After this webcast was recorded, a court ruling blocking a significant fraction of U.S. tariffs was announced. This complicates the tariff outlook, but likely doesn’t change the medium-term trajectory as the ruling may yet be overruled and the White House has other means to implement tariffs. In this session, you’ll gain a nuanced understanding of:
The ongoing presence of sizeable U.S. tariffs and their lasting impact
The outlook for the U.S. economy, with no outright recession expected
The recent U.S. budget bill and its potential impacts if passed
A revived stock market and what it signals for investors
Stay informed on these pivotal topics and explore a wealth of additional economic insights in Eric’s latest webcast.
Watch time: 42 minutes, 34 seconds
View transcript
00;00;06;15 - 00;00;25;09
Hello and welcome to the monthly Economic Webcast for the month of June 2025. My name is Eric Lascelles, I'm the chief economist for RBC Global Asset Management and as always, very happy to share with you our latest economic thinking and views and forecasts as well. As you can see from the title of this presentation, tariffs are still on the mind.
00;00;25;09 - 00;00;43;11
Indeed, I would say there have been two notable developments over the last month on that front. And so one would be we have seen some tariff deals – including, certainly, with the UK. One might argue with China, though you could quibble there too. There are also some tariff threats in terms of other directions that tariffs might go. And so we'll certainly talk to those things.
00;00;43;13 - 00;01;07;06
We'll also talk a little bit about fiscal concerns, particularly in the U.S. context and what that is doing as well. o leSt's jump in as we always do. We'll begin with a report card of sorts.
Report card: Indeed, why don't we start on the positive side of the ledger for once. And so I would say that the main story is still, and this has been true since about the middle of April, that the White House appears to have blinked on the tariff front.
00;01;07;06 - 00;01;25;13
And so we've seen some tariffs scaled back. And we feel at least that we have a sense for the sort of tariffs that are likely to ultimately settle and at least some sense for the guardrails, for how big they could be, which is to say, maybe not quite as big as was feared a few months ago, though still substantial.
00;01;25;13 - 00;01;43;07
Equally how small they might be. And the answer would appear to be tariffs aren't completely going away either, and so that's giving us some help, at least in terms of trying to predict the future and figure out where all of this goes from here.
As mentioned, there have been tariff deals of sorts with the UK and China, and I'll get into those in a little bit more detail, in a moment.
00;01;43;07 - 00;02;02;28
And so, of course, just welcome that the U.S. is in a position to strike deals, welcome that some tariff rates at least are coming down to some extent. Also giving us a sense for what other countries might be trying to negotiate and the sort of outcomes they might be able to achieve. And I would really say good news that a deal has been struck in particular with the UK.
00;02;03;01 - 00;02;24;06
The bad news is that tariffs do not appear to be going away altogether, even for the countries striking deals. From an economic standpoint, we’re still seeing broadly normal economic and actually inflation data when we're talking about the U.S. The U.S. economy's holding on, and we still think there will be some pain down the road, but we are not forecasting an outright recession.
00;02;24;06 - 00;02;39;16
There's a risk of that. It's a higher-than-normal risk. But that risk has been falling and our base case forecast is that the U.S. economy still manages to at least eke out some economic growth.
On the fiscal side of things, boy, you could go in quite a variety of directions on this, given some fiscal concerns as well.
00;02;39;17 - 00;02;58;14
But from a budget perspective at least, the House of Representatives has passed a budget. It still needs to be approved by several other parties, including the Senate. So not a done deal at this point. But nevertheless, those Trump tax cuts do seem to be on their way to being implemented, along with some other implications we'll get to a bit later.
00;02;58;17 - 00;03;16;06
We've seen the stock market revive. It was feeling fairly glum a couple of months ago with a staged, not a complete revival. But it has staged a significant revival from where it was, reflecting some of the things that we've talked about – including the hope of some tax cuts and the view that tariffs may not be quite as bad as initially feared as well.
00;03;16;08 - 00;03;30;25
And then just pivoting to the rest of the world – and this is a very broad, sort of grandiose comment, as there are quite a varied set of forces applying to different parts of the world. But we would still say, at least through a tariff lens, that most countries are not that exposed to U.S. tariffs.
00;03;30;25 - 00;03;49;27
I'll show you a table to that effect a little bit later. And similarly, tariffs really are not set to be that inflationary, outside of the U.S. and a handful of other countries that are retaliating against U.S.tariffs. And so again, the implications may be not quite as bad as feared for much of the world.
00;03;50;00 - 00;04;08;00
That's the good news. On the negative side, well, there are still pretty big tariffs in place that are consequential. We think they will show up in the data eventually. That UK trade deal isn't that great. Didn't get rid of all the tariffs. Did require some concessions from the UK. Again more on that a bit later. There are still other tariff threats.
00;04;08;00 - 00;04;31;23
There are sector tariff threats. There are tariffs that expire or rather tariff waivers that expire, returning higher tariffs at a later date, and the list goes on. So we're not fully through this challenge yet. Tariffs of course do create a stagflationary impulse. They tend to reduce the growth story and the growth outlook. They tend to increase inflation and the inflation outlook, neither of which are things that we're particularly eager to have.
