Trade and tariffs

Deep dive: How to monitor U.S. inflation in 2026

As we approach the five-year mark of inflation running above the Federal Reserve’s 2% target, we remain concerned about the likelihood it remains stuck closer to 3% throughout 2026. The combination of a tight labor market, strong consumer spending, tariff pass through, and a lagged housing inflation measure is a recipe for sticky inflation.

Recent developments have suggested some moderation in the inflation profile—in particular—a slowdown in core services and motor vehicle prices. But we’re not convinced these deflationary trends will continue in the coming year. That said, monitoring inflation is particularly challenging right now. Data distortions and disruptions, uncertain tariff policies, and structural shifts related to demographics are adding crosscurrents in inflation’s path, and our ability to read it.

The 2025 US federal government shutdown disrupted data collection—with monthly data largely missing for October and collected over a condensed window in November. Ongoing distortions complicate high conviction interpretation of month-over-month inflation prints. Meanwhile, the Owners’ Equivalent of Rent (OER) component of the Consumer Price Index (CPI) continues to distort the picture, exerting outsized influence on the CPI basket, though its impact on the Fed’s preferred measure, core PCE, is more limited.

Click here for our full guide on how to monitor inflation data in the months ahead.

Trade Zone: Smashing down the trade barriers within

Two of Canada’s top CEOs—Tracy Robinson of CN Rail and Max Koeune of McCain Foods—recently joined Sean Strickland of Canada’s Building Trades Unions for a discussion with the Business Council of Canada’s Goldy Hyder, on the big changes that Canada needs to make to infrastructure development, business regulation and immigration.

Robinson said we need to review our approach to labour negotiations to ensure the economy doesn’t get shut down as often as it does, especially in a world when other countries are happy to see that happen.

Strickland pushed for better labour force planning, to ensure we’re recruiting the right people and right numbers for the right needs in our economy. We’ve talked about that for years. It’s solvable.

Koeune called for immigration reforms that would give permanent residency applicants a clearer view of how long it will take, and where their application is at. He called the system a “black box,” which I’ve heard from plenty of other employers in recent months.

Davos ’26: Making sense of a new world order

Last year, a day after his second inauguration, Donald Trump spoke by video to the Forum and promised a golden age for America. This time, he came in person to proclaim victory. With five cabinet secretaries and hundreds of American CEOs in tow, the President spent an extraordinary two days in the Swiss Alps projecting a 21st century version of American power.

This is no stay-at-home superpower. In Trump’s vision, the world will trade and prosper more than ever, on America’s terms.  Close to three-quarters of global trade is still compliant with WTO rules. Inventory build-ups helped many companies escape the initial tariffs. A greater impact may come this year. But for the most part, “it’s still holding,” said Christine Lagarde, head of the European Central Bank, arguing the global economy is so intricate and intertwined even the U.S. cannot unravel it.

Trump’s more mercantile Pax America is not just economic. He came with an unsolicited bid for Greenland that was rejected by his closest NATO allies. He left with a Board of Peace, supported by an unlikely collection of 19 countries with a combined GDP of $5 trillion, roughly equal to Germany. Only four (Albania, Bulgaria, Hungary, Turkiye) are in NATO, and only four (Argentina, Indonesia, Saudi Arabia, Turkiye) are in the G20. Will Trump be able to expand America’s reach without stronger partners? Or is this the new geometry of power?

Earnings season offers U.S. equity investors a chance to refocus

There were four big takeaways for us in last week’s update from EPFR on U.S. equity funds flows. First, passive retail flows to U.S. equity funds have been solid in recent weeks, suggesting to us that retail investors have been helping to support the rally in U.S. equities to start the year.

Second, when we zoom out, we see that flows to U.S. equity funds as a whole have been choppy in recent weeks, though flows to global equity funds have been strong. We see the former as a headwind to U.S. equity market performance and the latter as a tailwind given the heavy market cap representation of the U.S. in global benchmarks.

Third, funds flows are showing a slight improvement for Western European equity funds, pointing to the possibility that some geographic rotation was occurring within the global equity community as 2025 wound down and 2026 began. We will be keeping a close eye on this data, along with investor conversations, to gauge whether a new “Sell America” trade may be returning to the equity market. This is an issue that we have seen as a key risk/headwind to monitor and one that could reasonably be viewed as having grown/strengthened in the aftermath of recent geopolitical and central bank developments (though RBC’s Rates Strategy team has argued that recent events related to the Fed can be viewed as actually having strengthened perceptions of Fed independence).

Fourth, at the sector level we note improving flows for Financials and Industrials, two of the cyclical workhorses of the U.S. equity market, along with continued strength in Energy and Materials/Commodities funds.

Overall, we think these trends in funds flow data highlight the complex dynamics underpinning U.S. equities today – renewed and growing optimism on the U.S. economy, but within the context of a global investor community that has become more open to geographically diversifying their equity exposure and has been presented with some new reasons to potentially do so as the new year has gotten underway.

Global economic outlook

Canada is technically avoiding recession this year, with improving data heading into 2026. The labor market shows extraordinarily low layoffs, though unemployment is rising due to weak hiring that disproportionately affects young people. Mortgage renewal pressures are easing, household balance sheets are strengthening, and business confidence is beginning to improve. While certain economy segments struggle and the country remains worse off than without trade tensions, the trade impact from U.S. tariffs has proven far less severe than widely anticipated.

The effects of tariffs remain concentrated in specific sectors and regions. Steel, aluminum, various auto sector segments, and softwood lumber continue facing substantial tariffs, while tariffs on canola and aquatic products add pressure. The 10% of trade affected by tariffs is predominantly located in southwestern Ontario, where unemployment ranges from 9 to 11%, contrasting sharply with areas maintaining very low unemployment rates. As 2026 approaches, this regional divide will likely intensify, creating significant challenges for policymakers.

Several risks warrant monitoring into 2026. In the U.S., the trade shock from tariffs is likely only beginning to materialize. A potential pullback in spending by the wealthiest 10% could impact the labor market and consumption patterns. The 2026 election cycle presents an underappreciated risk during a fragile economic transition. AI investment currently supports growth and creates jobs, though much of this value may prove transitory.

2026 Outlook: Macro, monetary policy & rates

Treasury yields and curves are expected to remain range-bound throughout 2026, with temporary upward yield shocks possible from tariff-related developments. Potential stimulus measures ahead of the 2026 midterm elections, including possible tariff rebate discussions, could generate headlines around tariff revenues and their impact on supply-demand dynamics.

One of the bearish risks for rates centers on inflation expectations. Continued gradual pass-through of tariff costs, combined with easy fiscal policy and fading uncertainty around trade tensions, could collectively push inflation expectations upward in 2026. This represents the most significant downside risk to monitor.

Canada faces a fundamentally different growth landscape entering 2026 due to the transition to a new trade environment. Third-quarter GDP growth masked weakness in final domestic demand, while net trade benefited primarily from reduced imports.

CUSMA Deal and U.S. Rate Cut

The U.S. could carve out separate deals with Canada and Mexico. U.S. Trade Representative Jamieson Greer said Wednesday that the Trump administration is keeping all options on the table for the future of the Canada-U.S.-Mexico Agreement (CUSMA), which comes up for renewal in 2026. "Our economic relationship with Canada is very, very different than our economic relationship with Mexico," Greer said at an event in Washington. Meanwhile, Kirsten Hillman, Canada’s ambassador to the U.S., is stepping down as the country’s top diplomat in Washington in the New Year.

FOMC Decision: Fed ends 2025 with a cut but dissents reflect growing divide

The Federal Reserve delivered a widely expected 25-basis point cut at its December meeting. The critical unknown is how tariff policies will shape the economy in 2026, with concerns shifting toward the inflation backdrop as the year approaches.

"There is no risk-free path for policy as we navigate this tension between our employment and inflation goals," Powell stated. "A reasonable-based case is the effects of tariffs on inflation will be relatively short lived, effectively a one-time shift in the price level."

The full extent of tariff impact on inflation has yet to be felt, and delayed government data releases continue to limit visibility into inflation's trajectory. PPI data has been delayed until January, further obscuring the tariff picture. Absent a notable acceleration in December inflation data, a window may remain open for one more rate cut early next year.

However, monetary policy will have limited impact on addressing tariff pressures in 2026. If tariff passthrough results in narrowed margins and consequent layoffs, monetary policy can do little to resolve a policy-induced price level shock. The risks are becoming increasingly asymmetric toward inflation, and as more FOMC voters dissent, an extended pause appears increasingly likely as the Fed's next decision.

Driving into the fog

2025 was largely a year of treading water amid stagflationary currents, and 2026 may prove more of the same. Expect sluggish hiring, slightly below-trend growth, and inflation stubbornly above target but lacking upward momentum.

Trade policy dominated 2025 but will take a backseat in 2026. The Liberation Day uncertainty spike served as an inflection point, though full tariff pass-through impacts remain outstanding. Growing comfort with the trade war should allow hiring demand and corporate activity to thaw. A court ruling on IEEPA could alter trade policy trajectory, and risks lean toward relaxation as the administration seeks to boost sentiment ahead of mid-term elections.

Beyond trade, a still-large deficit, robust tax refunds, and possible fiscal stimulus should limit demand deterioration. Fed rate cuts and neutral monetary policy should add marginal support. Replacement demand from elevated retirements and declines in foreign-born workers should maintain a soft floor under hiring.

Five themes for the US economy in 2026

Heading into 2026, we see a US economy that is increasingly on track for a stagflation lite scenario: GDP growth running below the typical 2% trend, while inflation remains uncomfortably high. The inflation story extends beyond tariffs – core services inflation runs hot at 3.5%, driven by housing and sticky wages, while tariff passthrough to consumer goods is expected to peak in Q2 2026.

The US consumer is becoming increasingly fragmented. The top 10% of households drive a near majority of consumer spending, benefiting from favorable tax policies and non-labor income sources like dividends and rent. Middle-income households face the greatest inflation pinch, while lower-income groups benefit from government transfers and cost-of-living adjustments.

The labor market has loosened but remains historically tight at 4.4% unemployment. Demand-side weakness concentrates in trade-reliant sectors, while supply constraints from immigration policy and record retirements remove nearly 3 million workers from the labor force since 2024, keeping unemployment capped around 4.5% for most of 2026.
Data center investment has driven recent growth but hasn't yet generated meaningful productivity gains. AI remains an infrastructure investment awaiting workforce skills development.

Finally, massive government deficit spending at 6% of GDP provides economic guardrails—limiting downside while constraining upside growth potential.

For a comprehensive analysis, read the full report here.

Tariff talk from last week’s earnings calls

Overall, many of the companies that reported last week seemed to lean towards the idea that tariff impacts are stabilizing, while some continued to remind investors of the potential for future changes and continued to highlight the situation as dynamic.

Margin impacts were cited by some, but companies generally continued to highlight how they are managing through with discussions of their mitigation efforts.

Taking additional price increases was something we read about for several companies in different industries last week in the context of tariff discussions. We also took note of comments on the timing of tariff impacts, with one company noting they were halfway through the incremental tariff impacts on a year-over-year basis.

To access the full report, “The Pulse of the Market – Early Learnings from Earnings”, please contact your RBC representative.

U.S. and China develop “very successful framework”

U.S. – China developed a “very successful framework” during trade talks. While a deal wasn’t reached, both sides emerged from two days of “candid and in-depth discussions,” on everything from tariffs to rare earth metals, feeling confident with where things are headed.

The framework paves the way for a meeting in South Korea later this week between U.S. President Donald Trump and Chinese President Xi Jinping, the first face-to-face between the leaders of the world’s two biggest economies since Trump’s second term began.

Missing the AI boom

AI-related investments may have masked the impact of the U.S. trade war on global growth so far, the IMF notes in the latest World Economic Outlook.

Since the release of ChatGPT in late 2022, U.S. firms have quadrupled data-centre construction spending to nearly US $40 billion. There are now 5,000 data centres dotted across the U.S. Imports of data centre related equipment is up 50% over the same period. Taiwan accounted for half of the growth when it comes to U.S. imports of digital processing units.

Canada, as the chart below indicates, has remained on the sidelines of the AI boom despite a growing number of data centre applications. Demand for related equipment has shown only a small uptick in recent years. Click here to read more on RBC’s ‘The Trade Zone’.

10% tariff on Canadian goods over ad

Donald Trump slapped an additional 10% tariff on Canadian goods over ad. The 60-second spot, sponsored by the Ontario government and featuring former U.S. President Ronald Reagan denouncing tariffs, had already prompted President Trump to call off all trade talks with Canada last week.

The Ontario government had said it would pull the spot, which aired during the World Series broadcast, on Monday. But Trump, who didn’t provide a date or what goods the increase would impact, demanded the hike on Saturday because the ad wasn’t removed immediately.

Softwood, Cabinets, and Beyond

To better understand the implications of these tariffs and their potential impact on the Canadian economy, click here to read our latest report.

Flying Blind

We still think the Fed is going to skip a cut by the end this year – but an October skip now looks a lot less likely. More broadly, our views still lean more hawkish than market pricing does. If you want a pretty perfect summation of where our own view currently stands, we found ourselves vigorously nodding along as we read this passage from President Lorie Logan’s recent speech:

“As I consider the path ahead, three features of the economy stand out to me at this time: 1) even setting aside temporary effects of this year’s increases in tariff rates, inflation is not convincingly on track to return all the way to 2 percent; 2) aggregate demand remains resilient, supported by consumption, business investment and buoyant financial conditions; 3) while the labor market has undeniably slowed, with meaningful costs to workers, not all of the weakness represents economic slack that less-restrictive monetary policy can ameliorate ….

There may be relatively little room to make additional rate cuts without inadvertently moving to an inappropriately accommodative stance.”

We see softness in labor market demand largely as a product of tariff-related uncertainty in the months following Liberation Day. We see that as distinct from a more cyclical hit to aggregate demand, which would see businesses actively reduce headcount to protect falling profits. We don’t think that really describes what we’re seeing in the data. While hiring has dropped off sharply since Liberation Day, businesses aren’t resorting to layoffs, and we see the data post-April as more of a “deer in headlights” moment for businesses than a response to falling demand for their products/services.

To access the full report from our U.S. Rates Strategy team, contact your RBC Representative.

PM Carney to meet with President Trump

Mark Carney will meet Donald Trump on Tuesday. The Prime Minister will be in Washington in a bid to reduce U.S. tariffs or seek a deal with the U.S. President. The meeting “will focus on shared priorities in a new economic and security relationship,” Carney’s office said.

Washington has imposed punitive 50% tariffs on steel and aluminum and 35% of all Canadian goods traded outside the CUSMA trade deal. President Trump recently noted that the tariffs are hurting the Canadian economy and diverting investment to the U.S.

How to navigate the U.S. government shutdown

As widely expected, the U.S. government shutdown started at midnight on October 1st. The U.S. federal fiscal year runs from October 1st to September 30th and government funding is allocated on a fiscal year by fiscal year basis. This means that for the government to fully re-open, Congress must pass 12 separate appropriation bills that allow for U.S. federal agencies to allocate and spend funds on their operations.

