United States imposing on us. And we’ve got one barrier that we put on herself. So, let’s start with the United States one. And it’s the literal border. And what you’ve seen from the rhetoric around Donald Trump and his administration is that Canada has been taking advantage of the United States. It’s a bad deal. All that kind of stuff is translating itself into US border guards being a little bit more careful in terms of the number of questions they’re asking Canadians to come in.

Our own Canadian government has put out a travel advisory. You should know and understand that, if you’re entering a foreign country, they get to ask to see your telephone, if you don’t give it to them and the password so that they can look through it, you’re not going to be able to go into the United States, they’ll deny you entrance. That is specific to individual border guards. It’s not something that’s been written, but certainly it’s a concern. You’re hearing about it anecdotally. So, that’s a real barrier for Canadians. All of a sudden. It’s not as easy to go down to Buffalo. All of a sudden it’s not as easy to cross the border.

The one that we’ve imposed upon ourself, and probably for good reason, is, a rule that was just a guidance that was just put out by the then Minister of Innovation, François-Philippe Champagne, where he said, when you’re considering a purchase of a Canadian company, you have to take a look from a national security point of view, whether or not that foreign company is going to be taking up some economic space from a Canadian point of view, that is important to supply chain, that is important to the Canadianism. We’ve not seen anything like that before, and it specifically applies to the United States. So, that may be a barrier that we’ve put on ourselves, quite frankly, that may slow down business that we want to see happen.

Roman Dubczak: Okay. Interesting. Well, lots to still discuss, but maybe we’ll just wrap up today with one bit of advice for our clients, in this period of turbulence. And I think it’s a fairly safe assumption, we’ll be back with, you know, more updates on the topic as it go along. So, Ian, why don’t we start with you?

Ian Pollick: – Sure. I would just say that your windows are going to be open and closed very quickly if you’re a hedger, if you’re an acquirer, if you’re an issuer, take advantage of the opportunity when the market conditions come your way, because you cannot overestimate, that that’s going to be there necessarily for a long period of time.

Roman Dubczak: Yeah. Good point. Thanks, Avery?

Avery Shenfeld: So unfortunately, I think the right advice for many corporates is to postpone decisions. And we don’t like that because we want companies to invest, we want companies to do things. But the reality is that given this cloud of uncertainty, it does make sense to get more information. The one thing companies can do is make sure that they’ve got a strong balance sheet, lots of liquidity. You know, we’ve been through this before. Sometimes the period of, of economic trouble is longer than you hope.

And you do need to live to see the brighter day on the other side. We’re still optimistic that, some of these tariffs will be negotiated away. The global economy could be improving again in 2026, but we just don’t know how long the issues will linger in 2025.

Roman Dubczak: Okay. Thanks, Avery. Lisa?

The Hon. Lisa Raitt: My advice to clients is going to be take the time to vote in the federal election because the only poll that really matters is the one that happens on April 28th. Until that point in time, they’re just people taking shots in the dark.

Roman Dubczak: All right. Well great. Well thank you. Avery. Lisa. Ian. Great conversation. I want to thank all of you for joining us here today. Clearly, turbulent times. But, the team here at CIBC is happy to engage and happy to answer any of your questions. And please feel free to reach out should you have those. And like I said earlier, we’ll be back in touch as, as these topics evolve. Thanks for joining us here today.