The Global Week Ahead: Careful What You Tease

Next Week's Risk Dashboard

• What this week’s House budget vote will consider…
• …and how Trump risks messing it all up
• Canada’s economy—hello consumers!
• US PCE—technical adjustments versus the January effect
• Germany’s election may disappoint Musk
• Ontario election likely to return Ford
• Canada’s federal election campaigning inching forward
• Comparing Canadian Liberal candidate platforms
• BoK can cut as the won gains
• BoT under political pressure to ease
• Bank of Israel on a prolonged hold
• Canadian bank earnings on tap…
• …and why the US is following in their footsteps
• BoC’s Gravelle to reinforce balance sheet plans
• Six key global macro readings

Chart of the Week

I own two Dobermans. They don’t share a whole lot in common with the bond market. Unlike bonds, they’re highly loyal to their owners, faithful, and highly affectionate. They are very intelligent animals, and sometimes share this trait with the bond market. But shifty strangers who tease them may be better advised to think twice. President Trump teased the bond market this past week. He wouldn’t make a good Doberman owner.

In this week’s issue I’ll go over the progress on US fiscal plans and how Trump’s cavalier interjections are at risk of messing things up in a disharmonious manner with the clock ticking on a government shutdown.

Also on tap for the week will be elections in Germany and the Canadian province of Ontario. Two debates by candidates jockeying to be Canada’s next Prime Minister—for a minimum of a few weeks—may seal their fates ahead of the March 9^th party vote and maybe a quick election call. Three regional central banks will weigh in (Thailand, Korea, Israel) and maybe we’ll hear a little more about the Bank of Canada’s balance sheet plans. Top shelf global macro readings are also on deck, as are earnings reports from Canadian banks.

TRACKING PROGRESS ON U.S. FISCAL PLANS

How do you negotiate a massive overhaul of the US government’s budget while the President is tossing bombs and rage bait in the middle of the exercise? Very good question.

The coming week will further advance the moves toward striking some sort of agreement in time to have a funding deal and avoid a government shutdown by the March 14^th deadline. The House of Representatives is moving toward voting on its plan after the Senate just passed their slimmed down just-to-avoid-a-shutdown version. Somehow, they must agree on a joint bill and get it to Trump for his approval. Trump said he dislikes the Senate version. Beware the Ides of March in Washington.

Here’s What’s in the House Budget Proposals

You can find it here but since this effort is about using budget reconciliation to achieve fiscal aims you need to go to the section labelled “Title II — Reconciliation and Related Matters” as well as the section toward the top of page 40 on mandatory spending. A few observations can be gleaned from the generalities, but details are unavailable so far. Achieving the broad outlines would then go to individual Committees to fill in the blanks which is likely to be a rather Herculean task.

Chart 1 summarizes the proposed measures.

The first observation is that tax cuts totalling $4½ trillion over ten years would be delivered. This is the document’s entry for the tax-writing Ways and Means Committee. Key on this point is that what is being implied is a temporary extension of the provisions in the Tax Cuts and Jobs Act of 2018 that are set to expire at the end of this year. To extend all of the TCJA provisions for the full decade of the budget plan would carry a price tag of $4.2 trillion as I went over in a prior weekly (here). Also key is that including Trump’s other tax cuts including exempting social security benefits from income tax, exempting overtime income from tax, exempting tips from tax, and cutting the corporate tax rate on domestic income would cost another US$2 trillion over ten years. The grand total for all of Trump’s tax cuts if extended over a full decade would be about $6.7 trillion. The House’s plan falls well short of that, but we can’t tell in the details how they fall short. It’s likely that they are extending the TCJA provisions by several years shy of 10 years, maybe half that, which punts the issue on future tax liabilities to whomever wins the 2028 election. Hence why Trump keeps talking about a third term which the 22^nd Amendment of the Constitution prohibits, but details, details.

The second observation is that the targeted cuts to discretionary spending would total $1.2 trillion over ten years and are broken down by Committee as follows.

• Energy and Commerce: -$880B over ten years
• Education and workforce: -$330B over ten years
• Agriculture: -$230B over ten years
• Oversight and gov’t reform: -$50B over ten years
• Transportation and Infrastructure: -$10B over ten years
• Financial services: -$1B over ten years
• Natural resources: -$1B over ten years
• Judiciary: +$110B over ten years
• Armed Services: +$100B over ten years
• Homeland Security: +$90B over ten years

On top of that $1.2 trillion of cuts, the House seeks to reduce mandatory spending by $2T over ten years. This category includes Medicaid, Medicare, Social Security etc. Trump has said he doesn’t wish to touch those areas and so it’s extremely unclear how this cut would be delivered. But if not achieved, then the House bill says that either fewer tax cuts or more spending cuts would be required. If more mandatory spending cuts are achieved than the $2T mark, then more tax cuts would be allowed. Targeted areas for mandatory spending cuts appear to be the $880B spent per year on Medicaid program for poorer individuals perhaps with work requirements, spending on student loan relief, spending on Supplemental Nutrition Assistance Program (aka food stamps), and spending by Homeland Security Committees.

