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Terminal and the Bloomberg Business App. Francis Donald of RBC writing, US tariffs in the size that they have been floated, or even a fraction of that size, could filter into the Canadian economy immediately, significantly and then persistently for many years. Francis joins us now for more and Francis, maybe we've avoided them, maybe they happen in one month's time. I don't know. But what I'd love to hear from you is the price of the uncertainty? What is the price that we have to pi.
Well, even though this trade shock that we look to have avoided would have been the largest in one hundred years for the North American economy. We do have some things that we know about terriffs and the threat of tariffs from the twenty eighteen twenty nineteen experiences, and one of them is even just the existence that they may occur has historically stalled business investment, household decisions. It creates an uncertainty tax on the entirety of these economies that
businesses lack clarity on what will happen next. So it wouldn't surprise me if we see a pause in business activity, a hit to business competence in the United States, Canada, and in other countries, and we see this distorting more of the Q one data on top of a period which historically we have a lot of trouble understanding the data from for seasonly adjusted reason.
Francis.
The way that John put it earlier was the some anti growth measures were being floated and dealed with, dealt with now by Donald Trump, and later there'll be the pro growth measures.
Are these hits to.
Potential growth offset with tax cuts and some of the other proposals.
We haven't been able to make the math work on tariff revenue matching tax cut needs. But what's really critical here in Lisa I think you nailed it is the sequence of these events. Trade shocks, tariffs, they're saxflationary. We know that to be true. They limit growth, they create inflation. But then you might see, for example, tax cuts that come through deregulation that tends to be pro growth, pro inflation.
And I think what's key here is that almost all of the policies that we've floated from Washington do have an inflationary element, but markets will care less about that, and the US will be able to absorb more of that inflation if it comes with a side of growth. And that's why I think you're seeing a lot more concern about the inflationary elements of tariffs than you are, for example, the inflationary elements of corporate tax cuts now
underlying the surfaces. I think the real inflationary story, and the one that should be concerning us most of all, is that the US lacks workers jobs. It is heading into a period where it's going to experience real demographic challenges. We expect the labor participation rate to decline in twenty twenty five. We have the least amount of workers ever working in the United States right now, the most amount of retirees if we see a change to immigration policy,
in fact we're already seeing some of that. We're going to see more challenges to labor supply. That's going to be the most nefarious form of inflation as it pushes up way just good but flows through the economy more broadly. So, inflation is one word, but there's all different types of inflation, and all these policies carry different variations of good inflation and bad inflation.
Francis, there's so much uncertainty that FED officials are saying very little and a lot of people are cheering that and saying nobody knows. Have you seen enough to change your outlook for the year when it comes to growth, when it comes to inflation in the United States.
Well, we were prepared to downgrade our US growth forecast if we had seen those twenty five percent tariffs on Canada and Mexico come through. Those would have shocked to US growth by a full percentage point in twenty twenty five and lifted inflation by half. As of right now, there's not enough even with the Chinese terces, to really make a meaningful change in that outlook. But our US rate strategist, Blake Gwynn has a really good line. He says,
the set is going to be watchful, not reactive. Of course, the fet is filled with a lot of economists, and I think economists on the street are going to be doing something very similar to that.
How much has changed, Francis in the last three months. I was listening to some comments from the Chicago Fed President Ustin Goilsby the same amount of sync with what I heard from him at the end of last year.
That's for sure.
Before Trump got into power, We've got to be more careful with how fast to cut rights.
What has changed for them?
Well, we may feel a huge sense of relief over the news from the past twenty four hours, but remember this massive trade shock. And I got to be clear here, this trade shock, twenty five percent tariffs on Mexico and China would have brought the average import terror for Americans up to almost eleven percent. It currently sits at three. It's a quadrupling of the trade pressure that would exist within the US economy. It didn't disappear. It's been paused
for one month. We still have the April First America April first America first trade policy negotiations. We have USMCA
being negotiated. We're hearing a lot of chatter about European tariffs, and then we have Chinese tariffs that came on that, as you mentioned at the start of the segment, is still a massive economic shock, and it would have to have you reevaluate how you're looking at the economy in twenty twenty five, especially if you're a central banker, because if you're a central banker in that situation, you're having to model growth down, inflation up. Some central banks only
have an inflation target. This central bank has a dual mandate, and those mandates would go in the opposite direction.
A rockin' haant place and somewhere in between. Francis, appreciate your time, soys Francis down.
With a Bomby c.
Find Saxon words join us now for more. If all of Wall Street's horses and all of Wall Street's men can't put the globalized economy back together again, how do we think about where best to allocate assets?