Until those bills are passed, an estimated 750,000 Federal workers will be furloughed, comprising nearly all employees who collect and analyze economic statistics. As such, the widely watched employment report, CPI, retail sales, and GDP, among others, will not be reported until the government reopens. 

Click here to read our latest report where we outline what this shutdown could mean for the economic data and growth moving forward, as well as some alternative, private data sets we will be monitoring in the absence of government data.

U.S. trade developments

Over the past week, the U.S. announced a series of trade developments across sectors impacting robotics, industrial machinery and medical equipment to trucks, furniture, pharmaceuticals and more.

Over the past week, a series of developments occurred in the Trump administration’s efforts to advance its tariffs and trade agenda. According to the latest Sullivan & Cromwell Tariffs Tracker, these include development that impact a range of sectors, affecting robotics, industrial machinery, medical equipment, trucks, furniture, pharmaceuticals and more.

Key developments:

• On September 26, 2025, the U.S. Department of Commerce published notices in the Federal Register requesting public comments in connection with recently commenced investigations into (i) robotics and industrial machinery and their components and (ii) personal protective equipment, medical consumables, and medical equipment, including devices.
• On September 25, 2025, President Trump announced on Truth Social that the U.S. will impose the following tariffs as of October 1, 2025: (i) a 25% tariff on heavy-duty trucks; (ii) a 50% tariff on kitchen cabinets and bathroom vanities and a 30% tariff on upholstered furniture; and (iii) a 100% tariff on branded or patented pharmaceutical products, unless the company is currently building drug manufacturing plants in the United States.
• On September 25, 2025, the U.S. Court of Appeals for the Federal Circuit issued a decision resolving a long-pending challenge to the first Trump administration’s modification of certain tariffs on Chinese goods under Section 301 of the Trade Act of 1974.

Tapping Indonesian nickle

After four years of negotiations, Canada signed a Comprehensive Economic Partnership Agreement (CEPA) with Indonesia last week.

The deal is expected to increase Canadian exports by $447 million–a paltry 0.04% increase over current figures. Still, it provides Canada with a call option on Indonesia’s economic growth. The country is expected to become a Top 5 global economy by mid-century and a vast market for Canadian agriculture, food products, machinery, services and even nuclear technology.

The announcement follows on the heels of the Trump Administration’s reciprocal trade deal with Indonesia, moving quickly to secure valuable critical mineral market access and resources—notably nickel. Indonesia agreed to remove its export restrictions on ore, allowing raw and semi-processed nickel to be shipped to the U.S. for refining and keeping the supply chain out of Chinese-operated Indonesian smelters.

Click here to read more about Canada’s big critical minerals push.

Canada-Mexico partnership

Canada agrees to a “strategic comprehensive partnership” with Mexico. During Prime Minister Mark Carney’s visit to Mexico City yesterday, he and Mexican President Claudia Sheinbaum announced an agreement to increase trade between the two countries in several areas, including energy, agriculture and critical minerals.

The two leaders also committed to work more closely on security and climate issues. The partnership between Canada and Mexico follows the news from earlier this week that the U.S. formally kicked off the CUSMA review process with public consultations.

A risk management cut

As was widely expected, the FOMC went ahead with a 25 basis-point cut in today’s meeting. But this meeting wasn’t about a cut (or two). It felt more like a reset of expectations for what the Fed sees ahead and how they will navigate this ongoing uncertainty surrounding their dual mandate.

We expect the biggest challenge going forward will be inflation and the uncertainty surrounding the pass-through of tariffs to consumers. Even before accounting for the impacts of tariffs, we expect to see inflation accelerating into year-end off the back of (i) goods prices rising (ii) services prices remaining sticky viz a viz wages and (iii) a floor under housing prices.

Before the next meeting, we expect the September CPI data will continue to show early signs of tariff pressures building, but we likely will not see material passthrough until we get closer to the December meeting, at which point, we expect core CPI to have reached 3.4%. We think the Fed's preferred measure (core PCE) will be telling the same story. That’s going to make a full-blown easing cycle more difficult but not impossible.

We saw a large dispersion in the 2026 dot plot – with significant uncertainty surrounding timing and magnitude of tariff passthrough to prices and the extent to which this weighs on growth. And while the weaker labor market data is currently giving the FOMC an opening to cut, we expect that justification will become more difficult in the months ahead. 

For more economic forecasts, analysis and insights, visit rbc.com/economics.

FOMC recap: Muddled in, muddled out

Outside of the widely expected 25bp cut, it was a bit of a confusing FOMC day. Powell seemed to struggle a bit justifying today’s cut and the slightly more dovish stance of the rate dots. He looked particularly uncomfortable on questions regarding the upside risks to inflation. Even on the labor side of the mandate…Powell’s answers seemed a bit muddled.

But in our view, none of this is an indictment on Powell. His comments around the outlook and stance of policy sounded muddled today, because the outlook and case for cuts IS muddled.

Powell is dealing with two-way risks that, as mentioned above, aren’t clearly leaning in one direction or the other. Some of the biggest of those risks could be upended with the bang of a gavel or stroke of a pen (i.e. tariffs). Like us, he doesn’t really know:

• How to interpret NFP prints given a wide and uncertain range around the NFP “breakeven” (he cited 0-50k).
• He has no historical roadmap for understanding how tariffs this broad or severe are going to work their way into inflation, inflation expectations, or growth.
• He doesn’t seem particularly convicted on where short-run neutral is right now – always says you will “know neutral by its works”.
• He is dealing with a split committee – apparent in the very atypical bi-modal distribution for the 2025 dots (despite being two meetings away from those dots being realized).

Lastly, while he may not admit it, there has to be some concern at the back of his mind about how every sentence might put the long-term independence of the Fed at risk.

Five disruptors to the U.S. economic cycle

The U.S. economy seems in many ways an anomaly.

Interest rates are in “restrictive” territory, and yet the unemployment rate remains quite low. The economy is in the midst of a historic trade shock with 100-year high tariffs, but the impact from inflation appears limited so far. The housing market, historically a solid leading indicator, is experiencing very limited activity on par with the aftermath of the global financial crisis, and yet home prices and rents continue to rise.
 
The answer to the disconnects, in our view, lies in a series of medium to long-term disruptions that are distorting an economy’s typical responses, and muting the standard “economic cycle.”

These disruptions make clarity on the U.S. outlook more difficult, but not impossible. They necessitate a shift in the way we think about the business cycle, cyclical versus structural trends, and even the way we absorb monthly economic data.

Click here to read the full RBC Economics report.

Ready, set, slow

The outlook for global central bank policies continues to evolve, and particularly for the Fed, it could have significant implications for global asset markets. On RBC’s Macro Minutes podcast, the team delved into the key macro themes driving monetary policy decisions and discussed when/if policy easing cycles will re-start, how fast they could go, and how low terminal rates might get.

Listen to the full episode below or on Apple, Spotify or YouTube Music.

“…right now, we’re facing upside inflation pressure or a lot of unknowns around how this tariff passthrough is going to hit the inflation side of the Fed’s mandate. If you look at the breakdown between the ‘doves’ and the ‘hawks’ on the FMC…

The doves are seemingly very confident that this inflation is a) entirely tariff-related and b) going to be a one-time shock. It’s a one-time price level adjustment and then we return to 2% inflation.

The hawks are saying if they look at both the labor and inflation side, we’re currently missing our inflation target by a fair amount. We’ve got a three handle on core CPI and moving in the wrong direction. Meanwhile, labor levels that historically would be considered very healthy…

I think the administration wants it, the markets have priced it in, a third of the committee wants to start cutting…so a cut this month seems like the path of least resistance. I still think there could be a pause in October.” – Blake Gwinn, Head of U.S. Rate Strategy

US CPI: Core goods and services pressures mounting

Inflation data from August continues to paint a concerning picture of uncomfortable services sector inflation that is now compounding goods sector pressures that are building. Core inflation landed in-line with consensus, at 0.3% m/m (3.1% y/y). This month marked the first month in which core services has not significantly outpaced core goods (both at +0.3% m/m) since January 2022.

We witnessed a widening breadth of inflation pressures in August and saw upticks in some trade-exposed sectors for the first time (new motor vehicles) – setting a concerning precedent for the inflation trajectory in the months ahead and when coupled with cyclically weak labor market data, serve as mounting evidence that tension is building on both sides of the Fed's mandate. 

We have consistently been watching inflation through two lenses: 

1) Tariffs notwithstanding, inflation was unlikely to reach target this year. We expected to see upward pressure building in services inflation through a variety of channels and this materialized in the August data, with core services inflation +0.3 m/m (stuck at 3.6% y/y).

Wage growth is still well-above pre-pandemic trend – and higher wages will continue to fuel services sector price pressures. If tariffs continue to translate to higher core goods prices – as we expect they will – these pressures will compound pre-existing services sector inflation.

2) Tariffs are starting to build on uncomfortable services sector inflation. Core goods inflation rose +0.3% m/m in August (at 1.5% y/y). Pressures mounted in most tariff exposed sectors this month. 

For more economic research, visit rbc.com/economics.

Canadian aluminum market; companies absorbing tariff costs

Europe emerges as a new market for Canadian aluminum. The continent accounted for 18% of Canadian aluminum exports in the second quarter, compared to just 0.2% in the previous quarter, as Canadian producers redirected metal exports to avoid punitive U.S. tariffs.

The U.S. now accounts for 78% of Canada’s aluminum exports, compared to 95% before, according to S&P Global Market Intelligence. The data highlights how the 25% U.S. tariff on Canadian aluminum has disrupted trade in North America’s highly integrated market.

Canadian companies are absorbing tariff costs. Third quarter data from Statistics Canada’s Canadian Survey on Business Conditions showed 42% of businesses didn’t pass along tariff-related cost increases to their customers in the past six months.

But that could change soon as around 40% of firms said it’s very likely or somewhat likely they’ll need to increase prices to cover tariff costs over the next year.

Nearly a fifth of businesses also reported higher sales of Canadian products, with around 21% of businesses changing their marketing to highlight Canadian-made goods.

How CUSMA strengthens both U.S. and Canadian economies

Amid the ongoing trade war, the Canada-United States-Mexico Agreement (CUSMA) has been a crucial backstop.

While product specific tariffs on goods including steel and aluminum, copper, and non-U.S. content in auto products remain, most Canadian exports have continued to cross the border duty free under a broad exemption from tariffs for trade compliant with CUSMA rules of origin.

Preserving that exemption is critically important for Canadian producers and exporters – and negotiations to extend CUSMA beyond 2036 are scheduled to kick off next year.

While U.S. trade policy remains highly unpredictable, there are good reasons to be hopeful that the CUSMA free-trade agreement could and should remain intact.

Click here to read the full report “How CUSMA strengthens both U.S. and Canadian economies”, published by RBC Economics.

Trade court ruling highlights risks of importing

Trade court ruling affirms solar duties under Biden administration. This past week, the ITC ruled that the Biden administration exceeded its statutory authority in its two-year moratorium (June 6, 2022 to June 6, 2024), preventing the U.S. Customs and Border Protection agency (CBP) from collecting duties related to Chinese companies circumventing AD/CVD tariffs by finishing products in Vietnam, Cambodia, Malaysia, and Thailand.

The Auxin v. U.S. decision allows the CBP to immediately begin retroactively collecting duties on cell and module imports from Cambodia, Malaysia, Thailand, and Vietnam during that time period. During this period ~88.2 GW of solar cells and panels were imported from these SEA countries with a total import value of ~$26.5 billion. Applying existing tariff rates (15.25% CVD and 238.95% AD) to this would equate to nearly $70 billion in retroactive tariffs that the importer of record will likely be responsible for.

Our view: We believe this has limited implications on industry as panel stock is already in the country either installed or in warehouses and will face duty charges whether installed or not. This could bias pricing higher near term as importers try to pass along some of the duty charges, though we think price will be dictated by supply/demand dynamics and that limits the opportunity.

U.S. equity markets – weekend tariff thoughts

On Friday, the U.S. Court of Appeals for the Federal Circuit ruled against the reciprocal tariffs. We anticipate questions on the implications for the US equity market outlook, so here are some of our initial thoughts.

In the short term, our initial instinct when the news first came out was that U.S. equity markets were unlikely to react much, and that remains our view ahead of Tuesday’s open. U.S. equity investors have generally moved to a “wait and see” mentality when it comes to various geopolitical and domestic policy/political developments over the summer.

On a more intermediate term basis, we think corporate uncertainty around tariffs will remain elevated, though lower than late spring levels. One of our biggest takeaways from 2Q25 reporting season was that companies continued to view the tariff backdrop as dynamic, evolving, and uncertain, despite the general dialing down of tariff levels from those announced April 2nd.

There are both positives and negatives associated with the continuation of elevated uncertainty.

• On the positive side, the potential for a further dialing down of overall tariff levels (beyond the obvious hope that tariff cost pressures could ease and the short-term boost to earnings estimates that would provide) is that it could keep corporates from taking more drastic actions to offset tariff costs.
• On the negative side, even if it’s due to hope for improvement, continuation of elevated uncertainty could contribute to further caution or delays in corporate customer decision-making that a number of companies continued to refer to during the last reporting season.

U.S. tariffs ruled illegal

The U.S.’s “Liberation Day” tariffs are illegal. That’s the verdict of a federal appeals court, upholding a ruling from the Court of International Trade, which had also rejected President Donald Trump's argument that his global tariffs, including on Canada, were permitted under the International Emergency Economic Powers Act (IEEPA).

Trump called the appeal courts’ 7-4 decision “highly partisan” and vowed to appeal, suggesting the U.S. Supreme Court will have the final word. The IEEPA tariffs are separate from the U.S. steel, aluminum and auto levies on Canada.

Not your 2024 Jackson Hole

Top tier data hasn’t added any clarity to the Fed outlook heading into Jackson Hole. Tension between the two sides of the mandate is going to make it difficult for Powell to signal a rate cut as clearly as he did last year. We still see a hold in September and first cut in December.

Labor risks are being oversold - we have basically been chopping sideways in a soft, low-hiring low-firing mode for some time.

Inflation level and trend – tariff impact or no – isn’t great. The Fed’s Musalem put it well: “…we are missing on our inflation target. We are not missing on our employment mandate.”

• It’s fine to want to “look through” tariff impacts – but it’s becoming clear that these impacts are going to be extremely tough to identify in the data and may take many more months to be fully realized. This is because of the breadth of tariffs, the long and uneven rollout, and varying and delayed corporate responses. Past tariff experiences, with a clear “switch” turned on for specific regions and products, are much easier to track and analyze.
• The risks that tariffs aren’t a one-off are still very real, yet there seems to be much more focus on the risks that labor deteriorates significantly.
• Aside from tariffs, let’s not forget inflation numbers weren’t exactly great before Liberation Day – the downward trend in core PCE basically flatlined above 2.6% in June 2024.

As for the Fed, many of the recent speakers seem unconvinced on need for a cut right now. We think a majority of the FOMC participants are truly going into the NFP print without having made up their minds on a September cut or pause.