00;04;31;25 - 00;04;49;08
We are still looking, as mentioned a couple of times now, for some lagged economic pain from tariffs. I can say from a Canadian standpoint, the Canadian economy is showing some damage. We think a lot of it was anticipatory, and maybe it doesn't have to be that bad in the end, to the extent that the tariffs have come in actually fairly light on Canada at this point.
00;04;49;10 - 00;05;08;12
Nevertheless, we are seeing some economic damage there, still dealing with some inflation stickiness even before the tariff inflation showed up. And then as mentioned, there are now some fiscal concerns that have mounted, and the bond market is feeling a bit nervous. And that can be rather consequential as well. So there are some challenges for sure.
00;05;08;12 - 00;05;30;13
And then on the interesting side – and this is a longer list than sometimes – first of all there is a question of will legal constraints stop White House tariffs? A lot of expansive interpretations of existing legislation to get all those big tariffs out in all sorts of directions. Our long-story-short takeaway would be we don't think legal challenges will ultimately prevent the White House from doing broadly what it would like to do.
00;05;30;13 - 00;05;57;00
It could slow things down a little bit. It could require the White House to pivot to a different set of legislation in terms of implementing tariffs. We don't think it will stop the White House from implementing tariffs altogether.
We had a UK-EU trade deal reached recently. That's consequential in the sense that it's sort of a partial unwind of Brexit, far from complete. I would say fairly notable in the agricultural space, fairly notable in the fishing space as well.
00;05;57;02 - 00;06;15;27
Military spending and so on also linked up much more tightly with UK, though certainly not a member of the EU at this point. There are still some significant barriers that exist, but a welcome development, I think we can say.
I'll mention again, this is not new news. This was known a month ago when we last recorded a monthly Economic Webcast.
00;06;16;01 - 00;06;45;12
The Canadian election, of course, settled. And we're still of the view that when we look across the set of policies that are proposed for Canada, we view them as being broadly growth supportive and ones that could help the economy move a little bit faster as opposed to a little bit slower over the next few years. But there are some significant question marks. In particular, how easy will it be to implement policy when there is only a minority government. Maybe a bit less of a natural set of partners to try to implement new policies.
00;06;45;15 - 00;07;01;16
The world order is certainly changing as the U.S. steps back. That remains fascinating and worthy of mention as China steps up and the EU has opportunities and so on. And that's going to be a theme, we think, that persists over the next several years, if not well, beyond that.
Okay. So that's your summary.
00;07;01;19 - 00;07;18;26
Let's jump in now and really just start to talk to some of the key issues in a bit more detail. And so the first one would be as we talk about trade policy and tariff policy.
U.S. trade policy uncertainty remains very high, but clearly falling: Of course, there has been really an unprecedented level of uncertainty up until fairly recently. I'm happy to say the level of uncertainty has declined a lot.
00;07;18;26 - 00;07;44;15
And that makes sense. It looks like we're not likely to get triple digit tariffs on everyone. And we're getting, again, guardrails in terms of how bad it might get. Equally and less desirably, we're getting guardrails in terms of how good it could get, because we're seeing that tariffs are unlikely to completely go away. So we're getting a bit of a flavor as much as there is still – as this chart would show – a fair amount of uncertainty that's left, in fact, a level of uncertainty that still is greater than what we saw in the first Trump term.
00;07;44;17 - 00;08;03;13
But we are getting some sense for the path forward. And of course, that's part of the reason why financial markets have significantly rebounded.
U.S. effective tariff rate has declined from peak: When we talk about the tariff rate, this is the U.S., the average tariff that they're charging everybody else. And of course, it varies quite a lot by country. And there have been all sorts of way stations and movement along the way.
00;08;03;13 - 00;08;26;28
But I guess the Coles notes version – and looking at the right side of this chart – is that not long ago, the U.S. had an average tariff rate of 22% on other countries. That has now fallen to about 13%. So that's on the back of the China and the UK deal. And if you're wondering, we've been saying that we think that the average U.S. tariff rate eventually settles at around 15%.
00;08;26;29 - 00;08;45;06
Now, when I say 15%, the point isn't to say that's two percentage points higher than the current 13%. I would say that's probably a bit too precise, a bit of false precision given the uncertainty that's out there. It's more a statement that we think the tariffs are likely to average more than 10%. Just like, talking about round numbers, they're likely to average less than 20%.
00;08;45;06 - 00;09;02;29
So that's how we end up with a round number like 15%. And just sort of walking our way through the main forces, it does look as though the 10% baseline tariff rate probably is going to stick for most countries.
So that's a starting point. We have seen some exemptions that can take that down a couple of ticks below 10%.
00;09;03;05 - 00;09;28;11
Conversely, though, the U.S. has implemented and seems poised to implement additional sector level tariffs. Those take you up several percentage points and into, let's say, the 10-15% or maybe the 8-15% range if you're talking about most countries.
Then China, we're assuming has a tariff rate of maybe 25-50% applied to it right now. It's actually a 39% average, if you're wondering. And that's how you get to something like a 15% rate.
00;09;28;11 - 00;09;45;29
So not that different than where we are now though, with some shifts and some reductions of some things, some increases on some sector levels and some other movement as well. So that's a significant tariff rate and it does do significant damage if not full-on recession level damage.
What countries are most exposed to tariffs?