There are plenty of hurdles to these wish lists. One is some of the responsibility would be downloaded to state and local governments. The courts might have a thing or two to say. The House cuts to mandatory spending could require Trump to drop his campaign pledge. There would likely be serious political and social blowback. Some voices have advocated unleashing Elon Musk’s DOGE on defence spending, but that too is getting strong pushback from GOP defence hawks. Like many of Trump’s early initiatives, many of these pledges could stumble at the execution stage.

The House plan also calls for a $4 trillion increase in the statutory debt ceiling from $36 trillion now to $40 trillion. That’s a further 11% rise in US debt from here (chart 2).

And Here’s How Trump is Complicating Things

President Trump is famous for moving the goalposts around on a high frequency basis. He’s doing that in the budget negotiations.

Trump now says that the US might balance the budget this year—yes, this year—and also disburse DOGE savings on spending cuts by giving 20% of them back to Americans presumably in the form of a rebate cheque, although he didn’t say, and putting another 20% of DOGE savings toward reducing the debt.

Trump’s budget claim is ridiculous. First, the US is running a deficit to GDP ratio of 7.2% now. Nothing in the House budget outline remotely supports such a claim that the budget will be immediately balanced; in fact, it would increase the debt ceiling and add to the deficit over time but by well shy of what would happen if Trump’s tax wish list were delivered for the full decade projection period.

Second, to contract the deficit by that magnitude in one year while delivering his sought-after tax cuts—assuming they would be immediately implemented—would require about $2½ trillion of immediate spending cuts this year, or over a one-third reduction in total annual US government spending now. That amounts to over 8% of nominal annual GDP and the spillover negative multiplier effects on the rest of the economy would add to this which would make for a large revenue hit and hence more self-defeating austerity to balance the budget. Hello recession, it’s been a while, you look worse than the GFC and pandemic.

Third, DOGE cuts have thus far been trivial judging by how daily Treasury outlays are tracking relative to prior years (chart 3).

Fourth, the House plan assumes aggressive DOGE cuts but still finances the overall picture with more deficits and more debt. That’s a net injection of stimulus into the economy that the bond market wouldn’t relish from an inflation and issuance standpoint. The lump sum paydown of debt would fall shy of the higher deficits and bigger debt ceiling.

ELECTIONS—SORRY MR. MUSK, YOU WON’T GET YOUR WAY

Elections in Germany and the Canadian province of Ontario will warm up political risk this week. The next major global election will then be Canada’s.

Germany’s Election—Musk is Unlikely to Get His Way

German voters cast their ballots on Sunday. Incumbent Chancellor Olaf Scholz’s Social Democrats are trailing well behind in the polls after their coalition collapsed late last year, triggering an election over proposals to ease fiscal rules (chart 4). The election wasn’t supposed to have been until September.

Friedrich Merz’s conservative Christian Democrats (CDU) are likely to win the largest share of the vote. They are well ahead in the polls.

Nipping at both of their heels is the far-right Alternative for Germany (AfD) party and its leader, Alice Weidel. AfD is in second place. Most believe it would be highly surprising if she won. Ms. Weidel curries favour with foreign supporters like Elon Musk. She backs ending Russian sanctions, mass deportations, and is opposed to green energy. You can see the parallels to the Trump administration.

Other parties could play king (or queen) maker but have no real chance at governing.

The leading CDU/CSU parties have clearly stated they will not form a coalition with AfD which means that while the party could siphon off support and drive greater fragmentation, Musk is very unlikely to see his championed party to victory. And yet who among the SPD, Greens and the rest may combine to form a coalition is uncertain. Chart 5 depicts the share of seats that could be won based on polling by various coalitions. For descriptions of the various coalitions shown in the chart (and others) go here.

Ontario’s Election—It’s Ford’s to Lose

Ontarians are already casting their advance ballots, and the rest will head to the polls on Thursday. An early election was called toward the end of January—fifteen months earlier than it needed to have been held. Progressive Conservative Party Leader and Premier Doug Ford was seeking to capitalize upon his lead in the polls and greater presence as a household name than the opposition leaders.

Attempts at translating polling numbers into seat projections show that Ford will either maintain or add to the number of seats his majority government holds (chart 6). Ontario elections have been known to have their big surprises.