This is an excerpt from “Ahead of the Curve: Not your 2024 Jackson Hole” published by our U.S. Rates Strategy team. To access the full report, please contact your RBC representative. 

U.S. CPI: Core services surge sets concerning trend in July

Three core themes stood out in today’s report:

1. Core services surprised to the upside in July

A notable uptick in core services pressure in July (+0.4% m/m) showed that core services continue to outpace core goods price growth. This is a concerning precedent as we continue to expect mounting pressures from both core goods and services.

Tariff pressures are only one ingredient of the upward trajectory in our inflation forecast through the back half of the year. Long-term demographic trends mean wage growth will limit the degree to which core services inflation can moderate, and if today’s print sets a precedent, it is a concerning one. 

2. Stagflation lite scenario is taking hold

This morning’s inflation print was an indication that we are continuing to see mounting evidence of our “stagflation lite” scenario taking hold. Today’s print taken with recent NFP revisions signals a scenario is evolving where both sides of the Federal Reserve’s mandate may soon be at odds – as trade policy bolsters price pressures while firms freeze hiring. 

Still, it takes time for tariffs to flow through to consumer prices and this print is just an initial uptick that likely signals the start of a broader trend.  

3. We are still waiting for tariff pressures to show up in some trade-exposed sectors

While we saw notable pressures in some sectors, others were still unaffected for now. This is unsurprising given the notable inventory build ahead of tariff implementation. We have reason to believe that in many sectors, an inventory drawdown is still taking hold.

For more U.S. economic commentary, visit rbc.com/economics or contact your RBC representative.

Tariff revenues by country

U.S. sets sights on pharma and chips

President Trump said tariffs on imports of semiconductors and drugs could come “within the next week or so” and eventually reach 250%, as the U.S. aims to boost domestic production in both sectors.  

In July, Trump sent letters to 17 drug companies urging them to lower U.S. drug prices by Sept. 29 to “most favored nation” amounts paid by other countries. U.S. stocks were bogged down by the latest tariff threats.

We have no decisions about September meeting: Powell

Blake Gwinn, Head of U.S. Rates Strategy at RBC Capital Markets joined BNN Bloomberg: The Close to discuss The Federal Reserve’s path forward after leaving rates unchanged, how tariffs may impact inflation, the latest labor market data and more.

Click here to watch Blake in action.

FOMC Recap: Powell playing the waiting game

Powell justified their decision to hold rates steady today in two ways. First, he talked about what we can observe now, which is an economy that is still generally healthy (i.e., what the labor data is telling us) along with stubborn inflation. Powell stated, “we think policy should be restrictive because inflation is above target. When we have risks to both goals, one of them is farther away from goal than the other and that’s inflation… That means policy should be tight because tight policy is what brings inflation down.”  

But what stood out the most is Powell’s assessment of inflation – even without tariffs, he views the path of inflation as “running a bit above 2%…even excluding tariff effects.” Interestingly, he went onto describe some of the catch-up inflation we are still seeing following the Covid supply-chain shock, namely auto insurance costs. In that light, we wonder if they expect to see a similar transmission of inflationary pressures in the insurance and broader services space as a result of tariff shocks. He also mentioned risk of added price pressures resulting from the cover of tariffs, specifically citing the rise in dryer prices despite washing machines being tariffed.

U.S.-China trade talks gain momentum

After two intense days of “constructive” talks in Stockholm this week, U.S. and Chinese trade representatives hinted at progress, agreeing to work toward extending the pause on tariffs set to expire on August 12. U.S. Trade Representative Jamieson Greer declined to weigh in on the likelihood of a deal but noted that conversations are “going in the right direction.” No word yet on whether U.S. President Donald Trump will meet Chinese President Xi Jinping, although Trump claimed that the Chinese leader has extended an invitation.

“I think this is the biggest deal ever made”

That’s how U.S. President Donald Trump framed the U.S. trade deal with the EU, which includes 15% tariffs on most goods from Europe and US $600 billion worth of EU investments into the U.S.

The framework closely resembles the U.S.-Japan deal announced last week. As far as coming to an agreement with Canada before the August 1 deadline, Trump said he isn’t sure it will happen and added that the U.S. may simply impose a tariff on its neighbor.

Q2 earnings takeaways on tariffs

Our overall impression from 2Q25 reporting season is that companies are managing through tariffs fairly well so far, but it’s still too early to assume tariffs won’t generate inflation pressures. A number of companies pointed to the 2nd half of 2025 as when tariff impacts are likely to kick in.

Here are four takeaways on what we learned in 2Q25 reporting season:

1. The overall tone still seems “fine but not fabulous” as we observed last week. Overall, companies seem to be managing through headwinds, though some are doing so better than others or sound more confident about their ability to do so going forward.
2. Second, on demand – our impression coming into last week was that tariffs and policy uncertainty generally had been accompanied by no meaningful impact to demand for some companies, a pause in activity or delay in decision making for others, and a pull-forward of purchases or activity for others, though the exact mix between the three seemed unclear to us. That generally remains our impression after going through last week’s transcripts.
3. On the consumer, we spent some time focusing on what the consumer companies, who we think give a more boots on the ground read for what’s going on than the Financials, had to say about the health of the consumer. We continued to get descriptions of the consumer as cautious yet resilient, while highlighting pressures on the low end and value-seeking behavior generally. Some companies are also highlighting the consumers’ sensitivity to pricing.
4. The timing of tariff impacts that’s worth noting. We took note of five different companies from the consumer goods and industrials sectors that discussed how tariff impacts were set up to hit in the 2nd half of the 2025. This helps to keep us in the camp that it’s too early to write off potential inflation impacts from tariffs as many investors have done. This also keeps us nervous heading into the fall, as U.S. equities tend to be strong over the summer, if you look at the past five years, but weak in the September-October time frame.

For more commentary, listen to the latest episode of the Markets in Motion podcast. To access the full report, please contact your RBC representative.

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U.S. inflation ‘a squeeze higher’ in second half 2025

RBC Economics current U.S. outlook can be characterized as “stagflation-lite” – growth running below trend coupled with inflation that is uncomfortably heading higher into year-end. The latter is less of a shared view, particularly as recent inflation prints have suggested price pressures are calming. Looking ahead, however, we see the headline and core CPI reaching above 3% by the end of 2025.

Importantly, our view of higher inflation is only partly fueled by our assumptions around the impact of tariffs. Core inflation slightly above 3% is a long cry from the more disastrous price shock during the pandemic. However, it will likely continue to weigh on most households, encourage the perspective that inflation is structurally higher post-pandemic, and further complicate the Fed’s dual mandate of price stability and full employment. We see four relevant areas worth monitoring for upside inflation pressures.

Read the full report – US inflation outlook: A squeeze higher in second half of 2025

U.S. and Japan agree to deal, lowering tariffs to 15%

As part of the trade pact, Japan will allow more imports of American cars and rice, and invest $550 billion in the U.S. Tariffs on Japanese cars, which make up most of its trade surplus with the U.S., were lowered from 25% to 15%.

The deal comes at a time of political uncertainty in Japan—an upper house election loss by the ruling Liberal Democratic party has led many to call for Prime Minister Shigeru Ishiba’s resignation.

How tariffs will flow through the U.S. economy

Economists are making a range of assumptions about how tariffs may work their way through the economy without relevant historical precedent. Using our own set of assumptions, we expect tariffs will weigh on the labor market and put upward pressure on inflation, exacerbating our view that the US economy is in a stagflation-lite scenario.

But, when and where those pressures show up will ultimately come down to two core questions: How much inventory has accumulated in the system ahead of the implementation of tariffs, and how much of the cost of tariffs businesses will pass to consumers.

As policies continue to evolve in the coming months and data begins to show evidence of the impact of tariffs, RBC Economics will be using a transmission framework as a roadmap to monitor the fallout.

Read the full report – Transmission framework: How tariffs will flow through the US economy

US CPI: Tariff pressure building under the hood

Bottom line: Our key takeaway is that tariff pressures are starting to show up in core goods, but cooling auto prices are masking the full extent. June provided another modest core inflation print (0.2% m/m) despite the threat of tariff pressures. Core services prices showed continued signs of moderating as consumer demand for services has waned in recent months. While core goods did rise 0.2% m/m, there were notable declines in both new and used auto prices despite the tariffs put in place on the sector itself, as well key inputs like steel and aluminum.

We continue to expect the import/inventory buildup will provide a buffer to high prices in durables goods, delaying the full impact of tariffs until later this year. But signs of tariff pressures are showing up in other goods, notably recreation and household furnishings and supplies (i.e., appliances).

The rise in the goods space will likely weigh on consumer demand in the coming months – and we do expect to see a pullback in goods spending as a result. But a bigger risk comes from demand destruction in the services space – if consumers continue to pull back meaningfully on spending there, we would expect to see job losses materialize.

Industrials sector: Tariffs still a fluid situation

Tariffs still a fluid situation but de-escalating vs. 1Q25; FX tailwind; geopolitical pressures. Though slightly varying across the industrial sub-sectors, we believe the significant de-escalation in tariff dynamics since the last earnings season implies a better-than-feared operating backdrop and room for margin/earnings upside as we head into 2Q25 and get 2H25 outlook updates.

FX has become a meaningful tailwind for U.S.-based companies.That said, as recent short-cycle indicators suggest, contractors and project managers could remain wary of pushing forward with project activities on tariff uncertainties (i.e., who pays the cost), and geopolitical turmoil also weighs on CEO confidence.

High-level industrial subsector commentary:

• Multis – Tariffs have been de-emphasized in recent conversations, likely creating a bias for “beat and raise” in 2Q25, but management teams could “bank the upside” for now.
• Transport/Rail – 2Q25 cargo volumes came in better than expected, with upside in bulk products (coal and grain). Chemicals, metals, forestry, and motor vehicle cargo volumes were largely as expected.
• Aerospace & Defense – In Aerospace, resiliency in aftermarket, especially in engines, remains the decided positive. Within Defense, excitement is building up for key programs including the Golden Dome.
• Clean Energy – Have held relatively well, though the “One Big Beautiful Bill” creates some uncertainties around clean energy tax credits.
• Auto & Auto Parts – One industrial sub-sector that is likely to feel the brunt of tariffs during 2Q25 due to its “just-in-time” manufacturing and companies’ reluctance to hike prices during the quarter. We expect carmakers to respond with higher prices starting in 3Q25, weighing on volume in 2H25.
• Paper & Forest Products – Top-of-mind remains ongoing reduction in capacity against weaker demand backdrop, with roughly 5% of capacity expected to come offline in 2025.
• European Industrials – There is excitement around European stimulus including an investment upcycle in Germany, though we caution the upcycle is likely at a nascent stage, and we expect early investment benefit in 2026/2027.

Investor sentiment on tariffs

RBC’s Lori Calvasina, Head of U.S. Equity Strategy, joined CNBC’s ‘Closing Bell Overtime’ this morning to talk about investor sentiment around the impact of tariffs, whether the market is overbought at the current levels and more.

Click here to watch Lori in action.

Risks to later cutting cycle start have grown

We still see a first cut in September. That could come on either continued softness in inflation, growing cracks in labor data, or a little bit of both.

But the pushback of tariff deadlines means another 30-days of uncertainty and could mean companies stalling further on tariff responses (passing on costs to consumers, accepting margin compression, cutting costs, etc.). This could also serve to keep the Fed locked in “wait-and-see” mode longer than we expect.

The current state of labor data isn’t enough to pull the Fed out of “wait-and-see” on its own, and  overall, we think the labor data is barely reaching Defcon 4 in the Fed’s eyes.

A hot CPI next week could upend near-term cut expectations as well. This would reinforce tariff-related inflation concerns among FOMC participants and push market pricing of the first cut further out (as it has already been doing over the last week or so). In contrast, if CPI is soft, the Fed just turns their eyes towards July data.

Overall, we still think the next two months of labor data could show some increased softening. As long as the inflation data doesn’t also pop, this could still be enough for the Fed to start cutting in September. But if inflation data starts coming in hot, July labor data sees a repeat of June, or if the Fed starts mentioning potential delays in tariff impacts due to the deadline extension, it will be very easy to push our cut call out to November or even December.

To access the full report from our U.S. Rates Strategy team, please contact your RBC representative.

Liberation delay (2/x?)

With the delays in implementation of reciprocal tariffs to August 1st, the administration is (again) extending the deadline for countries to reach new trade “deals” with the U.S.

Despite some limited volatility immediately following the announcements, rate markets seem to have brushed these headlines off. Short-expiry volume has declined across tenors and overall, there doesn’t seem to be a lot of fear that these tariffs will be going into effect in August either.

We are reminded of a similar learning curve in Trump’s first term, where the market reaction to “tape bombs” seemed to become more and more muted over time (see diminishing reactions to multiple rounds of infrastructure “announcements”).

U.S. plans 50% copper tariff

Our view: This could cause a short-term push to get more copper into the U.S. ahead of the tariff. However, once this ends, the risk is the London Metal Exchange (LME) price falls as the pull to the U.S. stops and the U.S. (7% of global demand) is left in surplus in the near term. The prospect of the tariff has already left inventory levels in the LME and Shanghai exchanges low and supported prices in all markets.

We expect further short-term volatility in copper and copper equity prices and this could be a negative for the majority of copper miners once the tariff is implemented, although the resulting low inventories provide downside support. Post tariff implementation, we think the market can revert to fundamentals and believe supply constraints and improving demand can support prices.

To access this report and our global research team’s copper outlook, please contact your RBC representative. 

After Independence Day comes Liberation Day 2.0

Markets are bracing for the more consequential American spectacle on July 9 when the 90-day pause on Liberation Day tariffs comes to an end. Will there be more pyrotechnics or a fizzle out?

“About 10 to 12 countries are very close to a deal,” said Joseph Lavorgna, an advisor to U.S. Treasury Secretary Scott Bessent, with another 20 negotiating in good faith. “And Secretary Bassett highlighted that many deals could be done by Labor Day.” Is that a tell that the administration is looking to push past July 9? Who knows.

While Canada has an eye on that date, Prime Minister Carney has marked his own red circle in the calendar: the July 21 deadline to conclude a security and economic deal with the U.S. To facilitate talks, Ottawa scrapped its digital services tax on Big Tech, which was an irritant to President Trump. Canada is now back in the “front of the line” in trade negotiations, assured Pete Hoekstra, U.S. Ambassador to Canada.

While Trump recently said his administration has “all the cards” in its negotiations with Ottawa, Carney has a few aces up his sleeve, too.

Click here to read the full article.

U.S. week ahead: Sparse data week shifts focus to tariff deadline

While we have a few data prints coming in next week, the central focus will be on the July 9th trade deadline, which marks the end of the Administration’s 90-day pause on Liberation Day tariffs.

Regardless of what is announced next week, two facts hold true:

1. The current average effective tariff rate in the U.S. (currently near 14%) is at a level for which we have no recent precedent and even with the 90-day pause in place, current trade policy is going to drive core inflation notably higher by the end of the year.