00;09;45;29 - 00;10;03;16
Countries most exposed to current tariffs: Well, let me overwhelm you with all sorts of numbers and pictures and so on. And so these two charts – or rather the two graphics, the left and the right side – both actually tell you the same thing, just depicted a little bit differently.
The idea here is that there are two metrics that you really need to focus in on when we're talking about what countries are most exposed to U.S. tariffs.
00;10;03;16 - 00;10;22;20
It's actually the second and third column in the table. The first is just how much trade do you do with the U.S.? What share of your economic output is consumed by the U.S.? And so, we see, Mexico and Vietnam and Canada very high on that list.
The third column is what tariff is being applied to you.
00;10;22;20 - 00;10;41;02
This is the current tariff rate, I should emphasize, not where things could go. So there may yet be some movement here. Nevertheless, when we look at that, of course, you know China is being hit quite, quite hard. The tariff rate on the likes of Mexico and Vietnam is pretty significant. I would flag maybe Indonesia, as well . . .
00;10;41;04 - 00;10;59;28
and a number of other countries are experiencing double-digit type tariff rates. And so those are the two key metrics for who gets hurt the most. And again, that's also depicted in the chart as the two axes.
00;11;00;02 - 00;11;17;04
So the first column combines those two forces and it basically says, if you don't trade with the U.S., then a giant tariff doesn't matter. If you do trade a lot with the U.S., but you have no tariff, then you're fine too. You know, it's really the interplay of the two, which is if you're trading a lot with the U.S. and you have high tariffs, that's where the problem starts.
00;11;17;04 - 00;11;35;15
We've actually sorted the countries on that basis. And the countries at the top of the list are the ones that have that most concerning interplay. And so actually Mexico is top of the list. Vietnam is next. There is then a list of I think it's seven countries that are certainly notably exposed, but much less so than those first two.
00;11;35;15 - 00;12;02;13
Those first two countries are a good three or so times more exposed, at current tariff rates, than anyone else. The other countries of considerable note would be Thailand, South Korea, China, Malaysia, Taiwan and Canada rounding out that pack. For Canadian viewers, Canada, of course, is exposed and has a very large, in fact the third-largest trade exposure to the U.S. So far, though it's getting off pretty lightly on the tariff side, with only a 4-5% average tariff rate.
00;12;02;13 - 00;12;23;21
So Canada is, at this juncture, not actually at the very tippy top of the most exposed countries. This could yet change. The USMCA (United States-Mexico Canada Agreement) trade deals will be renegotiated. There could yet be challenges that emerge that damage Canada more. But as it stands right now, those are the most exposed countries. And believe it or not, Canada isn't quite at the top of the list.
00;12;23;23 - 00;12;39;19
As we work our way down, then, I'll just say something I've said before, which is a lot of countries aren't that exposed to U.S. tariffs. They just don't trade that much with the U.S is the main angle. And that applies to a lot of Europe and it applies to the UK. It applies to some EM (emerging markets) countries, including China and India as well.
00;12;39;19 - 00;12;57;15
But certainly when we're doing our economic forecasting, we are looking through this lens significantly as we try to assess the level of damage that affects different markets.
Okay. So the tariff state of affairs.
Tariff state of affairs: I won't speak to all of this in great detail because some of it is now fairly long standing. But, again, let's acknowledge there are significant tariffs in place.
00;12;57;15 - 00;13;19;27
The 10% baseline, a bigger tariff on China, some sector tariffs on steel, aluminum and autos as well. U.S. consumers are being hit by the removal of that de minimis exemption that cheap consumer goods were coming in under. And we've seen some retaliation by some countries, including China and Canada. So those are significant tariffs. There is real damage coming down the pipe from that, if not of a recessionary magnitude.
00;13;20;00 - 00;13;36;13
Then we can talk about the direction of travel. So we've actually had probably more good news than bad news. We had, of course, a delay of the reciprocal tariffs – or a chunk of them at least – in mid-April. Chinese tariffs were just reduced significantly, at least for 90 days, in the last couple of weeks.
00;13;36;13 - 00;13;56;23
And so the average rate is 39%. The average rate was 105% before. If those don't sound familiar, officially it went from 145% down to 30%. But there are other bits and pieces of tariffs that actually take the effective rate of 105% down to 39%.
Certain pain points have been removed. U.S. can import cell phones from China without tariffs, as an example.
00;13;56;23 - 00;14;16;14
Some auto parts exempted as well.
And then an outline of a UK trade deal, which I'll get to in a moment. So I would say more good than bad in terms of the direction of travel, maybe pivoting a little bit in a less savory direction just quite recently, at least as I'm recording this in late May.
00;14;16;17 - 00;14;34;19
Again, let's not forget that some 90-day tariff delays do expire, first in early July, then for China in August. Those will sneak up on us faster than we might imagine. We do still need to see that USMCA trade deal renegotiated, which could be challenging. Further sector tariffs are planned . . .
00;14;34;19 - 00;14;53;21
Copper, forestry, computer chips, pharmaceuticals. The European Union (EU) was threatened just a couple of days ago, as I'm recording this, with a 50% tariff, which came quite out of the blue. It was then delayed and so not seemingly active right now. But the White House is still capable of making tariff threats and surprising us and making us nervous.