What a question. Sarah Johns' is now for more, Serah, good morning.
Good morning.
I'm going to talk about red wine from that way, as much as I'd love to. Let's talk about this the policy mix that we're going to see from this administration. Does it a track capital or push it away.
I think that that's a million dollar question right now, and it's certainly something that's been talked about for the first week in a way that it wasn't talked about in the first Trump one point er, right, There wasn't an argument about capital then, And I think that that what we're going to see is what we've seen so far, which is, you know, going this way, going that way. There's going to be a zigzag back and forth, and I think it is hard to pin those things down.
So I don't know what the answer is yet, but the big fear is that it does have a negative effect on capital.
The consensus view seems to be that this is still a pro growth administration, that it will attract capital. The S and P five hundred is still around six thousand, but there has been some damage done, particularly to the auto makers. How investible do you think certain industries with this cloud hanking over them?
Well, the tough thing for the automakers is that that's a tough industry anyway, because it's so capital intensive and things change so fast. So I think that there is I mean, you obviously have seen on the semiconductor side, those stocks have not really recovered, even though the market seem to recover some of the issues from the deep seaks.
So I think that there's a variety of different things going on at the moment, and people will start to have more enthusiasms or less, either for different sectors or different areas. But I think that this adding into the tariff thing absolutely puts you a little bit more of a question mark on going too deep into anything without recognizing that there's possible issues that are coming.
We started the show with Steve Chivun of Federated and he came on and he does his typical Monday morning although it is Tuesday morning, he did his typical look, does all of your horses look at the fundamentals. There are a lot of good things going on out there, and he's generally bullish, and he's looking to buy on the dips, whether it's semiconductors or some of these other spaces that have been disrupted by tariffs.
At what point do agree with that?
Well, I think that there have been already areas where you have reasonably good value. I mean the discussion prior to a lot of this was that the SMP equal weight was going to start to catch up to the S and P because the SMP was so heavy in those top mag seven names. And so I think that there are areas where you can look at the valuations and go, you know, this is completely reasonable. You know, you look at things like some of the materials food.
Some of the food stocks have gotten absolutely crushed. There are a couple of different things that we like in that area that have good dividend yields and reasonable valuations ten thirteen, fourteen times earnings. That's not crazy given where the SMP is right now. So there are obviously areas that you can look at, but it is definitely more of a nimbleness and you have to be watching things much more closely.
We've seen the NASDAC underperform pretty considerably in text talks in general for the past more than a month. Actually, as you mentioned, they really haven't recovered at the same time that you have seen this broadening out. Yesterday was instructive in terms of what stocks would get most beaten up as some of the trade tensions really picked up small caps. So how much does the tariff talk threaten the broadening out that a lot of people have been hoping for.
Well, I think that it's I mean, yes, you're going to get those reactions, and then you have to see where that data comes in and your discussion earlier about the FED there, I mean to the extent that they may not want to do anything. This sort of gives them cover not to do very much for some period of time as they sort out what's going on. It really is going to depend on where the economic data go, and that's going to matter for the small caps enormously
as well as interest rates. And I think that that right now is one of those vulnerabilities that that's an economically sensitive area. Not that the rest of the market is an economically sensive but it's more so and it's more tuned to what's going on in the US economy. So I think for those companies, what really matters is how things are going on the earnings and the economic front.
At that point.
There's a real important message coming from the bond market yesterday, where we didn't see a huge rally in the ten year yield. We didn't see a huge sell off either from some of the inflationary impacts of potential play stry impacts of tariffs.
What was the message to you?
Was there one or was it just people paralyzed because they had no idea how to came it out.
I think yesterday was It's interesting because I think that yesterday the equity markets obviously had a big reaction in the morning, but I think that there was some of a wait and see attitude about where is this really going to go by the end of the day, because we know that there is the possibility. I'm having phone calls, so that's telling you there's a possibility for this not to be as harsh as it sounds at the get go. So I think that on the bond market, people were
more waiting to go. We're not really sure which way this is going to go, and it's until you know. If it had gone through to today and nothing had changed yesterday, I think you would have seen the bigger reaction. But I think because that reaction was muted within the same day it changed, I think that gave people enough time to go it's okay, we can wait before we make any major decision.
I won't debate how much move, but I think on this stress test, I think we could take something Awhite directionally from what happened. The fact that yields dropped back at the long end, it didn't rise. There is something to be set. There be mostly and think can make that point. We discussed it earlier. The certain parts of this market, certain investors have begun to talk about the growth risk associated with tariffs, and not exclusively the inflation risk.
