Daily Points

ON DECK FOR WEDNESDAY, APRIL 16

KEY POINTS:

• Risk off sentiment has several drivers all centered upon misguided US tariffs
• EU guides that a long trade war is likely
• US announces chip restrictions on Nvidia in China
• US takes a truly odd step toward critical minerals tariffs
• US commences pharma investigation to pave way for tariffs
• A glimmer of hope? California sues US administration over tariffs
• BoC day expectations—will a history of surprises repeat?
• Canadian tariff remediation won’t affect the BoC’s stance
• Powell’s latest outlook has probably changed very little in a short time
• US retail sales: will tariff front-running spill into core?
• The first of Canada’s election debates is tonight; or watch the Habs
• China’s GDP disappointed, and momentum into Q2 will fade
• Soft UK core CPI was shaken off by sterling, gilts

Risk off sentiment is dragging equities mildly lower across global benchmarks. US equity futures are down between ¾% for the S&P and 1½% for the Nasdaq, while European cash markets are off by around ½%. Sovereign bonds are benefiting with yields down a bit across the US front-end as well as the gilts and EGB curves. The dollar is feeling no love as all majors are up against it.

As for the catalysts, there are plenty. One is that the EU guided yesterday afternoon that it expected a long trade war based on little progress in talks with the US which should surprise no one. My narrative remains focused upon European dysfunction as the vast differences across the EU will restrain their ability to either retaliate or negotiate.

The drop in S&P futures had been larger before headlines hit that China is open to trade talks but subject to a list of what are likely to be rather difficult demands to meet. One caution is that this is “according to a person familiar with the Chinese government’s thinking” and so take it with a lot of salt. Second is that the person that could be anyone from a senior official to Xi Jinping’s driver signalled that China wants respect from the US administration, consistent communications from US cabinet members by reining in pointed insults (looking at you Navarro…), and to address concerns on Taiwan and sanctions. Good luck!

Another factor weighing on sentiment is that late yesterday, the US imposed China restrictions on H20 chips from Nvidia which is hitting their shares.

Also late yesterday was the announcement that the US is starting a Section 232 critical minerals probe that possibly paves the way for tariffs. This is rather odd given US reliance upon critical minerals from abroad (here) and how there is very limited potential to ‘bring home’ such production.

If that’s not enough, then recall that on Monday, the US also commenced a national security study into pharma supply chains that may set up tariffs on drugs. I’m sorry, but how dumb is that. The US already faces the highest drug prices basically anywhere. Tariffs on imports will drive those prices higher. More people—who already face big gaps in access to and affordability of health care—will die of cancer and other ailments.

The state of California announced this morning that it is suing the Trump administration by contesting its ability to impose tariffs. This could be interesting in that it has long been thought that someone would step forward to challenge the abuse of past pieces of US legislation that Trump has used to declare national emergencies as justification for tariffs. And California has deep enough pockets to see it through in a legal system in which money definitely talks! There are four legal challenges underway now including others such as the Koch family’s challenge.

Overnight data didn’t really matter. The main focus into the N.A. session will be the BoC, plus it’s doubtful that Powell will have much to say that is new about the outlook this afternoon after US retail sales.

BANK OF CANADA—HOLD OR CUT?

Then it’s the BoC’s show from 9:45amET through to about 11:30amET. The statement lands at 9:45amET along with the MPR that includes forecast ranges and scenarios this time plus Governor Macklem’s opening remarks to his press conference that itself begins at 10:30amET. There may also be a technical paper that updates staff estimates of the neutral rate range that to now has been 2.25–3.25%.

A hold is fairly widely expected but it’s a close call and this central bank loves a good surprise every now and then. Chart 1 shows a sampling of times when they have surprised. They’ve ended QT and controlled CORRA so there should be nothing to see other than the policy rate, likely a careful bias, and forecast ranges plus a probable re-estimation of the neutral policy rate. See my weekly (here) for comparisons of the hold and cut cases that I won’t repeat here.

TARIFF REMEDIATION WON’T AFFECT THE BOC

As for yesterday’s new tariff relief announcements from Canada (here)? The timing—coming a day before the BoC—raised some eyebrows with some clients, but they won’t matter to the BoC based on our rough guesstimates that the impact on Canada’s average effective tariff rate would be a rounding error plus uncertain future effects on Canadian tariffs on imported US vehicles. Chart 2 shows John McNally’s calcs for the effective tariff rate on Canadian exports and Canadian imports both before and after yesterday’s announcements. Particularly hard to estimate, however, is the effect of the autos announcement since we need to monitor pledges from auto companies to keep production in Canada as a condition for tariff relief. 

The Government of Canada is expected to offer more details on yesterday’s tariff announcements at 2pmET today.

POWELL TO UPDATE HIS OUTLOOK BEFORE COMMUNICATIONS BLACKOUT

And then Powell gets the last and perhaps most impactful word when he speaks on the economic outlook in Chicago (1:30pmET). Maybe he’s got something to say before the communications blackout two Saturdays from now. I doubt his message will change from the April 4^th outlook and I highly doubt he’ll echo Waller’s talk yesterday.

CHINA’S ECONOMY—Q1 DISAPPOINTS, SIGNALS MOMENTUM INTO Q2 THAT WILL FADE

A blast of macro releases out of China started the fun last evening. All of the releases were stale given downside risks ahead.

Q1 GDP grew by 1.2% q/q SA (1.4% consensus) which is the slowest in three quarters (chart 3). The quarter ended on an upbeat note in terms of higher frequency data, perhaps on tariff front-running effects. Retail sales were up 5.9% y/y (4.3% consensus) and industrial output grew by 7.7% y/y (5.9% consensus). Those readings will offer a favourable jumping off point for Q2 growth, but it’s likely all downside from there.

Chinese home prices continue to decline with new homes down -0.1% m/m and resales down -0.2%. Both have been falling each month throughout the past two years, but the pace of decline was ebbing before trade wars (chart 4).

UK INFLATION—CORE MATCHED EXPECTATIONS, MARKETS SHAKE IT OFF

UK CPI then took the baton with CPI figures for March that had little effect on UK markets. Key is that at 0.5% m/m, core CPI in m/m NSA terms matched the average compared to like months of March in history (chart 5). That dragged the y/y core CPI reading down a tick as expected to 3.4%. Headline CPI was up 0.3% m/m (0.4% consensus). Services CPI was softer than expected at 4.7% y/y (4.8% consensus, 5% prior).

US RETAIL SALES ON TAP—WAS TARIFF FRONT-RUNNING ABOUT MORE THAN JUST AUTOS?

US retail sales for March (8:30amET) are expected to be strong in terms of the autos contribution that most think could drive a gain of over 1% m/m, but key will be ex-autos as potential further evidence of any tariff front-running versus confidence effects. The US also updates industrial output that is expected to be soft for the month of March (9:15amET)

THE FIRST CANADIAN ELECTION DEBATE

Last, how Canadian is this. The first of the leaders debates was brought forward to 6pmET tonight in Montreal in French because they didn’t want it to conflict with Montreal’s final regular season game that will determine whether they get a wildcard spot in the playoffs. Love it! The English debate is tomorrow night.