00;14;53;21 - 00;15;11;16
So that was an example of all those things. Foreign-made cell phones have been threatened with a 25% tariff if manufacturers like Apple don't shift their production not just away from China, but all the way to the U.S. So that could yet become relevant. And so fundamentally, the U.S. still has a lot of grievances with a lot of countries.
00;15;11;19 - 00;15;29;04
Fundamentally the tariffs, economic pain, hasn't been fully felt. In fact, it's barely been felt at this point. So there are still some issues very much to deal with, even if the direction of travel was fairly positive across April and much of May.
Interpreting recent trade deals: So let's interpret some of these recent trade deals. One would be, I guess people are calling it a U.S.-China trade deal.
00;15;29;04 - 00;16;01;07
It's not really. It really is just a reduction of tariffs while they negotiate in pursuit of a deal. That would be the way that I would describe it.
And so that China tariff rate did fall notably. The Chinese tariff rate on the U.S. also fell notably. In fact, by a similar magnitude. Again, this is now when the real negotiations start. There are still big disagreements and the U.S. is still upset about the level of subsidy that the U.S. government gives to various key industries, about how intellectual property is treated, and about access to Chinese markets and the list goes on.
00;16;01;07 - 00;16;20;04
And so, I'm not convinced that we will see a big deal struck here. We are budgeting for a Chinese tariff rate that averages about 25-50% at the end, which is in the realm of where we are right now. So not expecting miracles from here, but nevertheless welcome that triple-digit tariffs are a thing of the past.
00;16;20;07 - 00;16;34;26
Then you have that U.S.-UK trade deal. Again, I've been a little cute with my language here. I think you can call it a deal, but it's equally probably more of an outline. Normally, a deal is thousands of pages of detailed documents, and this seemed like it was the result of a few phone calls or something much more loose.
00;16;34;28 - 00;16;53;10
Nevertheless, there's a deal of sorts that's been struck. I would say it's substantial. But it is also a little bit underwhelming. The tariffs do not go away even for the UK. If you're wondering, why did I say even for the UK, what's special about them? Well, the UK is one of a very small number of countries that actually runs a goods trade deficit with the U.S.
00;16;53;10 - 00;17;08;29
So they are not, contributing to that U.S. trade deficit that the U.S. is so upset about. In fact, it's the opposite. And so the UK, you would think, would get among the lightest of touches when a trade deal was struck. Yet even it is still in a position where it's paying for most products a 10% baseline tariff.
00;17;09;00 - 00;17;27;29
So that was not removed. If you're thinking, well, at least they managed to avoid the bigger reciprocal tariff that the U.S. initially threatened everyone with on April 2nd, actually that's not the case either. So the way it worked on April 2nd, you might recall, is that countries were threatened with pretty big tariffs. In the EU example, it was 20%.
00;17;27;29 - 00;17;43;15
For Japan, I'm forgetting it was 24 or 26%, but let's call it a number like that. Then, after a couple of days, they scaled that back and said, “Everybody's going to pay 10%. We'll revisit the higher number 90 days from now.”
So time is ticking. The UK got the 10%, you might say. Great. They've avoided their bigger tariff.
00;17;43;17 - 00;18;00;03
There actually wasn't a bigger tariff for the UK. They were one of a few countries that was only ever threatened with a 10% tariff. So this is actually, you could say, the full reciprocal tariff they were ever in a position to pay. So again, not really a big reduction of anything.
They did manage to reduce certain sector tariffs.
00;18;00;03 - 00;18;21;14
The steel aluminum auto tariffs, which were set to apply at a 25% rate. For autos, I believe it's a 10% rate now. For steel and aluminum, I believe it's actually eliminated, so a 0% rate. So they did make progress there, but with pretty strict quota limits. So for instance UK can only sell 100,000 cars to the U.S. before bigger tariffs apply.
00;18;21;17 - 00;18;39;26
That's about what they're selling right now. It's also not that big of an industry in the grand scheme for the UK. And so again helpful, but not a huge win.
The UK also agreed not to engage with China – and this is part of this theory that we're going to see different spheres of influence, and countries are going to have to choose which one that they're going to be a member of, if they get a choice.
00;18;39;29 - 00;19;00;16
The UK had to promise really not to engage with China in certain key sectors like steel and aluminum, and potentially elsewhere. The idea being China can't buy businesses in those sectors, China can't be a provider of key materials for those sectors. The UK has had to sign on to team USA as opposed to Team China, if that makes sense.
00;19;00;18 - 00;19;16;07
Now what did the UK get? Well, again, they avoided bigger tariffs and they did manage to negotiate down some sector tariffs. Maybe the big thing though was kind of looking in other directions, saying what might they have had to give up that they didn't ultimately give up? And so they were not forced to remove their digital services tax.
00;19;16;07 - 00;19;32;10
And though, as I'll mention a little bit later, they may yet have to remove it given a clause that's in this new budget bill for the U.S. But the trade deal itself didn't talk about that. It doesn't look like they're being pressured to get rid of their VAT tax or sales tax, which the U.S. did have a bee in its bonnet about for most countries.
00;19;32;10 - 00;19;50;08
So that's welcome, I'm sure. They were not, to my knowledge, compelled to increase their military spending to 5% of GDP, though they already have some plans to increase it to a lesser extent. And then they were not forced to crack open various service sectors that, at different points, the White House has talked about opening.
