Markets ’fully unimpressed’ with tariffs and ’sheer randomness’ of policy - BMO

Investing.com -- BMO Capital’s Chief Economist, Douglas Porter, highlights the recent toll that tariffs and trade uncertainties have taken on global markets and economies. The report, titled "Tariff Bueller’s Day Off," discusses the lack of market enthusiasm for the recent trade news, which has included the U.S. applying additional 10% tariffs on China and 25% tariffs on Mexican and Canadian goods.

"Markets have been fully unimpressed by both the tariffs, and retaliatory measures, but perhaps most of all by the sheer randomness of the trade news," Porter commented.

Stocks faced downward pressure throughout the past week, with the Nasdaq entering a correction phase on Thursday, dropping almost 10% over the past 11 trading sessions. The MSCI World index also saw a decline of 5% since its record high on February 18. Treasury yields have edged up, influenced by Germany’s release of its debt brake, which sent bund yields up significantly.

The U.S. dollar, which had remained strong, is now facing depreciation due to concerns over the potential economic damage from a multi-faceted trade war and signs of slowing U.S. growth. The euro has seen a near 5% increase, supported by Germany’s potential for aggressive public spending and increased defense spending in Europe.

Despite trade tensions, the Canadian dollar managed a slight advance, reaching 69.5 cents, or $1.439/US$. BMO forecasts that the Bank of Canada will cut rates by 25 bps to 2.75% at the next rate decision, with the market expecting less than three full cuts by December. BMO suggests the Canadian dollar could weaken by year-end, potentially to $1.49/US$, or 67 cents.

The report also covers recent U.S. economic data, which has been relatively strong, but notes concerns such as a spike in layoff announcements and a record trade deficit in January. BMO has revised its U.S. GDP forecast downward due to trade uncertainty and government spending cuts. Conversely, Canada’s economy has shown strength, with a trade surplus and a potential Q1 GDP stronger than the U.S.

BMO anticipates that tariffs will be fully reactivated on Canada on April 2, and the U.S. President has reaffirmed that 25% tariffs on steel and aluminum imports will commence next week, with Canada being a significant supplier. The report concludes with a revised economic forecast, projecting lower GDP growth for the U.S. and Canada, higher inflation, and deeper rate cuts by the Bank of Canada, acknowledging the palpable recession risks for both countries.