Francis Donald mentioned that it would take about a percent off growth in the US if some of these tariffs had.
Gone into effect. I think you're right on the long end.
The fact that you saw yield curve flattening, it shows that people have a very clear sense of what kind of disinflationary hit it could have over the lot.
I don't know what these tarifts would do. We've talked about this repeatedly. By definition, the import paces the tariff, how the cost gets distributed. It's going to depend on what the goods are. I know this though. You can't replace Ferrari. Ferrari coming out with earnings moments ago. Okay, FIE sales rising fourteen percent, one in four vehicles sold. Guess where in the United States? The stock is up this morning by a little more than three percent.
You can't replace Ferrari, but some of us can't afford it, so it would be really nice to, you know, share it once.
In a while.
Let me have the keys.
So obviously, you know you can enjoy it.
I can't.
Not many people can afford Opus one either.
Brand I know, you know, it's sort of the perception is, you know that it's a really wonderful car, and I just wonder if any of this will dep that perception.
Yes, agreed, going to see it, Sarah, Thank you as always, Sarah Hummett of Vampine Saxon Wood. George Sarah Vellos of Deutsche Bank saying euro dollar is a risk of parity, writing the drivers of euro dollar can be broken down into two parts, relative monetary policy and the tariff risk premium. George, John just now for more, George, welcome to the program. Let's talk about the second part, that tariff risk premium. How big is that?
So, John, I.
Think it's the key question for the next few months, and on our end, we're not spending much time trying to predict what President trub will do.
I think the experience of the last few days has shown it's not a very fruitful exercise.
It's all about trying to figure out what the market's pricing and therefore the risk distribution around its events. And when we look at the so called tariff risk premium, and you can see in many different parts of the market. You can see in the US inflation curve, you can see in the deviation.
Of the dollar from fair value.
You can even see in what's known as the EFP in COMEX futures for gold. When we look at all these tariff metrics, they've been send me a consistent message that the market's pricing a very limited tariff risk premium. It again tried to price more yesterday. It's now reverted back, but it's precisely because that tariff premium is still quite low. But we see the risk distribution skewed towards essentially pricing in more tariffs if and when they materialize.
George, is that just the euro or can you say the same thing about the Chinese currency?
I would say it's across the board.
If you're looking at all global markets, whether you're looking at fixed income and the so called inflation hump that's pricing to break events. It is still that inflation hump is still very low. It is definitely valid for the dollar when you're looking at the euro, for example, when we mentioned parity, that is not a forecaster to speak
at seven stone. It's just that if you get a reasonable outcome in terms of tariffs around the midpoint of the range that's been discussed, that's where we'd get to. Of course, if you're gett even worse outcomes, it could be bigger. China is more difficult because this is a policy determined currency. The market is not free floating, and I think this one is where the specific policy choices by the authorities will play much bigger role.
George, you talk about the trade war risk premium, and that typically has been strong dollar. We've been talking on the show about at what point the hangover effect of the tip for tad of trade negotiations trade wars ends up with the rest of the world trying to withdraw money from the United States, not put money into the United States. How much and how closely are you watching what indicators to maybe suggest that the appetite for the dollar or serring to wane.
That's a great question, and I think a very important one. So the way we think about it, first of all is relative economic impact. You have to think about currencies in that way, and the US possesses a number of unique features. It's the world's largest economy, it has the lowest share of trade, it has a big trade deficit, and it's very service is intensive.
And President Trump, of course knows all these things.
But what that means is that every time tariffs are threatened, it has an asymmetric impact on the rest of the world, and that's exactly why the dollar is strengthening. I think what you need to see for an unraveling of the inflows you allude to is essentially a big US centric growth slowdown that's more sharp than the rest of the
world that causes the FED to become more dovish. And so far, especially given that tariffs are tied in with the fiscal negotiations, potentially in a fiscal expansion, we don't see any signs of that.
In the meantime, there is the like we heard, as you said, the disproportionate effect in other countries that if tariffs do go into effect or even the suggestion of them, will slow economies like Canada. We heard that from the Bank of Canada or potentially in the European Union. On the margins, even though this is a single mandate ECB. Do you expect them to cut rates more aggressively to counteract some of that potential growth shock?
Well, again, the ECB is a huge focus.
And to go back to the point around the tariff screemom that was priced in uptil last week, the market was pricing the ECB to stop.
Above two around two point one two point two. Now, if you think about that, that was the upper end of.
The neutral range, which Leguard alluded to two twenty five to one seventy five. So of you on the ECB has definitely been more dubbish than market pricing. If you take a step back, European growth is below trend. Forwardlooking numbers of inflation are pointing at or below trend. You've got a net fiscal stances tightening and tariff risks.