If the 10% average tariff on imports from most countries is maintained alongside higher tariffs on steel and aluminum and motor vehicles and parts, we could see core inflation surpass 3% and approach 3.5% by Q4, and this will result in slower growth. If Liberation Day tariffs are re-instated and sustained (at a similar magnitude to what was announced on April 2nd), this would result in an even worse outcome for core inflation.

2. Regardless of next week’s outcome, that “on-again off-again” tariff policy is disruptive and puts consumers and businesses in a position of uncertainty paralysis.

This weighs on consumption as households defer major purchases and it weighs on hiring and business investment, as firms avoid making major decisions in a vacuum. A deferral of the 90-day deadline would be a continuation of the status quo, and the status quo is immense uncertainty that will continue to hamper activity this year.

The rapidly evolving bull thesis

We spent last week on the road seeing institutional U.S. equity investors in several different states. While it did not appear to us that they were uniformly bullish on U.S. equities, some came across as downright excited and most of those who had been more tempered in their outlooks appeared to be talking themselves into a more bullish stance. Based on what we heard last week, the bullish thesis seems to have evolved a bit.

While tax cuts and deregulation are still seen by many as stimulative, the focus on tax in particular has narrowed, with many investors making the case for a ramp-up in capex spend due to some provisions in the tax law (this has gone hand in hand with a high degree of bullishness on the extremely expensive Industrials sector).

The cooler inflation data that has been seen recently also appears to have caused many investors to believe that there simply will not be any inflationary impacts from tariffs, and several also expressed doubts about any adverse impacts coming to labor or the broader economy.

Instead of displaying a willingness to power through any tariff-related potholes, U.S. equity investors seem to be gravitating towards the idea that there simply will not be any potholes.

To be fair, not everyone we spoke with agreed with this rosy assessment, but we ended the week thinking that overall conditions in U.S. equities didn’t seem frothy quite yet but were headed down that path.

This is an excerpt from The Pulse of the Market – Mid-Year Market Musings written by Lori Calvasina, Head of U.S. Equity Strategy. Contact your RBC representative to access the full report.

CNBC Fast Money: China’s economic struggles

Lori Calvasina, Head of U.S. Equity Strategy at RBC Capital Markets, joined Fast Money as a guest trader for the 5 p.m. hour to discuss where the U.S. is in the equity market snapback, the AI evolution, China and tariffs, what recent M&A may be signaling for corporate confidence and more.

Click here to watch Lori in action. You can also watch the full episode here and listen here.

RBC U.S. Equity Capital Markets tariff update

Risk-taking has been encouraged by transient policymaking, including a declaration on Thursday by Trump that the July 9th deadline on the 90-day extension of tariffs is ‘not critical’ along with the growing possibility of an early replacement of Fed Chair Powell in favor of a more dovish appointment.

President Trump’s decision to end all trade discussions and threat to impose a fresh tariff rate on Canada Friday afternoon caused the recent rally to pause heading into the weekend. Trump’s decision came after Canada implemented a new digital services tax on technology companies, with the first round of payments due Monday, June 30^th.

Consumer crosscurrents

What’s your read on the health of the US consumer?

Nik Modi: We’ve been cautious, and last earnings season confirmed consumer strain. They’re grappling with lingering inflation, job pressures, lower savings, rising debt—and now tariffs. February marked a significant pullback, and many categories remain soft.

Steve Shemesh: Consumers have shown more resilience than expected, but balance sheets are being drawn down. Tariffs and global instability have made them cautious, especially on discretionary items. Unless tariffs reverse materially, we see a slow deceleration in spending.

Who’s most exposed to tariffs, and how are companies responding?

Nik Modi: Everyone’s exposed to some degree, but those with China exposure are hit hardest. CPG companies are turning to productivity gains to offset costs. Pricing is hard to push through and risks further volume loss.

Steve Shemesh: Many companies in our coverage source overseas, creating risk—especially in furniture, home furnishings, and general merchandise. We expect more diversified sourcing, cost-cutting (including AI tools), and some price hikes.

30-day deadline

Canada and the U.S. are eyeing a trade deal in 30 days. A statement from the Canadian side announced the deadline after U.S. President Donald Trump and Prime Minister Mark Carney met on the sidelines of the G7 summit in Kananaskis, Alberta. The White House has not issued a statement. The readout from the Canadian side noted that the leaders also spoke about collaborating on priorities like critical minerals, illegal drugs, border security, and co-operation on defence. Trump has left the G7 meeting early to address the Middle East crisis

Canadian firms are looking beyond the U.S. for growth. Two-way cargo traffic with China surged 77% over the past few months, according to Port of Montreal data. China is now the port’s second-largest export market after India, up from fifth place last year, statistics show. Cargo volumes from Montreal to Spain surged 147% and 10% with the Netherlands, while two-way trade with African and South American countries was also on the up. While overall cargo volumes dipped 2%, container tonnage rose 14% in May compared to the same period last year.

FOMC Preview: Wait-and-see – now with dots!

We expect yet another quiet FOMC meeting this week, with little changes to the statement, dots, or Powell’s language, and their overall “wait and see” stance still intact. The data (and the trade policy outlook) since the Fed last met have moved in a slightly dovish direction on net, but we would heavily emphasize the word “slightly”.

Labor market data certainly shows a continued cooling relative to last year, and the recent trends in claims and payroll revisions are worth keeping an eye on, but none of the data has shown the type of deterioration that would be needed to override the Fed’s concerns about upside inflation risks.

We continue to see a first cut at the September meeting, with 25bp cuts at each subsequent meeting until May 2026 (i.e. terminal rate at 2.75%-3.00%). The risks around that call are skewed towards later.

While not our base case, the biggest market risk would likely come from a hawkish shift in the 2025 median dot.

To access the full report, contact your RBC representative.

The U.S. and China have a tentative deal

Beijing’s agreement to temporarily restore rare-earth licences was one of the major breakthroughs in its latest round of intense trade talks in London. But the reportedly six-month limit illustrates how Beijing wants to hold certain aces up its sleeves if tensions flare up again with Washington. In return, the U.S. agreed to relax restrictions on products such as jet engines and ethane, a vital component to make plastics. Market reaction was muted as details on the agreement were limited.

U.S. inflation and Canadian industry sales for May

Economic data in the coming week will continue to highlight on how trade disruptions in its early stages are impacting the Canadian and U.S. economies.

Inflation reports in the U.S. so far have failed to show the impact of tariffs on consumer prices. Core goods inflation in April was the first positive yearly reading since December 2023, mostly due to larger monthly increases earlier this year with a relatively subdued 0.06% month-over-month rise in April.

Nevertheless, tensions are brewing. Read more.

US jobs report: Trade headwinds have yet to derail services payroll growth

This morning’s nonfarm payroll report came in above consensus for May (+139K). The unemployment rate held steady yet again in May at 4.2%. A slew of retirements resulted in a lower labor force participation rate (down to 62.4% from 62.6%).

It was evident in this morning’s print that tariff uncertainty has yet to meaningfully grind payroll growth lower, with the impact of the current policy backdrop on employment limited to trade-reliant sectors. Manufacturing and retail suffered from an environment in which businesses and consumers remain in limbo, paralyzed by uncertainty. But services activity continues to drive payroll growth forward at a pace that is supported by demographic tailwinds.

We continue to highlight the dissonance between cyclical and structural themes. While monthly trends remain robust, the current trade situation (if it remains status quo) will translate to job losses later this year, which we expect to nudge the unemployment rate up near 4.5%.

Read the full report to find out what else stood out to us in the May data.

Trade talks: PM Carney speaking to Trump, U.S. reengages China

Mark Carney and Donald Trump have been talking directly on trade. The two leaders have been "laying out the perimeters" of a trade and security deal, Peter Hoekstra, the U.S. Ambassador to Canada, confirmed. An agreement could come by September—without CUSMA member Mexico. Sources told CBC/Radio-Canada that Ottawa is hoping to land a deal in time for the G7, being held in Alberta in mid-June. The news comes as Canada’s trade deficit hit a record high $7.1 billion, led by a 15.7% decline in exports to the U.S.

U.S. and China to revive trade talks. Following a "very good" 90-minute call with China's President Xi Jinping, Donald Trump announced that the two trade-warring nations would soon get back to the table. In recent weeks, Washington and Beijing have accused the other of violating the terms agreed upon in Geneva in May, a truce that lowered the triple-digit tariffs each had levied on the other for 90 days. The recent escalation was focused largely on access to critical minerals from China and new U.S. restrictions on computer chips.

Three questions with RBC’s VP of Trade Finance

Q: How are Canadian businesses diversifying—both in terms of sourcing and selling?
A: Two key observations: In April, we had a record number of customers and prospective new users of our RBC Global Connect tool, which provides resources such as best countries to buy and sell and other trade intelligence. Secondly, some clients have found better margin opportunities in Europe for products historically shipped to the U.S. And importers are ensuring resiliency of supply by finding new suppliers.

Q: How have things changed in the past couple of months for companies that have maintained their business with U.S. customers?
A: Compliance with CUSMA rose to 50% in March from 33% in February. From client discussions, we expect this will be much higher now based on the noted estimate that 94% Canadian exports to U.S. are likely to comply. Clients have maximized U.S. inventory storage and distribution channels to meet short-term demand and minimize tariff impacts. They are also regularly reviewing timing of shipments and location of delivery to navigate U.S. tariffs. Some clients have been able to pass on higher tariff costs where alternative supply is unavailable, and demand persists. Others are pausing transactions to ensure certainty of pricing and demand, especially if they can’t cover tariff costs.

Q: What advice do you have for companies navigating the uncertainty?
A: We are encouraging clients to review their key buyer and seller trade cycle—order to payment, contract terms and documentation available—and identify opportunities to renegotiate terms. The aim is to maintain long-term relationships and avoid Back-to-School, Black Friday, and Christmas peak sales cycles disruptions. There are a range of solutions available to minimize payment risk, improve cash flow and enable cost/ return efficiencies as new markets, suppliers and buyers are being considered.

Click here to read more from this week’s edition of “The Trade Zone”.

RBC U.S. Equity Capital Markets tariff update

New tariff threats loom, with President Trump threatening a 50% tariff on the EU and a 25% tariff on Apple. The U.S. dollar dropped to its lowest level since December 2023, making it clear that headline risk and volatility remain. Additionally, the global macro and geopolitical backdrop is volatile, with tensions between Iran and the U.S. at highs at their fifth round of negotiations this week.

On Thursday, May 22nd, the House narrowly passed Trump’s tax bill and will advance to the Senate subject to changes and delays once there. The bill covers topics of tax reform, immigration policy, and spending cuts. If implemented, the bill would make the tax cuts during Trump’s first term permanent. Notable changes would be tax cuts for businesses and wealthy individuals, and the installation of work requirements for food assistance and medical insurance. The market is bracing for the future impact if the bill passes, as the yield on 30-yr Treasury bonds spiked to above 5%.

Trade tensions are redrawing Canadians’ travel map

The decline in U.S. travel isn’t unique to Canada. Arrivals to the U.S. from countries other than Canada and Mexico fell from a 5% increase in January to a 1.6% decline over March and April. Most of that drop come from fewer Asian and Western European visitors.

International travel spending falls under the services trade. When foreigners travel and spend in the U.S., those expenditures become services exports. Expenditures from Americans traveling and spending abroad are then considered services imports.

Lower demand for travel to the U.S. means fewer travel dollar collected. That will shrink total U.S. exports and slow gross domestic product growth (if there aren’t major changes in Americans traveling abroad). But, the impact will be marginal since tourism accounts for a relatively small share of the U.S. economy.

More significantly, it will widen the overall trade deficit—the opposite of what the current U.S. administration is trying to achieve through import tariffs.

Bloomberg Brief: Bond market warns of swelling deficit

Amy Wu Silverman, Head of Derivatives Strategy at RBC Capital Markets, joined Bloomberg Brief to discuss the potential impact of Trump’s tax bill and looming tariff developments on the market, how fixed income is driving the equities trade right now and more.

Click here to watch Amy in action (24:28).

Trade deal with China won’t get inflation back to target

The Trump administration announced an agreement with China, lowering tariffs on U.S. exports to China while maintaining a baseline tariff on U.S. imports from China. Importantly it set a path for future negotiations, reducing the risk of further retaliatory actions.

As part of the announcement, effective May 14, both countries will lower tariffs by 115%. The U.S. will slash a staggering 145% tariff burden on Chinese imports down to 30%, a drastic tariff de-escalation that rippled across global markets. By our estimate, this significantly lowers the average effective U.S. tariff rate to 13% from our previously estimated 24%. Still, this announcement does little to help get inflation’s path back to 2% as a 13% effective tariff rate is still nearly 5 times higher than the 2.4% rate seen in 2024.

For now, these are the three core economic takeaways:

• The uncomfortable truth remains – inflation will continue to run above target. The Fed’s 2% target will remain elusive as the passthrough of higher tariffs to consumers remains a risk.

• Uncertainty will persist as trade policy remains subject to revised agreements over the next 90 days. In this uncertain environment, economists have to run multiple scenarios at any given time given the rapid evolution of trade policy.

• We are not out of the woods yet and growth will likely remain sluggish in 2025. For now, we expect the U.S. economy will continue to see below-trend growth throughout 2025. We expect higher prices for goods will weigh on consumer behavior and job losses remain a risk in trade related sectors like retail, wholesale, transportation and warehousing. We do expect some degree of substitution to take place.

Present Trump’s EO unlikely to rattle U.S. biopharma sector

This morning, President Trump issued the anticipated executive order (EO) on his most favored nation (MFN) pricing policy. Significant uncertainties remain, including implementation challenges due to historical legal hurdles, limited authority to Medicare (and possibly Medicaid), and undisclosed ex-U.S. prices/discounts. The vague language directing HHS to propose target drug prices and consider direct-to-consumer sales or re-importation may not be feasible or have minimal impact on biopharma companies.

The conference's tone appeared much more punitive towards "freeloading" EU countries than to biopharmas, as President Trump hopes to empower biopharmas to bring ex-U.S. drug prices closer to U.S. levels, though the EO does incorporate threats of FDA withdrawal for non-complicit drug companies (though this would be difficult to carry out).

Surprisingly, there were no specifics on if/how MFN could apply to Medicare pricing, such as through a CMMI test model or the IRA negotiation framework. With Medicaid cuts reportedly excluding MFN, the impact on Medicaid may be less than anticipated. However, drug pricing headlines may persist as this and related policies unfold.

Overall, we see reason for relief in the sector alongside improving FDA clarity and limited tariff risk.

For more information on this report, please contact your RBC representative.

Inflation prints expected to be benign on tariff holdout

Next week promises a whirlwind of economic indicators, headlined by Tuesday's closely watched inflation report. Last month, we stated that it was too soon to see the impact of tariffs show up in the inflation prints — with the 90-day pause on tariffs until early July, this is still largely true. But we do expect to see early signs of slight price-acceleration in specific sectors.