00;19;50;08 - 00;20;06;11
So those were maybe the wins for the UK. And then I guess you could say this sets potentially a template for future deals. Other countries probably are not going to get rid of that 10% baseline tariff rate. We were hearing the scuttlebutt is for Japan, they're trying to get rid of their auto tariff, or negotiate that down from 25%.
00;20;06;11 - 00;20;26;16
The U.S. is much less interested in doing that, it would appear, for Japan than for the UK. Because of course, Japan is a real competitor and does produce millions upon millions of cars, not just a fairly small 100,000 vehicles a year, that it exports to the U.S.
So, not that everyone will get this deal, but it gives us a bit of a flavor.
00;20;26;19 - 00;20;32;10
And it's consistent with the thinking that we've had in the past, which is you end up with a middling level of tariffs when all is said and done.
00;20;32;10 - 00;20;54;04
Stock market jitters unwound on “White House put”: Turning to the stock market – this is the S&P 500 – you can see how nervous the stock market was in February, March and into early April as big tariffs were threatened and some were initially implemented.
You can see the stock market has since managed maybe not a complete recovery, but quite a significant recovery as some of the worst fears have been avoided.
00;20;54;11 - 00;21;10;13
We had a sense, as mentioned, for maybe the guardrails of where tariffs might go from here, as the economy has also held up, at least so far, a little bit better than expected. And so that's all, of course, quite welcome.
I don't have a crystal ball as to where the market will go, but I will say a couple of things.
00;21;10;13 - 00;21;37;18
So one would be, I think you can argue that the White House went lighter on tariffs over the last couple of months probably in part because of the level of concern that markets expressed. And so one small concern we have now, and that could explain some of the recent threats for the European Union and threats on cell phones and in a few other directions, may have been because the White House felt emboldened again to act now that the market isn't in the same place and isn't expressing the same level of concern.
00;21;37;18 - 00;22;02;21
And so it could be a situation in which when the market's happy, the White House is going after tariffs. When it feels a bit more glum you see them back off. But they're still sort of incrementally inching toward their objective of significant tariffs. And so that's not totally welcome, I suppose you might say.
The other thought is just that we still do believe that there is some economic pain coming and some inflation pain coming, and that there are real tariffs that are going to persist coming out of this.
00;22;02;28 - 00;22;24;06
There is a chance that markets are feeling a little bit too glib, in that context. So there are a few risks that extend in that direction.
Okay. Let's take a look at the actual economic data.
Evidence of tariff-related front-loading: I can't say we're not seeing any evidence of anything from tariffs in the data, because right here you can see that consumer goods imports have absolutely exploded higher, actually, over the last several months.
00;22;24;06 - 00;22;46;29
And so, of course, that is a source of, of economic strength, you might say. But of course, it's also temporary. This is the front-loading story that we're very familiar with – the idea that businesses and to a lesser extent, households are actually buying more things in the very short run because they're trying to get everything across the border and into their inventory wares and into their houses as quickly as they can before bigger tariffs potentially apply at a later date.
00;22;46;29 - 00;23;02;29
And if you'd asked me a month ago, we would have said we think that's mostly over. We're probably going to see some settling back down now, maybe even an air pocket, as demand goes back to normal or even below. But actually the reduction of tariffs on China recently has opened up another avenue for this.
00;23;02;29 - 00;23;23;12
It would appear, for instance, the number of containers that have been booked from China to the U.S. in recent weeks actually surged after those Chinese tariffs were lowered. So we're getting some front- loading. So there is some story there. But that's not really the damaging part, of course.
If we look beyond, expectations and sentiment are quite weak.
00;23;23;12 - 00;23;44;19
Economic expectations have fallen sharply: So here are some really business-oriented metrics of new orders and anticipated new orders and so on. Those are weakening. Businesses are bracing themselves for some economic softness to come and we're forecasting some softness – though, again, not of recessionary magnitude – to come, as well. But what's interesting is that when you look at the actual economic data, it has been holding up.
00;23;44;19 - 00;24;04;28
But actual economic data is holding up – positive surprises: So this is a measure of economic surprise. And it's actually our own focused Economic Surprise Index. And so we look at seven different key U.S. economic indicators and basically indicate, did they surprise to the upside or to the downside? As it happens this time, over the last month, all seven have surprised to the upside.
00;24;04;28 - 00;24;25;09
We've had pleasant surprises across all of them. And so again, we're not getting disappointments. We're not getting really signs of an economy that's in freefall. The economy is actually holding together.
Real-time economic data only slightly softer: And when we look at measures of real-time economic data, here is the Dallas Fed's weekly index for economic activity. It's not just for the state of Texas.
00;24;25;09 - 00;24;42;24
It is for the entire U.S. You can see a little bit of a retreat there. So maybe a slight weakening.
I would say a similar thing about jobless claims. There’s a slight weakening, but in the grand scheme, nothing is falling off a cliff right now.
We're going to watch this particular trend quite closely. And we are budgeting for some softness to appear over the summer.
00;24;42;24 - 00;24;59;11
So that's still our expectation. And maybe we're getting a bit of that. But it's actually surprisingly hard to find in the data so far.