So we see the ECB potentially cutting down to one point fifty.
The market has adjusted over the last few days, but I think especially versus the Fed, we see that rate differential widening again.
Essent George mention it. I just want to jump in.
I'm surprised that that's even somewhat contrarian right now. It's surprising to me that ECB officials are still talking about neutral and not talking about getting accommodative.
When's that going to change?
So it's a very interesting point in your age, John, because the narrative in the market is.
That the ECB should be cutting more.
But I always like distinguishing between the narrative and what ultimately matters, which is pricing.
And if you look at market.
Pricing for the ECB has been fairly hawkish, it's been above two. Why has that been the case? You have had sun rise and energy prices and the ECB sensitive to that. But I think crucially it's the ECB communication, especially from those hawkish members for example Governing Council member Shabul And I think what is required to change is for these members to gradually set that the ECB is going to need more, to do more, and I think we will get that over the next few months.
Hey, George Clinic from you as always a foreign exchange. Appreciate your time, George Saravelos there of Deutsche Bank.
Let's turn to the auto industry.
Danaives have wet Bush is not overly concerned about Tariff's writing. The supply chain kind adjust to a near term shock and weather the storm.
If these tariffs stand place.
For thirty to sixty days, we see minimal impact to GM and to Ford Dan John's just now for more Dank and Monic greed to be here thirty days. If we got that in thirty days and they lasted thirty days, are we only saying there's only going to be like minimal damage? Does this not hold these companies back from making big decisions?
I think it's the minimum. I mean, I'll be in Detroit, you know tomorrow. I think ultimately right now in terms of GM four, it's very continue. In terms of the impact, I think when you were good TAB so that's probably the one that's weezed impacted, especially given their supply chain. But our view is here bark worse than the bite, whether it's on the auto side, and I continue view on the China side, even on chips, even though that's pressuring names Nvidio and others. Just as we've navigated in
twenty eighteen twenty nineteen. You don't sell these socks because of it, because I continue view, just like you talk about where is this spending? I think it's gonna be another robust number from Google tonight saw Palatine and other's AI revolution alive and well. Tariffs are not impact that in our view.
One of the reasons why your analysis is particularly special. It's not just because you've been right about a lot of it, but also you travel a lot, you talk to people, you see the sentiment. Has there been, even in the past couple days, any sort of shift in the optimism because of the uncertainty.
Yeah, I think less about like in terms of Mexico and what we're seeing Cana. It's more it's from a China tariff perspective combined with deep seek. I think there's just general meybium a little more adjita in terms of what that means in terms of US China cold tech war tariffs, what the next step is. Because part of the issue is if you go back to this last week, Nadella doubles down eighty million, Zuckerberg sixty five billion, you see just massive cap backs tonight from Google, pound tier
and messy AI just another phenomenal quarter. I think the worry is could anything spoil the party? And the only thing that spoils the party is rattioning up in terms of US China tension. So I think in terms of the nervousness. That's why you're seeing pressure on Nvidia on overall tech here. You know, as this plays out.
GM was supposed to be immune from this because they actually moved their operations and their business out of China, largely to Mexico.
Now they're in the crosshairs.
I just wonder if other tech companies in particular are moving operations out of China more aggressively to immunize themselves from this type of shock.
Yeah, I mean like to that. Look in GM, it's been sort of one punch after another from the ev perspective in terms of from one administration to the other. The Mexico situation, I do believe, you know, marrying the team navigated that extremely well, and thing GM continues to be a start that we're bullsh on here in terms
on the China side. Look, we talked about if Apple decided today, if timberog is like we're gonna move ten percent of our supply chain out of China, that would basically take about two years and ultimately something that could cost you know what, I think thirty forty billion if it ultimately translated. The point is that it's always easier said than done. And I think that's the conundrum because the reality is like when you look at Apple, you
look at Tesla. That's why Cook must ten percent politician ninety percent CEOs.
Let's talk about Elon Musk and the closeness to the administration. We've talked about the benefits of that closeness and what it could mean, the halo effectors you've talked about over Tesla. Foreign nations are starting to see this as a potential pressure point. We saw that from a Canadian province in the last twenty four hours threatening to cancel a Starlin contract. Is it a benefit or not?