• Tariffs on steel and aluminum and autos are expected to nudge new car prices slightly higher alongside motor vehicles and parts.
• China-exposed categories—particularly apparel, communications equipment, and personal care goods—are similarly vulnerable to price acceleration.

Against this backdrop, we anticipate core inflation will tick up 0.2% m/m, pushing the y/y pace to 2.8% in April. Our headline inflation forecast maintains a 0.2% m/m increase, as retreating natural gas prices likely counterbalanced modest increases in food and fuel costs.

Where we could see tariffs start to show up in the April data is in the trade services category of PPI, which we get on Thursday. Thursday is a crowded day for data, with April retail sales landing as well. April’s data will come off the back of a blowout March retail print. We don’t have any reason to expect that momentum will continue into April and have a -0.4% m/m retracement in headline retail sales.

As such, most discretionary spending categories (clothing, sporting goods, general merchandise, restaurant spending) will likely be a bit weaker. Building materials are the exception here as we expect that last month’s surge may well be reflective of a lagged rebuild after the destruction associated with California wildfires earlier this year. If this is the case, April could also be stronger, and we expect to see this trend reflected in higher building permits issued for April (+1485k).

Get the latest economic forecasts and analysis from RBC Economics.

U.S.-U.K. announce new trade deal

The U.S. and U.K. announced a new trade deal. Under the agreement, American tariffs on British automotives are slashed from 27.5% to 10%, with steel and aluminum reduced to zero. The deal also involves American exports of beef, ethanol, and agricultural products and closer technology partnership between the two countries.

More details will come later. The deal suggests America is "open for business," with "many more to come—stay tuned," President Donald Trump wrote on his social media. The deal provides American exporters US $5 billion in new market opportunities.

Tariffs hit manufacturing jobs in Canada

There are now clearer signs that the ongoing trade war is hitting the Canadian labour market. Employment would have fallen by 30k in April had it not been for a surge in public admin jobs thanks in part to temporary election hiring. Most of the decline outside of public administration can be traced back to manufacturing, where employment declined for a third straight month in April.  

Going forward, slower population growth and reduced demand for Canadian exports due to disruptive U.S. tariffs will remain headwinds to job growth in Canada. The economic outlook still remains highly contingent on the evolution of international trade risks, but job openings have continued to edge lower, signaling more softening in hiring in the pipeline. Overall, we expect slowing conditions will push the unemployment rate up to over 7% this year. 

Get the latest economic forecasts and analysis from RBC Economics.

FOMC preview: Willing to wait for it

Ahead of the Federal Open Market Committee meeting on May 7th, here’s the latest from our U.S. Rates Strategy team on what to expect while tariff policy remains a moving target:

• We expect an extremely quiet FOMC meeting, with no policy changes, no major changes in the statement language, no dots (May is not SEP meeting), and Powell still flagging patience amid the potential tension between the two sides of the mandate.
• We continue to see a first cut at the September meeting, with 25bp cuts at each subsequent meeting until May 2026 (i.e. terminal rate at 2.75%-3.00%).
• Markets should take a repeat of Powell’s “wait-and-see” approach in stride and we are expecting muted price action on Wednesday. Risks around that are relatively two-way, but with perhaps a slight bias towards a dovish response. 

The FOMC is still in wait-and-see mode. What is it they are waiting to see exactly? Following their March meeting, we wrote that the Fed was waiting for further clarity on three main questions before they could confidently start moving in one direction or the other:

1. How are executive policies going to evolve in the coming months?
2. How will the impact of those policies break down across upside inflation and downside growth/labor risks?
3. Are there any signs that the recent deterioration of soft data and sentiment is starting to have a real impact on business/consumption decisions? All those questions remain unanswered.

A little less conversation about tariffs

The big things you need to know:

1. It was another week of stabilization on the earnings stats we track, helping to support the recent stabilization in equity market pricing.
2. There was a little less conversation about tariffs in last week’s earnings calls, which left some additional room for discussions on the health of the consumer and the impacts of non-tariff policy changes.
3. In our other weekly updates, what jumps out is that when we bake in current consensus assumptions on key macro variables and bottom-up EPS for 2025, the S&P 500 ended the week roughly in line with where our model says fair value for the index should be at year-end.

On tariffs, we didn’t learn too much in the way of new information after the prior week’s avalanche of Industrials earnings. With a heavier dose of Tech companies taking the spotlight from the Industrials sector, the tariff discussions overall seemed a bit less front and center as well.

The biggest casualty from the unfolding trade war is likely to be CEO confidence, with a resulting snowballing of project delays, pushouts, cancellations, and lowered capex. The upcoming earnings season will likely be especially unsatisfying, since managements will only be in position to cautiously discuss their preparedness to raise prices and control spending, with few specifics about any changes in demand. We will not be surprised to see some companies pull guidance.

PM Carney visits the White House; Canada’s automotive industry got a break

PM Mark Carney will be in the White House on Tuesday. The in-person meeting with U.S. President Donald Trump is high-stakes for Carney who led the Liberals in Canada to a fourth consecutive mandate. Carney unveiled an ambitious agenda on Friday, promising the “biggest transformation of the economy” since the Second World War, including tax cuts by July 1. A new cabinet will be sworn in the week of May 12, and parliament will be recalled on May 26 with King Charles delivering the throne speech.

The Canadian automotive industry got a break—but it’s not enough. Auto-part exports to the U.S. that were going to be hit with steep duties in May got a U.S. reprieve, with CUSMA-compliant parts now exempt from 25% tariffs. But Unifor, which represents Canadian auto workers, said the new guidance "changes nothing" for the industry.

Battery tariffs

Battery tariffs could result in project delays. Effectively no solar is directly imported from China due to prior tariffs, but Chinese cells accounted for ~90% of the battery energy storage system (BESS) deployed in the U.S. in 2024. With tariff rates at ~156% and increasing to ~173% in 2026, we believe project economics will be challenged and could cause developers to defer projects and result in a dramatic reduction in storage development.

Depending on contract structure, developers could be insulated from tariff impacts. However, we believe other smaller developers are unlikely to have such favorable terms and will now be looking to renegotiate pricing with manufacturers or delay development timelines as they wait for a resolution.

There is precedent for parties to delay projects. During the pandemic-induced supply chain crunch, increased prices and longer lead times on equipment led to changes in project timing. Lead times on storage are 12-18 months so existing projects with firm supply contracts for delivery this year could see less of an impact, but we believe negotiations for future sales could be on pause until there is more visibility on ultimate tariff rates.

Additional LFP capacity in Europe is coming online, but additional greenfield cell capacity expansion takes time especially in the U.S. where LFP cell plant construction timelines can take up to 3 years. Material inputs like the anode and cathode would still likely need to be sourced from China and could face tariff risk and a headwind from an anode AD/CVD investigation that could result in a ~900% duty.

With U.S. policymakers considering early sunsets for the Inflation Reduction Act (IRA), we believe it becomes increasingly unlikely that manufacturers look to expand cell capacity in the U.S. Instead, we believe EU and Southeast Asia (SEA) are more likely options.

To access the full report, contact your RBC representative.

Volatility is higher — we’re in a limbo regime: RBC’s Amy Wu Silverman

Amy Wu Silverman, Head of Derivatives Strategy at RBC Capital Markets, joined CNBC Worldwide Exchange to discuss why she believes markets remain in ‘limbo’ amid tariff policy uncertainty, the importance of timing in hedging, what she’s hearing from investors who remain cautious, and more.

Click here to watch Amy in action.

The Fog of Tariffs

The big things you need to know:

• First, earnings sentiment is at an important crossroads, with the rate of upward EPS estimate revisions having fallen to 30%.
• Second, what we read in S&P 500 earnings call transcripts last week keeps us in the camp that recession is not a foregone conclusion, makes us concerned that any adverse impacts from tariffs may be felt a little later in the year or even next year, and pushes us toward the idea that the consumer is holding up but still hasn’t been unscathed.
• Third, the idea that investors are rotating out of the US assets into other geographies is supported by recent funds flows data.

Safe haven status of Treasurys faces Washington headwinds

Blake Gwinn, Head of US Rates Strategy at RBC Capital Markets, joined Yahoo! Finance: Morning Brief to discuss the outlook for potential rate cuts this year, risks around policy uncertainty, stability premiums on U.S. Treasurys, and more.

Click here to watch his Yahoo! Finance: Morning Brief interview.

CNBC: 90-day pauses are not an eradication of tariff risks, says RBC’s Frances Donald

Frances Donald, Chief Economist at RBC, joined CNBC’s 'Power Lunch' to discuss the market rallying on news that Trump is pausing tariffs on certain countries for 90 days.

Click here to watch her CNBC interview.

Bloomberg: S&P 500 may fall 27%-32% in recession: RBC’s Calvasina

Lori Calvasina, Head of U.S. Equity Strategy at RBC Capital Markets, joined Bloomberg Surveillance to discuss Recession pricing, lowered S&P500 targets, how to price the current market environment as tariff turmoil spreads, and more.

Click here to watch her Bloomberg interview  and listen to her on Bloomberg Talks and Single Best Idea.

Tariffs won’t show up in core goods inflation just yet

Following “Liberation Day” tariff announcements and in the wake of a continued deterioration in the “soft” economic (sentiment) data, this week’s U-Michigan survey will likely show another rise in inflation expectations. Against the backdrop of steep tariffs, we are watching closely for stagflationary risks in the economic data. But announced tariffs won’t show up in the inflation prints just yet!

In fact, we anticipate a slowing in core inflation in March as our forecasts call for a month-over-month rise of 0.2% in both the headline and core measures.

• Core goods sector inflation is likely to hold steady as announced motor vehicle and parts tariffs did not go into effect until April.
• Services sector price growth should continue to outpace goods, at least for another month.
• Weaker gas prices in March will provide some downward pressure to headline inflation. We will likely have to wait until the April report to see the impact of higher auto prices on core goods.

Last week’s ISM manufacturing prices paid index – a leading indicator – suggested that the share of firms facing higher prices rose drastically in March. We expect this to be reflected in core goods prices in the months ahead. We will be watching to see if the spike in used car prices relative to prices for new cars– which we saw in February’s CPI report– continues. This could signal a further deterioration in consumer purchasing power.

Multi-industry take on tariff impact

The biggest casualty from the unfolding trade war is likely to be CEO confidence, with a resulting snowballing of project delays, pushouts, cancellations, and lowered capex. The upcoming earnings season will likely be especially unsatisfying, since managements will only be in position to cautiously discuss their preparedness to raise prices and control spending, with few specifics about any changes in demand. We will not be surprised to see some companies pull guidance.

Companies best positioned to weather tariff impacts should be the high-earnings quality names and companies leveraged to defensive end markets, such as water. Companies more at risk could be those with higher exposures to auto and electrical.

According to the UN Comtrade database, the most imported categories/goods to the U.S. in 2024 were (1) machinery, nuclear reactors and boilers (HVAC), (2) electrical, electronic equipment, and (3) vehicles.

What’s next for the multi-industry sector?

• Near-term, expect the sector to deal with a spike in Cost of Goods Sold (COGS) due to higher imported materials costs; there is likely to be a falloff in short-cycle demand.
• Broadly, sector is comparatively less exposed to imports/exports given prevalence of in-country/ for-country manufacturing and some degree of de-risked sourcing strategies post-pandemic.
• The less-draconian treatment of Mexico was a modest positive, especially for the HVAC OEs.
• Playbooks will likely be to offset tariffs with price hikes and surcharges, leaning on the experience gained from Trump 1.0 tariffs.

To access the full report, contact your RBC representative.

CNBC: RBC’s Helima Croft on OPEC+ producers raising crude oil output

Helima Croft, Head of Global Commodity Strategy at RBC Capital Markets, joined CNBC’s ‘Power Lunch’ to discuss the oil market as eight OPEC+ producers accelerate crude oil output hikes, whether the price of oil goes lower, and more.

Click here to watch her CNBC interview.

March job surge coincides with front-running of tariffs

The March payrolls report showed a significant upside surprise - with 228k jobs added. A surprise uptick in leisure & hospitality (after weakness in February) coupled with strong payroll growth in transportation and retail (likely spurred by a ramp up in hiring associated with an inventory build-up ahead of tariffs) accounted for the bulk of growth alongside health care & social assistance.

We saw fewer job losses in the federal government this month after federal layoffs slowed in response to the OPM announcement in early March that essentially paused the government-wide probationary layoffs by shifting responsibility to individual agencies. While the unemployment rate rose, this was largely reflective of an increase in new entrants rather than layoffs.

Looking ahead, uncertainty around tariffs will likely weigh on payroll growth. If this week’s tariff announcements stick, weaker demand for exports will likely weigh on goods-sector hiring. 

A thorn in the Fed’s side: What could tariffs mean for U.S. inflation and growth?

Should the sweeping “reciprocal” tariffs announced by President Trump stay in place in the coming months, our expectation is to see significant upward pressure in inflation and negative shocks to growth.

Roughly 10% of U.S. consumption is accounted for by goods and services imported from abroad. Considering the extent of sweeping tariffs, it will be relatively difficult for consumers to substitute away from imported goods in the near term. For example, U.S. technology in many cases requires chips from Asia and most textile factories are found beyond U.S. borders.

We have elaborated on how 25% tariffs will impact the price of new cars here – but outside of the auto sector, “reciprocal” tariffs will show up in household furnishings (including Scandinavian furniture), recreation commodities (including children’s toys largely from Asia), and medical supplies from Europe among others.

We expect to see a spike in core goods inflation as early as May. This would result in a notable increase in both core and headline inflation. Relative to our baseline forecast (prior to the announcement we had core inflation ending the year at 2.7% y/y), we have modeled two likely tariff risk scenarios:

1. 10% tariffs across the board with 25% tariffs on autos and 20% steel and aluminum (*includes USMCA exemptions)
2. 20% tariffs across the board with 25% tariffs on autos and 20% steel and aluminum (*includes USMCA exemptions)

Click here to read more about these scenarios and access the full report outlining how tariffs could impact inflation’s path and weigh on U.S. growth.

Are services immune to tariffs in the trade war?

More attention is being focused on how Canada can better diversify trade to alternative sources as U.S. tariffs and threats continue to escalate. In the goods trade, Canada’s geographical proximity to the U.S. makes it difficult to diversify away from the U.S. But, that is much less of a constraint for services.
In this episode of the 10-Minute Take, economists Claire Fan and Carrie Freestone dig into:

• How much services Canada trades and with who?
• Is Canada well positioned to leverage services for broader trade diversification?
• What are the headwinds facing services amid the ongoing trade war?

Listen to the episode.

Trump’s “Liberation Day”: What comes next

Starting April 5th, the U.S. is imposing 10% baseline tariffs, with most countries facing a tariff rate that appears to be based on a calculation of trade deficits as a share of exports from that country. Crucially, it exempts Canada and Mexico as it’s not applied to USMCA-compliant products.

