US Tariff Threat Looms Over Canada’s Retail Momentum & Inflation Outlook

Today's expected range for the Canadian Dollar against the major currencies:

US Dollar        1.4100-1.4320

Euro                 1.4750-1.4980

Sterling            1.7870-1.8070

WTI Oil (opening level) $70.43

The CAD is opening at 1.4216 ( 0.7034 )

Retail sales have been accelerating in the second half of 2024 and the trend is expected to continue into this year. The potential headwind to consumer spending is the Trump administration’s threat to impose tariffs on Canadian products. With around 75% of Canadian exports heading to its southern neighbor, a trade war with the US would cause significant damage to Canada’s economy and Ottawa will be pulling out all the stops to placate President Trump and avoid tariffs.

US tariffs would boost global inflation, which threatens to undo the progress the major central banks have made to contain inflation. The Federal Reserve has pointed to tariffs as an upside risk to inflation and Bank of Canada Governor Tiff Macklem has acknowledged that the tariffs are causing uncertainty. The US has suspended tariffs aimed at Canada until March 3 and whether the tariffs are reinstated or not could impact the BoC’s decision at its meeting on March 12.

Headlines

German election: Germany's CDU/CSU bloc secured 28.6% of the vote in the federal election on Sunday, and importantly, as the BSW party just missed the 5% threshold for representation in the Bundestag, the CDU/CSU will be able to form a majority government with the SPD if both sides can agree on a platform, as they would take 328 of the 630 seats. In a victory speech yesterday, CDU leader Friedrich Merz, who will become the next Chancellor, said that Germany will "achieve independence" from the US as President Donald Trump is "largely indifferent to the fate of Europe".

US business activity grew this month at its slowest rate since September 2023, primarily due to the service sector. The S&P Global preliminary composite index for services and manufacturers fell to 50.4, a 17-month low, amid uncertainty about the Trump administration's policies. Values above 50 indicate growth.

US consumers' long-term inflation expectations have peaked at a nearly 30-year high, due to concerns over Trump's tariffs. The University of Michigan's February reading shows an expected annual price rise of 3.5% over the next five to ten years, the highest since 1995, mainly driven by Democratic respondents.

Key Points

·    Equities: US stocks fell; Fed signals rate cut pause; Walmart outlook weak; Nvidia earnings ahead

·    Volatility: VIX jumped; VVIX above 100; Nvidia & PCE report key catalysts

·    Digital Assets: Bitcoin < $96K; Bybit hack impacts sentiment; Coinbase -8.3%

·    Currencies: Euro firms on German election results. JPY strength eases in late Asian session

·    Commodities: Crude slump challenging support. Rising copper stocks point to consolidation

·    Fixed Income: US treasuries rallied hard Friday as risky assets sold off badly