You know, there are definitely offsets, as we've talked about. But with the goal at the end of the rainbow is autonomous, I mean autonomous, we think that that's worth a trillion dollars in terms of that to the Tesla story. I think as you get a federal framework, and I think this is key in terms of the Trump administration, that is really that's the path for growth in terms of what I view as generational growth for Tesla. So Musk, he's someone he's not gonna ultimately peel back, right, So
he's going to continue going down in this direction. There's negatives, no doubt, should I just think them positives? It was a bet for the ages on Trump and it continues to be that, and I think it's going to be historical.
The President clearly wants to celebrate the national champions of American at Corporate America and Suwy should swe should Let's be clear about that. The question I'm asking is whether other countries begin to punish those national champions. We've seen that from the Europeans on tech. We've seen the tech plans not even be able to get into China. Test that's a round one.
It's very rare. I mean Tesla and Apple you put on just a different perch because there is about with Google they have an operator in China who cares. China's actually the only two tech companies. It's Tesla and it's Apple. And that's why that's the tight groupe, right because for Musk, and that's also why even when it comes down to TikTok and we continue to think Musk or Allison is probably in the front runners in terms of what potentially
is that asset sell. But for Elon right now, it's navigating this whole thing by continue viewing him more entrenched in the Beltway. Despite all the noise, is the best thing that ever happened in Tesla's shareholders.
To your point, John, last month, Tesla sales fell sixty three percent in France. That is because in large part people were taking a look at the political backdrop.
And saying, nahuh, this isn't our gig.
I do wonder if there is some reputational damage being done in the longer term where people are looking at what's going on some of the tactics and they're saying, let's look elsewhere.
Are you seeing that in any capacity?
Look, I think it's contained in terms of the demand issues that may that they've seen from a negative perspective, you know, because of it. But Bogies, I think the most important thing is when you think about autonomous, you think about robotics. I mean, that's really the testlo star. I think ninety percent of the story today is about that. So there could definitely be some demand issues. We'll call
it contained with the streets focused. And you saw it last week, right like the Bears scratching their heads like why is this stock not going down given numbers got low because the street is focused on autonomous robotics, and that ultimately, if you look where they are in the Trump administration, Musk is in a you know, he continues to play chess, others playing checkers. Relative to this situation.
One of the big arguments, especially as the China US trade war really heats up, or trade dance, whatever you want to call it, there is a question about whether it pushes China even more to develop a parallel tech sphere to the US that becomes dominant in its own right that might be more amenable to a number of countries around the world. How realistic is that to you? Does that become more of a possibility.
I think it's not realistic just because in video, I mean, we just continue at high scale GPUs in terms of true buildouts you need video. There's one red phone that goes to Jensen. Now obviously deep seat. That was kind of the white knock on moment. Everyone's like, does this change the whole narrative? But I think it's more has come out about that people realize, you know, maybe the barker's a lot worse than the bite. Look, you'll have a decoupling in terms of what's happened China in the US,
but negotiations. It's so important because again US needs China needs US, and I think that's why it's very very important, especially when it comes to chips, that this could be the coupling. But not get in the way of what I've u as a generational tech environment in terms of you know what we see with AI in video months to run up over the last few years.
Got to say that up front, but twenty two percent draw down in the past few months, why hasn't that stuffed recounted? We had a weight we worked out of the deep seek ITTs, maybe not what people thought it was, and here we are, we're still rolling over.
And I think that there's a few reasons. One it's just like Microsoft has you know, Apple that they've sold even after I think better than fear numbers. I think there's there's worries just in general about like can they continue to sustain it if any little thing happens flying the ointment stock gets crushed. So you've seen a little bit of a risk off. But look, I just continue
to view it. Six nine months from now, we look back at this as a golden buying opportunity, not the time where there's something structurally wrong and numbers.
Going on, Oh, we've just found betef exos to the play the same, which is talents it.
But to that point, that's why you look at like again that that's a if you look at that Pollenteer quarter, they could print that press release off put in the lover in terms of just how strong it was, and it shows what they're doing in terms of Pollenteers, I believe one of the best plays in AI. But to your point, there are look as a second third derivatives take hold from Google to Salesforce to others. There's gonna be other ways to play. It's not just about Mac seven.
There's there's that play.
Into this next to the Mona Lisa untamed Ai demand.
Right to and then there's I think that that that's.
Could be where Larco twin NFT special VP tickets something like that.
It's twenty it's going to see you.
Thanks, thank you.
A lot to talk about in tech right now, that's for sure, Dan of Webish there. This is the Bloomberg Surveillance Podcast, bringing you the best in markets, economics, angiot politics. You can watch the show live on Bloomberg TV weekday mornings from six am to nine am Eastern subscribe to the podcast on Apple, Spotify or anywhere else you listen, and as always, on the Bloomberg Terminal and the Bloomberg Business app.