Here is the first of six key impacts we’re watching out for next:

1. Canada lives to fight another day, but not without some pain.

Existing tariffs remain, including those based on IEEPA/fentanyl, steel and aluminum and auto and auto-parts that went into effect just past midnight today. Duty-free trade still applies to products that are USMCA compliant—perhaps a signal that the President still takes the agreement he signed seriously.

• Most, if not all, Canadian auto manufacturers have 50% U.S. content, which means an effective tariff rate of 12.5%. Combined with a 70-cent Canadian dollar, it puts Canadian auto and parts makers in relatively good stead, especially in comparison to Asian and European automakers facing up to 25% in tariffs.
• The story on energy is similarly that of relief—RBC Capital Markets highlighted how most, if not all, oilsands producers are USMCA compliant, and not be subject to the 10% tariff on energy. A 10% tariff on other resource products and potash, although significant, is not enough to affect producers’ bottom lines.
• While we may see specific provinces and sectors negotiating for exemptions, most will likely not want to rock the boat until the federal election is over on April 28, and an economic and security partnershipcan be negotiated. But Canada isn’t out of the woods yet—lumber is still in the U.S. administration’s crosshairs, and President Donald Trump alluded to a longstanding irritant of his in Canadian dairy.

Read the full report covering tariffs/taxes, China, trade negotiations, supply chains and more.

Canada emerges relatively unscathed

Canada emerged relatively unscathed in the U.S.’s latest tariffs – for now. 

President Donald Trump announced 10% baseline tariffs on all imports and higher rates on nations that had “looted” the U.S. Canada and Mexico were excluded from the reciprocal tariff regime, but levies on autos, steel and aluminum remain in place.

Prime Minister Mark Carney said he will consult with several stakeholders, including premiers, before responding with “purpose and with force." Global stocks fell, but the loonie was up in after-hours trading.  For more, read RBC Thought Leadership’s analysis here.

U.S. Senate blocks Trump’s tariffs on Canada. Four Republicans joined all 47 Democrats in the Senate to vote 51-48 on a resolution to end the state of emergency that allowed Donald Trump's administration to unilaterally impose tariffs on Canadian goods. The vote is largely symbolic as it's unlikely to pass the Republican-controlled House of Representatives.

Republican Senator Rand Paul, a staunch supporter of free markets who co-sponsored the bill, said tariffs in general are a "terrible mistake," noting that the declaration at the northern border was "not a real emergency."

Assessing tariff impacts on healthcare

• Biotech tariffs (biotech research team) “President Trump's executive order issued this evening lists pharmaceuticals (in addition to copper, semiconductors, and lumber articles) as goods that will not be subject to the Reciprocal Tariff. While this may be read positively, we note that

(1) Pharmaceutical tariffs could still be implemented in the future - and indeed, we thought that many had expected an announcement specific to pharmaceutical tariffs to be announced later, and/or to be phased in rather than immediate

(2) The order calls out the need to maintain "robust and resilient domestic manufacturing" in sectors like pharmaceuticals, suggesting this remains on the administration's radar for the future

(3) The impact of tariffs on the U.S. biotech sector was likely to be relatively modest and manageable, assuming the transfer price on import reflected drugs' cost of goods which are typically very small, though may have been greater for companies with IP domiciled ex-U.S. that kept taxes low.

We continue to monitor but see the ongoing developments at FDA as more material for the space than tariffs.”

• Medtech tariffs (Shagun Singh) “Overall, we believe the broad implementation of tariffs is an incremental headwind for most companies in our universe except those that are U.S. based or exempt. We maintain a positive outlook on the sector with positioning based on relative exposure and companies' ability to offset tariffs to some extent. Net-net, we see more opportunities in the sector and underlying fundamentals are robust.”
• Life Science Tools & Diagnostics (Conor McNamara): “We believe the sector will only feel a modest impact and will look toward Q1'25 earnings calls for more clarity on tariffs and how well these companies can manage. In the meantime, we analyzed company filings, and it appears that over a dozen of our companies are 'net exporters' from the U.S., meaning they have a higher percentage of manufacturing facility assets in the U.S. than domestic revenue. And though these tariffs are likely to impact overall customer demand, perhaps delaying end-market recovery in the sector – expected for 2H 2025 – it could provide a competitive advantage for nearly all of our companies that compete with foreign based entities selling in the U.S.”

Gold strategy: Liberation Day quick take

Despite the initial move lower from high prices and extended long positioning, we suspect that the cocktail of uncertainty, and growth-negative/inflation-positive implications will support gold. Bullion’s exclusion from tariffs should end the arb trade.

• Given extended long positioning and all-time high prices, macro questions and a near-term shift in gold thinking may have meant the initial move was lower for gold.
• Whatever floor it settles upon, we think will be a building point over the medium and longer term, as we think the net effect of “Liberation Day” will be supportive given the ongoing uncertainty and growth-negative/inflation- positive implications.
• While the 10% minimum baseline tariff could have been a bit of a tariff clearing event on its own, reciprocal tariffs for major trading partners are high and uncertainty certainly lingers ahead of retaliation, responses, etc.

To access the full report, contact your RBC representative.

Natural gas strategy: Liberation Day quick take

With natural gas in Annex II and not subject to ad valorem rates and USMCA compliant natural gas not subject to the 10% carveout rate, it was a bit of a tariff clearing event for gas. Yet, we do eye economic impact and retaliation risks.

• With natural gas included in Annex II list of exempted goods and thus not subject to the ad valorem rates and USMCA compliant natural gas not even subject to the 10% carveout rate for energy, for now “Liberation Day,” outside of any downside from reduced economic activity and retaliation risks for exports, was a bit of a clearing event.
• Given the uncertainty, shifting nature of the agreement, and eventual of renegotiation of the USMCA itself, we say “for now” it may be liberated from tariffs, and thus natural gas at this point is, in the near term, left to trade on its fundamentals.
• We still think that yet again, natural gas is too high as late season chills have allowed natural gas to hold on to elevated levels with injection season underway. While it’s clear after Q1 that our middle scenario probability has diminished and high scenario has gained steam, we still think natural gas prices have some downside ahead.

To access the full report, contact your RBC representative.

Clean energy tariff implications

Near-term reciprocal tariffs have mixed implications across the solar landscape. Assuming the tariffs remain for a more significant period of time, we believe they could provide a relative competitive advantage for manufacturers with domestic supply chains. However, near-term the reciprocal tariffs will pressure foreign supply chains broadly and costs across our coverage. While many manufacturers have established significant domestic supply chains, not everything is sourced domestically and will face the impact of tariffs.

To access the full report, contact your RBC representative.

Washington strategy: Moving targets

1. Ahead of tariff ‘Liberation Day’, there is much discussion over the impact of these measures on energy markets. At first glance, the imposition of tariffs would appear to be bearish for oil prices, given the likely contractionary impact for key demand centers such as China. And yet, the White House’s willingness to directly target oil exports through sanctions rebranded as tariffs to punish producers seen as American adversaries poses the opposite price risk.
2. Geopolitical uncertainty over the market impact of tariffs and sanctions was one of the overarching themes at last week’s Financial Times Global Commodity Summit in Lausanne. Though multiple speakers noted that the oil market was well supplied, Washington’s move to impose sweeping tariffs and energy sanctions was seen as moving prices outside the range of simple supply and demand models.
3. Underlying the angst is the difficulty of determining the ultimate policy priority order for an administration whose policies can appear to be working at cross purposes. Although Secretary of Energy Chris Wright has deep ties with U.S. producers, we suspect the White House may not have the same connectivity with the physical oil trading and market community at this stage.

The report “Washington strategy: Moving targets” was published on April 1, 2025.
To access the full report, contact your RBC representative.

Biotech: Impact on U.S. biotechs of pharmaceutical tariffs could be relatively limited

Amidst the backdrop of biopharma weakness (XBI down 11% YTD), most recently aggravated by the resignation of Dr. Peter Marks over the weekend, the undefined threat of tariffs levied against the biopharmaceutical industry continues to cast a long shadow.

Relatively little is yet known about these proposed sector-wide tariffs, though additional clarifying details could emerge later this week that better define their scope of implementation. To date, the Trump Administration has suggested several policies - a 25% tariff on pharmaceuticals, and/or policies that would levy reciprocal tariffs to account for any additional subsidies that other governments and tax havens might offer to support certain pharmaceutical companies (though this remains opaque).

In our report, we detail potential implications for the broader sector and individual covered companies. Key questions are what exactly the tariffs would apply to; assuming these would be on the low-cost drug substance being imported, the effects would likely be minimal given generally very high gross margins across the space, though tariffs pegged closer to drugs' list prices and/or designed to offset offshore IP tax advantages could be more impactful. Generally speaking, companies with more ex-U.S. IP and manufacturing would be more exposed.

The report “Biotech: Impact on U.S. biotechs of pharmaceutical tariffs could be relatively limited” was published on April 1, 2025.
To access the full report, contact your RBC representative.

Canada’s main political parties are pitching energy corridors

Conservative Leader Pierre Poilievre vowed to fast-track approvals of new infrastructure to transport Canadian energy domestically and abroad without going through the U.S.

Prime Minister and Liberal leader Mark Carney is also eyeing a regulatory reboot to speed up energy infrastructure development.

The Conservatives also promised to defer capital gains taxes if the proceeds are reinvested in Canada. With nearly a month to go, the Conservatives are trailing the Liberals and the NDP is on track for one of its worst election results.

Tracking the global consumer on tariffs

Given mounting investor concern regarding a weakening consumer and the implications of tariffs, our global consumer and retail research team summarized their latest thoughts on the consumer, using hard data points from our various coverage universes.

On tariffs, we generally believe that companies operating in and around the US and Canada have the highest potential to be adversely impacted. Uncertainty around the tariff situation has likely led to hesitation across the supply chain, from the consumer to the retailer and the supplier. Anxiety from the consumer has led to a recent sharp dip in consumer confidence and sentiment.

Methods to mitigate the impact of current and potential tariffs are wide-ranging. These include, but are not limited to, sharing incremental costs with suppliers, further diversifying supply chains and sourcing, shifting manufacturing locations, raising prices, and leaning into productivity. We see particular hardship for products that have certain appellations, or legally defined geographic origin and quality (e.g., Champagne, Scotch Whisky, Irish Whisky, Cognac, Tequila), or marketing provenance as shifting manufacturing is nearly impossible.

On the contrary, additional U.S. tariffs on China may free up manufacturing capacity to serve European retailers and put further downward pressure on shipping rates, thus providing a cost tailwind.

Contact your RBC representative to access the full report, including commentary on U.S. consumer staples, hardlines/broadlines, food retail & e-commerce, restaurants and leisure facilities, the Canadian consumer, and European consumer staples and general retailing.

Five ramifications of U.S. auto tariffs

On Wednesday March 27th, President Trump announced a 25% tariff on imports of automobiles and parts. Importers are set to face tariffs on all non-U.S. import content effective April 3rd. This announcement will have wide-ranging ramifications due to the multi-layered supply chain linkages of the North American auto sector.

Ahead of the implementation next week, we sought to spell out the potential impact of these tariffs to the U.S. auto sector. Here are five ways that the auto tariffs will impact the U.S. automotive sector and broader U.S. economy:

1. Tariffs could result in a near-term boost to growth from an inventory build-up
2. Tariffs will drive up consumer prices for new and used autos
3. Consumers may shift towards purchasing used autos
4. Auto loan delinquency rates could rise
5. Weaker demand for vehicles could drive layoffs in the sector

Click here to read the full report.

Frances Donald on CNBC

Frances Donald, Chief Economist, RBC, and CNBC’s Steve Liesman join ‘The Exchange’ to discuss where the economy is heading, their take on the latest inflation data, and more.

Click here to watch Frances in action.

Food Fight: China’s tariffs adds to exporters’ woes

China retaliated with tariffs of its own on various Canadian agricultural exports in response to Ottawa’s tariffs last fall on Chinese electric vehicles and metals.

While the new tariffs—100% on Canadian exports of canola oil, canola oil-cake, and pea imports, and 25% duties on pork and aquatic products – are expected to impact a small share of total Canadian domestic exports, some industries and provinces may face more significant challenges than others. 

The new tariffs mark an escalation in trade tensions between Canada and China, with the risk tilted to the upside. It comes as the agriculture sector is already experiencing challenges posed by the trade uncertainty with the United States.

Read the full RBC Economics Report.

Macro Minutes podcast: Butterfly effect

Below is a summary of their discussion.

Click here to listen to the full podcast.

In the latest edition of Macro Minutes, recorded on March 26, 2025, the discussion centered on the butterfly effect of U.S. trade policies and their broad impact on international fiscal policies, politics, and potentially monetary policy and the bond market. The episode highlighted how even minor tweaks in trade strategies can send shockwaves through the global economy, prompting shifts in political dynamics and financial strategies in various countries. Expert guests provided insights into the repercussions of these policies, emphasizing the interconnectedness of global economic systems and the importance of considering far-reaching consequences when formulating trade agreements.

Eye on U.S. reciprocal tariffs ahead of key job market reports

The United States’ administration’s announcement on reciprocal tariffs on Wednesday threatens to overshadow normally key job market reports for February in Canada and the U.S. on Friday.

The start and stop of trade threats and actions from the U.S. have been dizzying, but as much as the uncertainty has intensified, U.S. tariffs implemented so far have not been large enough to cause a recession in Canada. By our count, the effective average U.S. tariff on imports from Canada has increased to about 2.5% from essentially zero in January.

The vast majority of U.S. imports from Canada that are USMCA/CUSMA compliant were quickly exempted from the more severe blanket 25% tariff imposed in early March. The additional steel and aluminum tariffs implemented on March 12 are large, but products impacted account for a relatively small share (about 4%) of Canadian exports to the U.S.

Click here to read the full report.

Assessing the impact of tariffs and trade wars on software

In an excerpt from the research report, “Assessing the Impact of Tariffs and Trade Wars on Software,” Rishi Jaluria, Software Analyst, outlines a framework to evaluate the potential impacts of tariffs on the software sector and which categories may be most affected.

Tariffs and trade wars create uncertainty.

• Anything that creates uncertainty is bad, especially for projects that have longer payback periods, are expensive, or are more discretionary.
• We would advise investors to dust off their playbooks from the early days of COVID, which led to longer sales cycles, deprioritization of projects, and smaller deal sizes.

Software should be relatively tariff-proof… but the end customers may not be.

• Software and services are difficult to apply tariffs to, so we don’t expect any real direct impact on the software companies or business models. But their customers may not be tariff-proof and that could have follow-on impacts on software companies more heavily exposed to those industries.
• Generally, any industry with a global supply chain would be at risk (i.e., manufacturing, aerospace, consumer products and electronics, semiconductors, energy), and many of those companies may focus more on their supply chain or tariffs leading to deprioritization of certain software projects.

What if tariffs cause a recession?

• While too early to make the call, if tariffs and trade wars trigger or contribute to a recession (similar to the Smoot-Hawley Tariff Act of 1930), then we need an entirely new playbook for software investing.

To access the full report, contact your RBC representative.