Some sectors benefit from tariffs: I'll also mention, and this is not to distract you from the fact that there should be some real damage that occurs. But of course, as we've known from the beginning, some businesses, some sectors like tariffs, right?
00;24;59;11 - 00;25;18;28
They've just lost their foreign competition. And so as you look at the U.S. steel production as an example, it's increased pretty notably. And I would think not coincidentally. Most of U.S. steel producers’ foreign competition have now been greatly disadvantaged by what amounts to a 25% tariff. So, of course, some companies are very pleased indeed within the U.S.
00;25;19;00 - 00;25;35;25
Some companies, of course, very displeased indeed, outside of the US.
April inflation data was tame, with little evidence of tariff effect: Let's look at the inflation data. So, probably too much information on here and not much of relevance to what I'm about to say. But nevertheless, as we're talking about the inflation numbers, the theory would say prices should go up and so inflation should be higher.
00;25;35;29 - 00;25;50;18
We are still expecting that. Nevertheless, when we look at the latest inflation print – and this is for the month of April – let the record show steel and aluminum tariffs came on in March. We did have a lot of tariffs come on in early April. You would think that you would start to see some higher prices here.
00;25;50;22 - 00;26;08;19
But really didn't get a lot of that. So how can I say that with all these different numbers bopping around?
Well, first of all, total CPI (Consumer Price Index), the yellow bar, is up 0.22% for the month of April. That's not a crazy number. It's a pretty tame number. We just didn't see overall inflation that was that high. The other bars all add up to the 0.22%.
00;26;08;20 - 00;26;25;27
They basically say, where did the inflation come from that we got? Well, the bulk of it was from the housing sector, which again, is not directly driven by tariffs. It's not the first place that you look. Within some of the places that maybe you would look, like apparel or clothing costs, famously made in Asia . . .
00;26;26;00 - 00;26;40;16
also food and beverages or food costs, a lot of food is imported into the U.S. – actually, those were, if anything, flat to a little bit lower. So again, we're not getting clear evidence of inflation at this juncture. We still think it will come. We’re just not getting it yet.
Why do we think it will come?
00;26;40;16 - 00;27;00;21
Price hike plans are notable, but still fairly limited: Well, one thing we're looking at is the fraction of U..S businesses that are planning to raise their prices. There has been a palpable uptick in that recently. You can look on the far-right side, that upward arrow. So more businesses are planning on raising their prices going forward. It was already a bit elevated. But we've kind of been through this period where you had that inflation shock a few years ago.
00;27;00;23 - 00;27;20;09
It doesn't look much like that. So we're not budgeting for inflation that's 8 or 9 or even 10%. We're budgeting for inflation that's moderately higher than otherwise. We think we're starting to get hints that that could be on its way, but again, not actually in the hard data just yet.
Inflation expectations have risen sharply for consumers, but those in the know expect less of a jump: When we look at inflation expectations, well, you know, the blue line would make you nervous.
00;27;20;09 - 00;27;42;14
So this would be consumer inflation expectations. Consumers are convinced, you know, that really challenging times are coming and that inflation is going to rise by quite a bit. But actually if you talk to – I think we can say this fairly – parties who are a little bit more in-the-know or might be more sort of professionally oriented toward answering this question, if you ask businesses, is inflation going to be higher in the years ahead?
00;27;42;14 - 00;28;10;06
That's the yellow line. They say yes, too, but to a much, much, much more limited extent and not nearly as much as we saw a couple of years ago. Whereas the consumer would say they're worried inflation is going to be even higher going forward than it was during the peak a couple of years ago.
I trust the business view a bit more than the consumer view on this subject. But the view I trust the most is the dark blue line, which is actually financial market-based inflation expectations that you can tease out of the bond market.
00;28;10;06 - 00;28;26;25
And, you know, similarly, it has gone up somewhat over the last several months. But it is much more tame and it is much less exciting in terms of its level. And it's actually come off a little bit recently as we've had a sense maybe tariffs aren't going to be quite as big as initially feared. That's probably the opinion I would take most seriously.
00;28;26;25 - 00;28;48;27
And so inflation is set to be somewhat higher. It is not set, we think, to be nearly as high as a couple of years ago.
Okay, a complete pivot here. Let's just abandon tariffs for a moment and let's talk about the fiscal picture.
U.S. fiscal developments: I would say that there are a couple of angles here. So the first, as briefly mentioned earlier, is just the U.S. House of Representatives has passed the budget bill, the long-awaited budget bill.
00;28;49;03 - 00;29;10;22
It does now, at least as I'm recording this, now need to pass the Senate then get White House approval. All sorts of things, moving parts within that budget. And so, a big part would be that the tax cuts that were delivered during the first Trump term, in 2017 to 2020, would be maintained. Those are set to sunset, to expire at the end of this year if something isn’t done.
00;29;10;22 - 00;29;39;02
So maintain those tax cuts, some new tax cuts, a bigger standard deduction for certain, eliminating taxes on tips and on overtime are some of the glossier elements to that . . . more military spending, more border spending as well. And then how do they get paid for it? Well, it doesn't fully get paid for is the main answer but, it's partially paid for with some Medicaid cuts and some working requirements, some other tweaks as well.
