Daily Points

ON DECK FOR TUESDAY, MARCH 25

KEY POINTS:

• Sovereign yields up, as the US 10-year yield remains 75bps above pre-election low
• The US is still trying to figure out its tariff plans…
• ...but here are the countries most vulnerable to the stated parameters
• Quebec’s Budget is likely to show worsened projections
• US new home sales are likely to remain weak amid low model home foot traffic
• US consumer confidence is expected to fall on high inflation expectations
• Updated Canadian election platform monitoring & deficit warning coming to fruition

Sovereign bond yields are under mild upward pressure this morning. The US 10-year yield is now over 20bps off the recent bottom in early March and remains about 75bps higher than last September when a Trump victory began to become more widely priced including expectations for higher debt issuance and inflation risk. US equity futures are volatile but presently slightly higher but underperforming bigger gains in Europe and Canada.

There were no material overnight releases or developments while markets continue to speculate upon what next week’s US tariff announcements may contain amid swirling headlines that conflict with one another.

German IFO business confidence increased a touch in March. The expectations component was up by 1.1 points for a second straight gain.

US Releases on Tap

Market risk appetite may be influenced by a pair of 10amET releases out of the US. Off-calendar risk is likely to continue to be driven by random tariff headlines.

Falling model home foot traffic is likely to mean continued softness in US new home sales (10amET). Chart 1. Consensus expects a rise of 3–4% m/m, Scotia expects 0.5%.

US consumer confidence is likely to fall in the face of deteriorating equity markets and tariff headlines (10amET). By how much is the question. A multi-point drop from 98.3 is widely expected. Key is likely to be the market’s reaction to inflation expectations that have been soaring (chart 2). All measures of inflation expectations—whether from surveys or markets—are of poor quality as predictors of actual inflation especially in the longer term.

That said, the starting point for the US economy remains one of excess aggregate demand and ongoing core inflation pressures. Layer onto that tariffs in an economy with capacity constraints and high pass through is likely. I’m of the view that tariffs represent high risk of sustained inflation because of capacity constraints, the impact on inflation expectations and more importantly, behavioural changes, and with the key being the sustained damage tariffs could do to supply chains including via product shortages. Fiscal plans are on ice for now, but how the deficit evolves is uncertain with my opinion remaining that it will rise as tax cuts are pledged while DOGE remains unsuccessful at reining in spending (chart 3).

The US also updates repeat-sale home prices for January (9amET).

Quebec’s Budget Likely to Deteriorate

The Quebec government will release its 2025–26 (FY26) budget after the market close today. Mitch Villeneuve notes that in its 2024–25 mid-year update, it projected a $9.2 bn deficit for FY26, including a small net contingency budget of $0.8 bn (about 0.5% of revenues). Given the intensified risks in the economic outlook and new tariff-related program spending (including low-cost loans to affected businesses) announced by the government earlier this month, Mitch expects some deterioration in Quebec’s fiscal outlook relative to what was last updated in November (charts 4, 5). 

US Tariff Plans in ‘Flux’

This FT piece is the latest spec on US tariff plans and it argues that a two-step process is being considered that would use emergency powers to impose “substantial” tariffs while conducting probes into trade practices of other countries. We don’t know what the April 2nd plans will unveil as the guidance changes from day to day. The most vulnerable countries are ones with relatively high tariffs on US imports and with whom the US is running trade deficits as shown in chart 6. The logic is weak and the target countries are not always consistent by both metrics, but it gives a sense of what the US administration has indicated to date. Chart 7 also shows that the US already has significant tariffs on many of these countries. The key may be the article’s remarks that the approach is still being debated internally and the purpose of the tariffs is still “in flux.”

Canada’s Election Campaign—Updated Platform Comparisons

The table on the next page (chart 8) offers an update of election pledges by the two leading candidates. There are five parties, but I focus on the two that are most likely to form a government of some sort. Guidance I provided at the start of the year on how fiscal deficits in a trade war combined with election promises could blow out to match or exceed pandemic highs is strongly at risk of coming to fruition. Many objected to that guidance at the time and yet it’s more common now.