European Markets with Peter Schaffrik: Germany's fiscal boost and tariff tensions

In this edition of European Markets, Peter Schaffrik, Chief European Macro Strategist, discusses the increase in fiscal spend that is likely to come out of Germany and Europe at large, and how it balances against the potential tariffs and obviously what it means for the economy and the market.

Predictions for a volatile geopolitical year ahead

In this episode of Strategic Alternatives, Helima Croft, Head of Global Commodity Strategy and MENA Research and Frances Donald, Chief Economist sit down with Fred Kempe, President and CEO of The Atlantic Council to discuss the top risks and potential outcomes on global trade and tariffs, implications for energy markets, Russia-Ukraine negotiations, intervention in the Middle East, and more.

Click here for the full transcript

How the Fed is navigating inflation, tariffs, and economic uncertainty

Blake Gwinn, Head of U.S. Rates Strategy, joins the Bond Buyer podcast to discuss factors influencing the Fed’s decision making, outlook for interest rates, current economic environment, tariffs, and more. Below is a snippet of their conversation:

Gary Siegel (19:42):

It's time to talk about tariffs. Blake, no one knows what's going to happen, but what is your view? How long will they be in place? What impact will they have on the economy or any other version of that question you want to answer.

Blake Gwinn (22:46):

Our view is that if you try to do these kinds of broad tariffs, that there would be court challenges that would essentially curb their ability to put in these broad tariffs. So, I don't think that for all the noise we've had over the last few weeks, I don't think either of those things has necessarily been disproven. I don't think maybe there's a slightly bigger risk now after seeing how aggressively they've gone after it after trade in the early days, maybe that increases the odds of a bad outcome a little bit more. But if anything, I can look at the pullback that we've seen and with the Canada where we've seen the rolling out of deadlines, we've seen the pullback in USMCA compliant categories, et cetera. It does seem like the pushback, and so I'm still relatively sanguine, again with very, very low conviction, with very low conviction that there's going to be a lasting large, broad type of tariff that we were expecting.

Click here to listen to the episode.

March George Davis Report: Revisiting our tariff scenarios

The George Davis Report is a monthly series on the movement of the Canadian dollar produced by RBC Capital Markets. This month, George revisits RBC’s tariff scenarios and discusses the Bank of Canada’s response.

Click here to watch the full video.

In this month’s edition of the George Davis Report, George explores the effects of the ongoing trade tensions and the recent Bank of Canada interest rate decision on the USD/CAD currency pair. The market has been wrestling with tariff-related uncertainties, which have led to a sticky resistance at the 1.4550 level, preventing a daily close above this threshold. Despite this, the risks are still skewed to the topside, with potential fluctuations within a 1.4600 to 1.4800 trading range, depending on the duration of the imposed tariffs. He also observes that the recent increase in long U.S. dollar CAD positions reflects the market's anticipation of a tariff premium, suggesting that as long as tariff risks loom, an upward pressure on the currency pair may persist.

Further complicating the currency outlook, George discusses the Bank of Canada's recent policy action, where a 25-basis point rate cut was implemented as a precautionary measure against tariff-induced economic risks. Although recent economic indicators have been robust, the softer survey data hint at potential headwinds, leading to the preemptive rate cut. However, the Bank of Canada has highlighted that monetary policy alone isn't sufficient to counteract tariff challenges, underlining the importance of a fiscal response. With the government's initial fiscal measures and the possibility of more stimulus in response to prolonged tariffs, he suggests that the expectation for further rate cuts may be tempered, which is an important factor to monitor for its potential impact on the Canadian dollar.

Metal wars: Five things to watch for as U.S. steel and aluminum tariffs roll out

The U.S.-Canada trade war has kicked off, with Canadian steel and aluminum exports, valued at $24 billion annually, set to be tariffed at 25% starting on May 12th. We highlight five themes to watch for as the two economies brace for the fallout from these levies:

1. The tariffs are unlikely to reinvigorate U.S. production
2. The devil is in the details on China’s access to U.S.
3. For all the China talk, Canada has become target number one
4. Exemptions for Canada will be hard to come by
5. The best chance for success is to offer concessions

Click here to read the full report.

It's a new dawn (day), and no one’s feeling good: Tariffs slash growth momentum in Canada and U.S.

Trade risks are set to wipe out early signs of economic recovery in Canada—we expect gross domestic product growth to slow and the unemployment rate to edge higher in coming quarters.

The U.S. economy’s run of exceptional performance is also facing headwinds from trade disruptions, government spending cuts, and lower immigration rates.

Central bank paths going forward are little changed from last month. The Bank of Canada will continue to cut interest rates, but we don’t expect a race to the bottom, pending fiscal supports.

Issue in focus: We look at how the value added tax (VAT), like Canada’s GST, is being tied to possible U.S. tariff plans as the planned April 2 announcement of reciprocal U.S. tariffs threatened on all trade partners approaches, and what it could mean for Canada and others.

Click here to read the full report.

In the media: Oil outlook and U.S. banks

• Helima Croft, Head of Global Commodity Strategy and MENA Research joins BNN Bloomberg to discuss the outlook on oil amid tariff policy uncertainty, impact of geopolitical headlines on energy markets, and more.
  • Click here to watch Helima in action.
• Gerard Cassidy, Global Co-Head of Financials Research and Head of U.S. Bank Strategy, joins Bloomberg: Surveillance to discuss tariff policy uncertainty and the impact on bank stocks, M&A activity, and more.
  • Click here to watch Gerard in action (1:51:46).

Tariff takeaways from the 2025 Financial Institutions Conference

Regulatory and Trade Uncertainty Remains a Challenge

As we entered 2025, the economic landscape remained complex, shaped by macro trends, regulatory shifts, and geopolitical uncertainty. While the U.S. economy continued to show resilience with moderate GDP growth and a robust labor market, new risks have emerged that are influencing financial institutions’ strategies.

The conference took place just as the administration imposed new tariffs on Canada, Mexico, and China, disrupting markets and adding uncertainty to global capital flows and corporate investment. The policy volatility is already pressuring businesses, with higher import costs, declining consumer confidence, and rising inflation expectations.

Regulatory shifts are also in focus. The Basel III Endgame proposal, which initially called for significant capital increases on large banks, is being reconsidered, potentially easing constraints on lending and M&A activity.

Trade Policy and Market Volatility

The impact of shifting trade policies was a dominant theme, with business leaders highlighting the uncertainty caused by tariffs and isolationist policies. These changes have led to corporate hesitation around M&A, capital investment, and supply chain restructuring, as companies struggle to make long-term decisions in an unpredictable regulatory environment. Rising inflation concerns were also top of mind, with some warning that labor shortages, supply chain disruptions, and geopolitical tensions could keep inflation elevated longer than expected.

Click here to read Vito’s full takeaways from the conference.

RBC Panel on Bloomberg TV

Today, there was an RBC “takeover” at Bloomberg Surveillance with two panels featuring our experts on the economy, FX, U.S. equity markets and equity derivatives. Their discussion focused on Trump’s economic agenda, how FX will impact U.S. tariffs and how inflationary they are, volatility amid tariff policy uncertainty, market reaction with stocks poised for the worst week of the year, and more.

Click here to watch the full show | Frances & Elsa at 30:30, Lori & Amy at 1:19:58.

RBC participants:

• Frances Donald, Chief Economist, RBC
• Elsa Lignos, Global Head FX Strategy
• Lori Calvasina, Head of U.S. Equity Strategy
• Amy Wu Silverman, Head of Equity Derivatives Strategy

In the media: U.S. Rates strategy, U.S. equities and consumer prices

• Blake Gwinn, Head of U.S. Rates Strategy, joins Yahoo Finance: Morning Brief to discuss the impact of February jobs data on the bond market, economic uncertainty amid potential tariffs, and more.
  • Click here to watch Blake in action.
• Lori Calvasina, Head of U.S. Equity Strategy, joins CNBC: Fast Money to discuss the impact of the falling dollar on markets, investor sentiment around the disruption coming out of Washington, tariffs beyond negotiation tactics, and more.
  • Click here to watch Lori in action and listen to the full show podcast here.
• Nik Modi, Co-Head of Global Consumer and Retail Research, joins Bloomberg Markets: The Close to discuss Brown-Forman beating Q3 estimates, what drove performance and impact of tariffs on alcohol companies.
  • Click here to watch Nik in action (18:20)

What is the impact of tariffs on the U.S. economy?

The effective U.S. tariff rate is now 12%. That’s the highest level since the 1940s after U.S. President Donald Trump slapped tariffs on Canada, Mexico and China. What is the impact of these tariffs on the U.S. economy? RBC Economics' Michael Reid and Carrie Freestone answer nine questions we’re getting asked about what this means for the U.S which include:

1. How important is U.S. trade with Canada, Mexico, and China?
2. Will there be a recession and how will this impact U.S. growth?
3. Which sectors will be hit the hardest?
4. How easy is it for the U.S. to “reshore” the most impacted sectors?
5. How might tariffs show up in U.S. inflation measures?
6. How will tariffs impact U.S. consumers?
7. How much revenue could tariffs generate for the U.S.?
8. How easy or difficult is it to substitute away from tariffed imports?
9. How might the U.S. Federal Reserve respond?

Click here to read the full report.

RBC’s McKay warns of hit to economic growth from U.S. tariffs

Featured in an article in Bloomberg, Dave McKay said he’s hopeful U.S. tariffs end up being temporary but that it’s disappointing to see the trade war started by U.S. President Donald Trump potentially impeding broader economic growth.

“It’s a little frustrating to see the loss on momentum,” the chief executive officer of Canada’s largest bank told investors Tuesday morning at the Global Financial Institutions Conference in New York. “We still hope for the best outcome that these tariffs are short-lived, and we get back onto a growth agenda on all sides of the border that we were on before.”

Watch the livestream of the interview here.

U.S. tariffs on Canada take effect: What is the state of play

The U.S. administration has implemented blanket tariffs on Canada and Mexico after a 30-day reprieve with 25% on all imports except 10% on Canadian energy. An additional 10% tariff on China is also planned.

Canada has been hit with its largest trade shock in nearly 100 years and responded promptly with 25% tariffs on $30 billion of U.S. goods, rising to $155 billion in 21 days. Evolving trade policies and government responses still remain highly uncertain as we highlighted in our first economic takeaways a month ago.

But, as we assess the implications of the implementation of tariffs on our forecasts—to be released in our monthly Financial Markets Monthly next week—here is a cheat sheet summary of what we know and are incorporating into our outlook.

Click here for the full report

In the media: Dave McKay on tariffs, U.S. and Canada trade relations

David McKay, RBC president and CEO, joins ‘Squawk Box’ to discuss the fallout from Trump’s new tariffs, impact on U.S.-Canada trade relations, and more.

McKay underscores the importance of the longstanding trade partnership between Canada and the U.S., advocating for maintaining consistent trade agreements and emphasizes Canada's role in supplying resources to the U.S. and the potential impacts of U.S. isolationism on the successful history of multilateral partnerships.

Getting critical on critical minerals: The five to watch

As the world races to secure the critical minerals essential to a modern economy, Canada has a crucial decision to make: what role can it play in de-risking a critical mineral supply chain that is overwhelmingly dominated by China?

At PDAC 2025, this question is top of mind for industry leaders, policymakers, and global investors. Building on our Getting Critical on Critical Minerals briefing, we’re diving deeper into five minerals increasingly vital to the economy of the future.

Each of these minerals are vital inputs across five key focus areas: artificial intelligence, border security, healthcare, energy, and defense. But supply chains are vulnerable, international competition is fierce, and Canada must navigate complex policy, investment, and processing challenges to establish itself as a global leader.

Explore the briefing here.

In the media: Economy and auto industry

• Frances Donald, Chief Economist, joins Bloomberg: Surveillance TV and Radio to discuss PCE reactions, outlook for U.S. economic growth, Canada and U.S. import and trade relations, and more.
  • Click here to listen to Frances on Surveillance and here for Single Best Idea.
• Tom Narayan, Global Autos Analyst, joins Bloomberg: Surveillance TV to discuss the impact of potential tariffs on the auto industry.
  • Click here to watch Tom in action.
• Michael Reid, U.S. Economist, joined Yahoo! Finance to discuss the upcoming tariffs for Canada, Mexico and China set to be implemented, what these events mean for the broader economy, how this could impact consumer spending, and more.
  • Click here to watch Michael in action.
• Lori Calvasina, Head of U.S. Equity Strategy, joins Bloomberg: Surveillance TV and Radio to provide her updated thoughts on the impact of tariffs on global equities, sentiment shock across the market, outlook amid uncertain U.S. growth, and more.
  • Click here to watch Lori in action, listen to her on the radio here.

Geopolitics: Inside track on tariffs

With the details of the White House’s looming tariffs on Canada and Mexico outstanding, we highlight the singular importance of Deputy Chief of Staff Stephen Miller in the Trump administration policy process. Miller essentially oversees the policy agenda for the White House and, along with Trade Advisor Peter Navarro, is reportedly helping to shape US trade policies. As we have noted, President Trump’s advisors have made it clear that he would break from past precedents on the use of tariffs. Rather than seeking to rectify trade imbalances, the second Trump administration would use tariffs to achieve pressing foreign policy goals and essentially operate as de facto sanctions. Miller has had notable staying power, joining the Trump campaign in 2016 and serving as a top aide and speech writer for the President, including in his four years out of office. He has been seen by many as the architect of the flood-the-zone policy blitzkrieg in the first month of the new administration, taking a step back from his traditional speechwriting role to focus on the execution and implementation of Trump policy.

Immigration has been of particular importance for Miller throughout his career, including while he was an aide to Senator Jeff Sessions, and has emerged as a key tool for rallying support for White House policies on the Hill. Navarro, another key voice returning to the White House from the first term, was seen as leading the push for early executive action on tariffs. Navarro was instrumental in the first-term China tariffs and has insisted this month that the tariffs on Canada and Mexico serve a dual purpose, namely to compel action from the respective governments on immigration and illicit drug trade. To that end, as market participants weigh the impacts of tariffs for energy, we reiterate that demonstrable policy changes from the US neighbors may be more material than trade balances for key players in the White House.

To access the full report, contact your RBC representative.

Food first: How agriculture can lead a new era for Canadian exports

More than $100 billion worth of agriculture and agri-food products cross the border every year, with the U.S. importing nearly 60% of this trade. And thanks to a surge in agri-food processing investment over the last 20 years, that trade gap is growing. The value of Canadian exports to the U.S. has quadrupled since 2000, and Canada is now the source of 20% of U.S. agriculture and agri-food imports.²

These advantages are now in question with the threat of large-scale tariffs. If they’re applied to agriculture and agri-food products, they will make Canada a less desirable trade partner to the U.S., as our position as a low-cost exporter of agriculture and agri-food products relative to others, including China and the Netherlands, will suffer. Agri-food manufacturing may also struggle to maintain investment levels, as one of its biggest selling features has been its preferential access to the world’s largest market.

Such challenges will force Canadian producers to make a choice: accept the cost of tariffs to access the U.S. market, or search for more demand abroad.

Click here to access the full article on the Trade Hub.