Ford would represent continuity to stable Ontario spreads and maintain his presence as a leading voice against US trade aggression.

Canada the Next Step for Global Election Risks

Next up on the list of global political risk and how it could cross into the realm of shifting policy priorities will be Canada’s election. First will be the Liberal Party’s decision on who to elect as their new leader by March 9^th. While there are technically five candidates, the race is basically between Mark Carney (former Governor of the BoC and BoE and political newbie) and Chrystia Freeland (former Finance Minister). The candidates will face off in French and English language debates on on Monday and Tuesday respectively.

Carney appears to be in the lead with the majority support of Liberal cabinet members among others (chart 7). Chart 8 shows he would put up a fair fight. Jay Parmar and I offer table 1 as a summary of their policy stances.

Developments may move quickly after March 9^th given considerable traction behind the possibility that Carney—if victorious—may call a snap election shortly after the vote. If so, then an election as soon as April may be feasible and hence well ahead of when the prorogued parliament is slated to return on March 24^th.

CANADA’S ECONOMY—HELLO CONSUMERS!

The Canadian consumer is the (late) Rodney Dangerfield of the world of economics—both get no respect. This point may shine through in a tonne of Canadian GDP data that lands on Friday that will inform how 2024 ended and 2025 began.

The figures are expected to be reasonably constructive and could add to the tone of strong job market readings (here) and persistent core inflation (here). BoC watchers will then shift their attention to one more jobs report before the March 12^th decision, and whether or not Trump is bluffing about threatened tariffs that he delayed until early March. At present, markets only have about a one-in-three chance at a cut priced for the next meeting.

I’ve estimated a 0.3% m/m SA rise for December GDP and 1.7% q/q SAAR for Q4 GDP. Statcan had guided that December GDP was tracking at 0.2% m/m back on January 31^st. Data since then suggests upside risk. January GDP is a tough call but may eek out a small gain not least of which because hours worked soared for the second straight month.

The upside surprise to Canada’s retail sales numbers gave me a little more confidence in my GDP estimates. Normally retail's small weight in GDP doesn't affect much, but the 2.5% m/m volume increase was a lot higher than what I had figured based on their advance nominal retail guidance and relevant CPI categories. Retail sales volumes are tracking a third straight quarterly expansion starting in Q3 into Q4 and with enough momentum built into the math to provide a strong running head start into Q1 (chart 9). 

Therefore, total consumer spending that was up by 3% q/q SAAR or better in each of Q1 and Q3 last year might have performed well again in Q4. Whether retail volumes under- or over-state consumption growth is unclear but we have limited ability to track services spending volumes. Retail sales are not a value-added concept like GDP, so there is translation risk. The surge in retail might have been at the expense of spending on services. But then again, since Canadian retail numbers include no spending on any services, this means that a likely surge in spending at restaurants that benefited from the GST/HST cut could add upside risk to the retail depiction of overall consumer spending. Watch Tuesday’s December reading on spending at restaurants and bars from Statistics Canada in the context of recent strength with the caution that the numbers are nominal (chart 10).

And if tracking for December and January Canadian GDP is reasonably close with no material prior revisions, then Q1 GDP is VERY tentatively tracking 1.5% q/q SAAR.

That's not great growth, but it's hardly bad and I’m still waiting for the recession that some thought was for sure going to happen. Details behind the Q4 GDP headline number will be important. There could be a net trade contribution (chart 11). Inventories are uncertain, but have been running relatively hot on a combination of trend growth and post-pandemic tolerance toward holding relatively high inventories relative to sales. 

Some will claim that a recession already kind of did happen by citing per capita GDP numbers, but I’ve never accepted that reasoning. Per capita GDP may stabilize if not begin to turn higher going forward. One reason why it was depressed was excessive immigration especially of temps, but this is going to reverse going forward (chart 12). Population growth is already reversing (chart 13). No doubt shocks lie ahead, such as potential tariffs, but if they can be avoided, then per capita GDP may bounce back but still be restrained by competitiveness challenges and weak productivity. And in any event, since temps have been the biggest driver of population growth, it’s important to constantly emphasize they—international students, temporary foreign workers, and asylum seekers—shouldn’t be expected to contribute proportionately to GDP other population segments do.

CENTRAL BANKS—REGIONAL CENTRAL BANKS UNDER PRESSURE

Three regional central bank decisions may be influential to local markets, but the big central banks are on ice until the ECB’s next decision on March 6^th kicks off another round of decisions. The ECB will be followed by the Bank of Canada (12^th), the FOMC and the BoJ (19^th), and the BoE (20^th). This week will also bring out further BoC communications on balance sheets.