00;29;39;04 - 00;29;55;18
Some food stamp cuts as well and capping the SALT deductions. If you don't know what SALT is, it's State and Local Tax deductions. Essentially when the tax rate is high at the state and local level, you've got some scope to deduct that from your federal taxes. And that was greatly limited a number of years ago.
00;29;55;18 - 00;30;16;17
And so the limit actually will be a bit bigger going forward, but there will still be a limit, which I think technically counts as therefore saving money, because otherwise the limit was set to go away completely. And then some of the green tax incentives implemented by the Biden administration go away too. So there are some significant cuts that partially pay for the tax cuts and so on.
00;30;16;19 - 00;30;36;14
The other thing, and so this is of much less relevance, at least directly to Americans. But it does affect the rest of the world and this is a little bit sneaky, I think. But one component of this budget bill is that foreign investors who invest into the U.S. and earn dividend income or foreign companies with subsidiaries in the U.S.
00;30;36;14 - 00;31;02;03
I guess there’s a transfer of dividend income – I'm not a corporate finance expert – if countries don't remove their digital services tax. And so this is basically a new tax in Canada and UK and France and a handful of other countries that essentially tax the likes of social media networks and so on. If those taxes are removed, then the dividend tax, the withholding tax for foreign investors goes up quite a bit and sort of ratchets higher every year over a number of years, I believe.
00;31;02;05 - 00;31;20;11
And so that is a concern. And that would be rather consequential for Canadian investors and British investors and a variety of other investors, if it stuck.
My best guess is, therefore, that the digital services taxes probably get removed. And that was something we thought was fairly likely anyways, just as a part of trade negotiations, even if it didn't happen in the UK trade negotiations.
00;31;20;13 - 00;31;36;09
But this does need to be watched quite closely because it would somewhat alter the equation of how attractive U.S. investments would be if that tax hike were to actually go through and actually be binding for other countries. I should note there is a disadvantage to the U.S. if they were to do that.
00;31;36;09 - 00;31;54;11
Keep in mind the U.S. likes receiving capital from other countries and it would receive less capital, and perhaps the cost of capital would go up a little bit as a result. So it's not a win for the U.S. really either. Nevertheless that's something to watch, too.
But that’s maybe more niche for an investor subject. Stepping back to the broader budget bill,
00;31;54;13 - 00;32;14;29
the deficit goes up if this gets implemented. And so the U.S. deficit will be cumulatively – not in a year, but over a decade – cumulatively $3-5 trillion larger. It's already a $1.9 trillion deficit per year. And so gives you a bit of a sense of scale there. That's in one year whereas this adds over a decade, an extra $3-5 trillion.
00;32;15;01 - 00;32;33;27
You know, putting on my optimist hat, that provides an economic boost in particular. In 2026, you could talk about tax cuts and more growth and so on, and maybe starting to offset the damage from tariffs. Putting on my pessimist hat or putting on my fiscal hat, of course, it does add to the fiscal concerns.
The U.S. already has a big deficit, already has a big debt load.
00;32;33;29 - 00;32;55;14
We already have concerns about that That i'll get into in a moment. And that just makes it all the more concerning. Not coincidentally, Moody's – one of the big three debt rating agencies in the world – did just downgrade the U.S. debt rating to an equivalent of a double A+ rating. It’s no longer that pristine triple AA rating. The two other major world debt rating agencies had already done this.
00;32;55;14 - 00;33;17;23
In fact, one did it, I believe, 14 years ago. So Moody's a little bit slow in making its move, but nevertheless expressing concern about this latest plan to even greater increase the U.S. deficit and really equally not to engage in the sort of austerity that would be necessary to scale it back. And so, when you get downgrades like this, of course, the cost of borrowing in theory goes up.
00;33;17;23 - 00;33;42;27
But you would justify a bigger risk premium. Indeed, we've seen the term premium, the risk premium –however you'd like to call it – increase to a non-trivial extent in the U.S., particularly at the long end in recent weeks as the market does grow a bit concerned and does opt essentially to punish U.S. borrowers a little bit.
U.S. fiscal position is challenging: And then just to really drive home that point of fiscal positions and how the U.S. is in a somewhat challenging position, this is our fiscal health index.
00;33;43;01 - 00;33;59;17
It's a measure that really tries to summarize the overall fiscal health of a country. It's a bit of a misnomer. High number Is bad. So sort of fiscal unhealthy might be the real way of framing that. The countries at the top are the ones in the most challenging position.
00;33;59;17 - 00;34;17;08
The U.S. is now – with the 2024 data that's become available to us – in the most challenging position. We're not predicting defaults or anything like that, but it really does limit the flexibility for what the U.S. can do. And, of course, the cost of servicing debt goes ever higher.
00;34;17;11 - 00;34;34;17
It's just not a perfect position to be in. And we are seeing the bond market start to demand a little bit of a pound of flesh, not just from the U.S. In fact, Japanese yields have been higher. And we've seen some concerns elsewhere, too. But nevertheless, certainly from the U.S. as well. And so that that's a more challenging position for the U.S.
00;34;34;19 - 00;35;03;29
U.S. term premium rising and is now positive: Here is that term premium – so, really, the punishment the market is insisting on. There was a period of time from the mid-20 teens until just a few years ago, when there was no term premium, when actually you could borrow more cheaply at the long end than at the short end. That's not me saying that a 30-year yield was lower than a two-year yield, but it was me saying that if you were to adjust for the expected central bank rate at different points in time, that the gap between those things was lower, the yield was lower for longer dated bonds, if that makes any sense at all.
