Are the U.S.-U.K. trade deal and the unwinding of restrictions on microchip sales a sign of good things to come?<\/p>\n\n\n\n
It was a busy week for the U.S. president. In addition to meeting with newly elected Canadian Prime Minister Mark Carney in the Oval Office, last week Donald Trump also announced a new U.S.-U.K. trade deal1<\/sup><\/a> and unveiled plans to rescind and revise restrictions on the sale of artificial intelligence (A.I.) microchips that had been put in place under the Biden administration.2<\/sup><\/a> In our view, Trump\u2019s overarching message was clear: he is trying to claim that all of his moves have been right, that these new deals and relationships are the result of the hard lines he had taken previously, and that the U.S. economy will be stronger going forward as a result. It remains to be seen whether that will be the case. Last week, I\u2019d expressed some surprise that the Trump administration hadn\u2019t announced more trade agreements. But now, Trump and his advisors are hinting that more deals could be announced soon. Also, it is becoming clearer that a 10% tariff is a minimum. Bluster aside, the potential for resolution to some ongoing trade conflicts is likely to bring some positivity to markets. However, the tariff situation with China is unclear\u2014earlier in the week, Trump has reiterated that he was standing by the 145% tariff on Chinese goods, while on Friday, he suggested that it could come down to 80%.3<\/sup><\/a> <\/sup>That uncertainty could temper expectations somewhat. On the Technology front, we\u2019ve already seen Nvidia and other chipmakers\u2019 stocks react positively to the likely easing of chip export restrictions. The situation is worth monitoring over the longer term, however, because it is fundamentally a matter of competitive advantage: the U.S. is hoping to maintain it, but China is closing fast\u2014it\u2019s just a question of how <\/em>fast. Our expectation is that the Trump administration will do whatever it can to hold U.S. companies\u2019 advantage for as long as possible.<\/p>\n\n\n\n Bottom line: New trade deals and the easing of A.I. chip restrictions are good news for investors, though whether that momentum can be sustained remains to be seen.<\/strong><\/p>\n\n\n\n Last week, the U.S. Federal Reserve (Fed) held interest rates steady, prompting more criticism from Donald Trump, who has repeatedly said that rates should be lowered to spur economic growth. It is a tricky situation for Fed Chair Jerome Powell, and most investors appear to understand that. Powell has warned that if Trump\u2019s tariffs persist, they could reignite inflation and hinder economic growth.4<\/sup><\/a> What many people don\u2019t realize, however, is that the 10% tariff only applies to the raw goods that are crossing a border or coming into a port. Typically, that represents about 40% of the actual cost of the product. The other 60% of the good\u2019s cost\u2014the value that is added after the raw good has already entered the country\u2014isn\u2019t subject to the tariff. So, if, say, a product costs $100, a $10 tariff would not necessarily raise the price of the product to $110. Rather, the tariff would only apply to about 40% of the product\u2019s value, so the overall cost for consumers would increase to about $104\u2014if it were only the tariff causing the price increase. Many companies opt to mark up the price of the product further, knowing that they can blame tariffs\u2014for instance, they may increase it to $108, and that markup translates into higher inflation. There are also companies that do most or all of their business domestically, and therefore aren\u2019t subject to tariffs at all. Those companies could choose not to raise their prices, and therefore gain market share compared to companies that are affected by tariffs, or increase the prices marginally in an attempt to gain some market share AND increase margins. Again, this kind of markup would increase inflation. We still believe that we could see a couple of interest rate cuts from the Fed before the end of the year. But for all the reasons above, Powell and the Fed have to be very careful how they handle the situation, because too many cuts, or cuts that are too early, could contribute to a rebound in inflation.<\/p>\n\n\n\n Bottom line: <\/strong>The Fed continues to be driven by the data, and our sense is that the more Trump pushes for rate cuts, the less likely the Fed is to comply.<\/p>\n\n\n\n In last week\u2019s column, I discussed Q1 earnings for some key U.S. companies and sectors. But how are Canadian companies holding up given the tariff situation? Generally speaking, the story is not dissimilar to the U.S.\u2014earnings reports have been decent, but companies have felt compelled to include comments about the uncertain landscape (especially with regard to tariffs) moving forward. Like their American counterparts, some Canadian firms have provided whatever guidance they can on their expectations for the future, while others have sidestepped the question entirely. That\u2019s unlikely to change in the short term, and looking ahead, we expect that companies\u2019 response to tariffs and overall uncertainty will vary from firm to firm. Still, it is a positive sign that we haven\u2019t yet seen the bad earnings that some were expecting\u2014they aren\u2019t as strong as last quarter or last year, but they aren\u2019t bad given the circumstances. The trend is still downward, and some companies are highlighting that the consumer may be weakening. But importantly, earnings from credit card companies do not<\/em> show that the consumer has stopped spending\u2014people may be travelling less, for instance, but otherwise their usual spending is continuing. To be sure, it will take some time for the tariffs to work their way through the economy and begin to seriously affect consumers. But as the dynamics slowly shift, consumers will have some time to adapt to the additional 10%–and needless to say, 10% is a lot more palatable than 40%.<\/p>\n\n\n\nThe Fed<\/strong><\/h2>\n\n\n\n
Earnings<\/strong><\/h2>\n\n\n\n