Six questions about the significance of interprovincial trade barriers in Canada

We address some of the questions RBC Economics has been receiving about interprovincial trade barriers—what they are, how much they cost the economy, and whether they can be effectively reduced. The questions are as listed below:

1. What are interprovincial trade barriers?
2. How costly are internal trade barriers?
3. How would reducing internal trade barriers improve the economy?
4. Would eliminating interprovincial trade barriers compensate for a significant loss of access to the U.S. market?
5. Which provinces and sectors would benefit the most?
6. How could trade barriers be reduced?

To get the answers on these questions, read the full article on the Trade Hub.

Uncertainty, policy, tariffs, and FX remain in focus on this past week’s earnings calls

The theme of optimism being eclipsed by uncertainty that we’ve been highlighting over the last few weeks persisted. In terms of optimism, strong demand/orders, M&A, economic resilience, and IT budgets were cited. Risks highlighted included currency, geopolitics, tariffs and trade, energy, and monetary policy. One bellwether Industrial company noted demand had been constrained by uncertainty. Meanwhile, a Tech company noted that they had seen some evidence of caution having an impact on customer behavior (though it had not yet translated into spending pulling back). As reporting season winds down, we find ourselves thinking that it may be 1Q25 reporting season before we get good color on how policy uncertainty is affecting current business conditions.

On policy, companies highlighted the uncertainties emanating generally and on trade, M&A regulations, food regulations, and SNAP benefits in particular. On DOGE, several companies highlighted the opportunity associated with a renewed focus on government efficiency.

Tariffs were once again in focus, and commentary highlighted the fluid and uncertain nature of the current situation and references to mitigation plans and possible supply chain readjustments. Some companies that discussed the topic last have the announced tariffs baked into guidance, while others do not, and as reporting season winds down we see further downside risk to S&P 500 EPS from tariffs.

Click here for the full transcript.

February George Davis Report: The fog of tariffs

The George Davis Report is a monthly series on the movement of the Canadian dollar produced by RBC Capital Markets. This month George discusses risks associated with U.S. trade tariffs.

Click here to watch the full video.

In the recent video, George Davis discusses various scenarios that could influence the potential impact of U.S. tariffs on the Canadian dollar. The most severe scenario involves immediate implementation of 25% tariffs on all goods from Canada, which could result in dollar Canada potentially exceeding the 1.5000 level due to the inflationary shock in the U.S. and negative implications for the Canadian economy. A more moderate scenario with immediate 25% tariffs but exclusions for certain industries, such as a lower tariff on crude oil, could see dollar Canada reaching between 1.4800 to 1.5000. This aligns with market reactions observed before the early February deadline when dollar Canada peaked at 1.4793 before retreating.

Another scenario posits a delayed implementation of 25% tariffs on all Canadian goods, which might cause a temporary spike in dollar Canada to levels seen during COVID and in 2016, around 1.47, followed by a decrease to the 1.4400-1.4500 range. This fluctuation is anticipated due to initial reactions leading to negotiations and the hope of reaching an agreement to prevent full tariff implementation, thereby mitigating the impact on the Canadian economy and its currency. The report also notes that continuous changes in monetary policy, including expected rate cuts by the Bank of Canada and stable rates from the Fed, could limit the Canadian dollar's depreciation to around the 1.4000 mark. Given the uncertainty and lack of concrete details on the tariff specifics, the advised trading range for the upcoming month has been adjusted to 1.4100 to 1.4600, with the anticipation of volatility in response to tariff-related news.

U.S. administration to consider reciprocal tariffs

President Trump signed a measure directing the U.S. trade representative and commerce secretary to propose new levies on a country-by-country basis to rebalance trade. Howard Lutnick, Trump’s nominee for the Commerce Department, said studies should be complete by April 1 and Trump could act immediately after. Trump said "I will charge a reciprocal tariff, meaning whatever countries charge" the U.S. The move came before he was set to host Indian Prime Minister Narendra Modi, whose country has high tariff barriers.

European Markets with Peter Schaffrik – Tariff update

In this month’s episode of European Markets, Peter is joined by Jason Daw, RBC’s Head of North America Rates Strategy, to discuss the subject on everyone’s lips: tariffs. They look at the potential impact of the tariffs using the example of Canada and whether there are any learnings and/or implications for European economies.

Click here to watch the full video.

Reorienting Canada’s economy in a changing world

The latest tensions with the U.S. should jolt Canadians into seeking an economic and trade reboot. While relations with Washington may recover, the scars should be a reminder that Canada must remain agile in a world of shifting alliances.

That does not mean moving away from the U.S.; a strong Canadian-American partnership is a source of strength for both economies. But it’s prudent for Canada to seek more allies, trade partners and customers across the Atlantic and Pacific.

Trade Hub, a new digital platform, aims to highlight opportunities for Canada in this new economic order. In this effort, we will examine several key areas where Canada can leverage our strengths, including agriculture, energy, critical minerals and manufacturing supply chains, and the regulations and policies that drive investments into the country.

Click here to access the full article on the Trade Hub.

President Trump to impose 25% tariffs on all steel and aluminum imports

The U.S. president said he would apply tariffs on Monday and announce "reciprocal" tariffs on countries that impose tariffs on U.S. goods likely within a couple of days. Canada is the largest supplier of both metals to the U.S. It comes a week after Trump paused plans to put 25% tariffs on imports from Canada and Mexico. He put 25% tariffs on steel and 10% on aluminum from Canada during his first presidency but lifted it a year later.

Click here to read the full article.

Central banks in a turbulent economic landscape

In the latest edition of Macro Minutes, recorded on February 4, 2025, RBC Capital Markets' macro and market strategists delve into the significant market developments that unfolded over the weekend and at the start of the trading week. The discourse was primarily driven by President Trump's announcement of tariffs on Canada, Mexico, and China, with subsequent postponements for Mexico and Canada, while signaling potential tariff impositions on the EU. The episode provides an in-depth analysis of central bank activities in light of these tariff announcements, as well as insights into the non-tariff fundamentals that are influencing policy decisions. The strategists discuss the Federal Reserve's recent halt in its rate reduction cycle, the Bank of Canada (BoC) and the European Central Bank (ECB)'s respective 25 basis point cuts, and the market's expectation for the Bank of England (BoE) to potentially follow suit later in the week.

Click here for the full transcript.

Five things we learned this week about U.S.-Canada trade

North America has seen a “reprieve” this week in what could have been one of the largest trade shocks in 100 years—25% tariffs imposed on Mexico and Canada by the United States that have been delayed by 30 days.

Still, uncertainty persists and hangs over the Canadian economy like an ominous cloud, likely weighing on business activity and consumer confidence. And, even as the list of unknowns remains long, the past week has taught us a few things about what a trade shock could look like for the Canadian economy.

Here are five things we learned this week that are critical for the trade discussion.

1. Trade angst isn’t likely to go away anytime soon.
2. The Bank of Canada would likely cut interest rates further.
3. Canada’s retaliatory strategy would impact growth and inflation.
4. Sectors and provinces would be hit differently by proposed tariffs.
5. Fiscal strategies suggest both outlays and reforms could be in play.

Read the full article for more in-depth analysis into each of the five key areas that are critical for trade discussion.

Navigating economic challenges: Canada's resilience and opportunities amid U.S. tariffs

After tariffs were delayed, RBC’s Chief Economist Frances Donald spoke with Ram Amarnath, Co-Head of Global Financial Sponsors and Head of Canadian Diversified Industries at RBC Capital Markets, about the potential impact of 25% tariffs on the Canadian economy and what corporations, investors and policymakers in Canada and the U.S. need to think about in the weeks and months ahead.

Read below for an excerpt from the Strategic Alternatives podcast.

Amarnath: Given tariffs are now delayed, how does that change the way you're thinking about this situation? What do you think we'll see over the next month?

Donald: One of the challenges we hear is that when the first Trump administration put tariffs in place in 2018-2019, there was no inflation, no big catastrophe. In part, that's because the magnitude of those tariffs was so small compared to this 25% across the board.

For example, China is about 15% of U.S. trade but Mexico and Canada are a combined 30%, so you’re tripling the ban on imports heading to the U.S. One measure economists use is the average import tariff for Americans. In 2018, that number rose from 1.5% to 3%, and had these 25% tariffs gone through, that number would've gone up to 11%. That's a quadrupling of tariffs that we did not see in 2018-2019.

It's particularly problematic because it targets a manufacturing base that sees products cross borders up to seven to eight times, meaning tariffs hit multiple times. This is the highest increase in an average ratio that we've seen since 1943, so we narrowly avoided (for now) one of the largest shocks in almost 100 years to the North American trading system.

Still, we did learn some things from 2018-2019 – that currency can offset a little bit of the pain; that behaviour of inventory hoarding; that behaviour of uncertainty and how it flows through. Some even point out that by the end of 2019, we were starting to see manufacturing weaken and some prices coming up, but then COVID wiped the slate clean on a bunch of data. So yes, there are lessons we’re using from 2018, but it's really a quarter of what we would've seen if 25% tariffs were enacted.

Click here for the full transcript.

In the media: Economy, rates, equity markets and commodities

Lori Calvasina, Head of U.S. Equity Strategy, joins Bloomberg: Surveillance TV and Radio to provide her reaction to tariffs sparking turmoil across global markets, impact on pricing, a sector review looking at where there is heightened risk, and more.

Click here to watch Lori in action (9:20 and 20:17)

Blake Gwinn, Head of U.S. Rates Strategy, joins Bloomberg Brief to discuss his takeaways on tariffs, why a potential trade war could pose more of a downside-risk to U.S. growth rather than inflation, and more.

Click here to watch Blake in action (29:58)

Frances Donald, Chief Economist, joins Bloomberg: Surveillance TV and Radio, to discuss how tariffs and President Trump’s threat of using them could ripple through the U.S. economy. She also discusses the price of uncertainty, variations of inflations and impacts, and more.

Click here to watch Frances in action (42:50) and listen to her here.

Helima Croft, Global Head of Commodity Strategy, joins CNBC to discuss how oil prices rising despite tariffs that could dampen global demand, uncertainty around further tariff actions and impacts, particularly for OPEC’s production plans.

Click here to watch Helima in action.

A U.S.-Canada trade shock now in play: First economic takeaways

Canada is facing its largest trade shock in nearly 100 years. While the landscape evolves, RBC Economics is providing insights and clear analysis with the recognition that the evolution of trade policies, and policymakers’ responses to them, remains highly uncertain.

Below are some of the first economic takeaways. Click here to read the full report.

Washington strategy: Tariffs and commodity impact

Since President Trump’s sweeping electoral victory in November, his advisors made it clear that he would break from past precedents on the use of tariffs. Rather than seeking to rectify trade imbalances, the second Trump administration would use tariffs to achieve pressing foreign policy goals and essentially operate as de facto sanctions. In the Trump World view, a clear benefit of using tariffs versus sanctions is that it does not accelerate the global de- dollarization trend in pursuit of important policy priorities such as curbing cross-border fentanyl flows and migration. Additionally, in our view, the unwinding process for tariffs can be more straightforward than with sanctions, which are often backstopped by or originated in Congress, giving the White House a freer negotiating hand.

While we are not ruling out a relatively swift resolution to the U.S. trade dispute with Canada and Mexico, it is unclear if either have an immediate policy prescription on hand that would result in the unwinding of the 25% tariffs on their U.S.-bound exports, which were imposed under the little-used International Emergency Economic Powers Act (IEEPA). In addition, since this is a nontraditional trade dispute, it is not clear which U.S. officials will have the most sway on the matter. Will Deputy Chief of Staff Stephen Miller and Commerce Secretary pick Howard Lutnick be equally weighted voices, or will the former prove to be the more important principal in this Oval Office conversation, as he already oversees large parts of President Trump’s agenda?

Some key Canadian energy corporates also likely have good lines of communication into the White House through staff members who served in the previous Trump administration. We envision that these individuals will continue to press the case for Canadian energy in Washington. Nonetheless, the broader U.S.-Canada trade standoff looks set to deepen for now even if energy has been granted something of a special situation status, with Ottawa already announcing retaliatory measures on $30 billion worth of U.S. goods.

Finally, China may actually have an easier road ahead than Mexico and Canada. There may have been a determination that the economic cost of a full-blown trade war with Beijing may be too calamitous. In addition, in our meetings in Washington, it was suggested that China may be able to placate President Trump by offering to make a sizable purchase of U.S. goods, including aircraft, soybeans, and natural gas – LNG in particular may feature, given the President’s early actions on LNG approvals and declaring an energy emergency. In return, China might seek to extract a pledge that the U.S. will not intervene in a China-Taiwan confrontation. While such a pledge might rattle some members of Congress, it would potentially align with the increasingly ascendant JD Vance view that the U.S. needs to pare back its overseas military and financial commitments.

To access the full report, contact your RBC representative.

Global oil pricing stress test

The latest on crude and tariffs:

“Out of all the places that the Trump administration could have shown restraint, Canadian energy was likely the optimal choice. Looking at the potential profitability impact scenarios, a 25% tariff on energy imports would have likely been enough pressure on profitability that physical disruption would have been highly likely.

At 10%, pricing offsets are more manageable, and likely will not require a significant overhaul to physical flows… While we should start to see seasonal upside pressure for gasoline prices, incremental upside from energy tariffs alone is likely ~$0.15/gal.”

To access the full report, contact your RBC representative.

Natural gas quick take: Tariff impact

The 10% tariff on energy is still disruptive (versus 25%) to the highly integrated natural gas market in North America, where the U.S. is both a vital supplier and consumer of natural gas via a highly integrated pipeline system between the U.S., Canada, and Mexico. The U.S. is a net importer of gas from Canada, which is where this tariff will bite. Outside of those imports, there are also substantial exports to Canada and Mexico, which bear watching in the case of any escalation to this trade conflict. On balance, we think imported gas may absorb most of the price impact.

While Mexico is the clear net consumer of U.S. gas, Canada is the clear net supplier. In fact, Canada is the only significant non-domestic supplier of natural gas to the United States, at over 2.9 Tcf in 2023, and 2.8 Tcf through November in 2024 (up 7% y/y); this is where the tariffs bite. The U.S. also supplies gas to Canada, about 1 Tcf in 2023 and just under 0.9 Tcf through November 2024. There is a regional split where the U.S. supplies gas mostly to eastern Canada and imports from western Canada, but on balance the U.S. is a clear net importer in any case.

In terms of those volumes flowing from Canada to the United States, we think that they will continue to flow, at least for now, because if they did not, they would either have to be injected into storage or not produced – the latter of which would take time and have other consequences – and LNG Canada will eventually provide a partial release valve. Affordable Canadian gas is an attractive and important source for U.S. consumers, and some market participants believe tariffs are already factored into the market for Canadian gas prices.

On balance, however, we think Canadian gas prices will absorb at least some if not most of the price impact and that flows will continue. However, this is highly unlikely to lower U.S. gas prices and if there is an impact, it would be to raise U.S. natural gas prices for U.S. consumers.

To access the full report, contact your RBC representative.