BoC on Balance Sheets

There should be very low risk out of his appearance, but Bank of Canada Deputy Governor Toni Gravelle—who heads the financial markets division—appears on an 8:15amET Monday morning panel at the Bank of England’s conference on central bank balance sheets (agenda here). There will be no published remarks or media. Gravelle is likely to repeat the themes from his speech on the topic in January before the BoC then announced the end of Quantitative Tightening. Go here for my attempt at projecting out the balance sheets and its key components over time.

Bank of Israel—On a Prolonged Hold

Consensus unanimously expects Israel’s central bank to hold its Base Rate at 4.5% on Monday. Governor Yaron had guided on January 28^th that one or two base rate cuts could be delivered by 2025H2 conditioned on achieving their forecasts notwithstanding what he described at “great uncertainty.” That implies a protracted hold through at least the next three meetings over 2025H1.

Bank of Korea—A Stable Won Opens the Door to Easing

Following its surprise hold on January 16^th, consensus unanimously expects the Bank of Korea to cut its policy rate by 25bps on Tuesday. With the economy stumbling with little to no growth over the past three quarters and core inflation still running at just under 2% y/y, the BoK can turn its attention back to easing in the context of a more stable won than was the case at its last meeting. The won has slightly appreciated so far this year (chart 14).

Bank of Thailand—Under Pressure

Thailand’s central bank is widely expected to hold its repo rate at 2.25% on Wednesday but a modest minority thinks that it could cut 25bps. When the BoT surprised by cutting 25bps at its October meeting it clearly communicated that the move was just a policy tweak and not the start of an easing cycle. The policy rate is close to being neutral. A case for a cut would rest upon CPI inflation running at just 1.2% y/y with core at 0.8% y/y, the appreciation of the Thai baht over recent weeks, and political pressure. PM Paetongtarn Shinawatra recently said “I want the BOT to consider cutting interest rate to help reduce people’s expenses. This is possible because inflation remains low.” She seeks greater collaboration between monetary and fiscal authorities.

CANADIAN BANK EARNINGS—MAKING THE BOC’S JOB EASIER

Canada’s big banks report earnings for the first fiscal quarter of 2025 ending January 31^st.

First up will be my employer (BNS) and BMO on Wednesday. TD, CIBC, RBC and National follow on Thursday and Laurentian Bank wraps it up on Friday. Chart 15 shows analysts’ earnings expectations.

One point that may come up is a comparison of the Canadian and US banking systems on the heels of Trump’s remarks. Speaking as an economist, the nationwide consolidate nature of the Canadian banking system maximizes the efficiency with which monetary policy changes transmit through the financial system and economy. They are learning this in the United States (here). As the US banking system continues to consolidate after about seventy years of restrictions against nationwide banking and branching from the McFadden Act of 1927 to the Riegle-Neal Act of 1994 (chart 16), evidence is emerging that this is aiding the transmission of monetary policy changes through the economy. 

GLOBAL MACRO—WATCH THIS HALF DOZEN INDICATORS

The main global macro releases not already covered are summarized in table 2. Six in particular may stand out.

One will be updated readings on the Fed’s preferred inflation gauges on Friday. US core PCE is expected by most shops to be 0.3% m/m SA that, when annualized, would retain considerable upward pressure on underlying inflation and further inform the FOMC’s patient stance toward future policy rate adjustments. Recall that core CPI was up 0.445% m/m in January. Adjustments for different weights would lower that estimate’s translation into PCE. Further, softness in the components within producer prices that get captured by PCE—one in particular—should also weigh down PCE somewhat. But key is that core PCE has been biased toward very strong readings to start off recent years and if this pattern persists then it could negate the other influences. This pattern may be due to a shift in company pricing decisions toward larger than usual seasonally unadjusted price hikes at the start of the year and/or to inadequate seasonal adjustment factors that overstate inflation at the beginning of the year.

Two is revised Q4 US GDP (2.3% q/q SAAR) and Q4 core PCE (2.5% q/q SAAR) on Thursday. No major revisions are expected, but we can never rule them out.

Three will be Friday’s consumer spending and income figures. Spending could be quite weak given what we know about retail sales last month.

Fourth, watch each week’s initial jobless claims (Thursday) for signs that job cuts by the US government begin showing up.

Fifth, China reports the state versions of the purchasing managers’ indices for February on Friday. They could post an artificial improvement from the somewhat earlier than normal Lunar New Year in January.

Sixth, Eurozone inflation readings for February will begin to roll in starting with Germany and Spain (Thursday) and then France and Italy (Friday). The Eurozone add-up won’t arrive until the following week.