00;35;03;29 - 00;35;20;19
And so we've seen that term premium really build. It's now a positive number again. It's getting bigger again and again. This is basically the market saying you need to pay me more if you want me to hold a U.S. 30-year bond, because there is a small level of risk, but not a completely zero level of risk and fiscal problems over that kind of time frame.
00;35;20;19 - 00;35;39;05
That just makes life more expensive in the U.S. And it trickles through to mortgage rates and everything else, which of course is not desirable.
Some U.S. companies are now deemed safer than government debt: I can say just out of interest that – and this is not the first time this has happened; in fact it happens about a third of the time. Nevertheless, if you look at AAA-rated, top-rated U.S. corporations – and there aren't a lot of them – Microsoft is one.
00;35;39;05 - 00;35;55;29
I don't think there are many beyond that, but the small number that are rated AAA – which is the top possible rating, suggesting a very stable position and unlikely to run into trouble from a financial perspective.
We're now in a position where actually, you know, Microsoft can borrow more cheaply than the U.S. government can.
00;35;55;29 - 00;36;12;22
And so it does speak to how that level of concern exists about the government, but how that balance of power has shifted a little bit as well.
Rising long-term borrowing costs not unique to U.S.: This is just to emphasize that as much as the U.S. is part of the story – it's the dark blue line – we have seen longer-term borrowing costs increase just about right across the board.
00;36;12;22 - 00;36;29;17
So this is not uniquely the U.S. I would argue the U.S. has a more challenging fiscal position than a lot of countries. But nevertheless, actually everybody's yields have gone up to some extent. And in some cases, it's because people have increased their long-term growth forecasts and they're feeling more optimistic. And that also merits a higher yield.
00;36;29;20 - 00;36;44;28
But in some cases, it's also that there are countries – and Japan is a key one – in which the debt loads are pretty heavy and there's work to be done there too.
Okay.
00;36;45;01 - 00;37;00;23
U.S. dollar eroding as reserve currency / safe haven: I'm going to finish with this and you'll laugh because this is not the recommended number of words on a screen. And I'm only half done. So we'll see where we go with this. I just wanted to get the full shebang down on one page. And feel free to pause if you really want to dig into the weeds. Or just let my words wash over you equally. When we think about the U.S. dollar, it has declined significantly.
00;37;00;26 - 00;37;16;16
I should say it's still a reserve currency. It is still a safe haven asset. We don't expect that to go away over the coming years or even necessarily over the next decade or so. But we do see some erosion happening. And so here are the things that are making the U.S. dollar look somewhat less attractive than before.
00;37;16;16 - 00;37;35;12
And ultimately, we do think the U.S. dollar may continue to soften, on a trend basis, in the coming years. The first would be it is overvalued. It's quite expensive by most conventional metrics. That's maybe the most important reason. The second is it's not behaving like a reserve currency. Normally when people get scared, reserve currency goes up and the U.S. dollar has gone down when people were scared in recent months.
00;37;35;12 - 00;37;54;00
There are some political forces that do not favour the dollar. The dollar was weaponized against Russia. The SWIFT financial transaction system was similarly weaponized, which has made people a little nervous about holding dollars – people being central banks and foreign governments, I should say, not you and me. High policy uncertainty . . .
00;37;54;00 - 00;38;11;24
What is that next policy step? It's hard to have much confidence about where the U.S. will go. The U.S. is retreating from the world, and so the world doesn't need as many dollars if it's not engaging with the U.S. quite as much.
There's been a loss of trust in the U.S. as the U.S. puts pressure on other countries and pressure on companies and even questions about the safety of capital.
00;38;11;24 - 00;38;30;18
and so on, as the U.S. muses about changes there, too. We know the White House wants a weaker U.S. dollar. That's a pretty good reason to think the dollar could soften. The U.S. economy looks a bit less exceptional than before. It's doing some less growth-friendly policies and tariffs. Other countries are doing broadly pro-growth policies so that U.S. advantage is shrinking.
00;38;30;21 - 00;38;52;13
There are fiscal challenges, which we've just discussed. Global forces: as globalization happens and the global order weakens, it argues that the linchpin of the global order becomes a bit less important. We've seen gold and other potential substitutes surge in a way that renders them perhaps more attractive and just speaks to the fact that people are diversifying, to some extent, their reserves.
00;38;52;15 - 00;39;12;28
You know, there are financial considerations. The U.S. stock market’s more expensive than some other stock markets. And so maybe we will continue to see some investment outflows from that perspective, weakening the dollar. It's just not behaving like a safe haven currency, as mentioned already. And so, that combination is certainly profoundly U.S.-dollar negative.
00;39;13;05 - 00;39;35;04
From a U.S.-dollar positive perspective, we shouldn't totally abandon the U.S. dollar. It is still the currency of the world's biggest economy. The U.S. economy may outgrow other countries by less, but it can still outgrow the rest of the developed world, in our view. There are still a lot of dynamic U.S. companies and entrepreneurs, and so investors should not abandon all exposure to the U.S. if they're looking to maximize their returns, at least.
00;39;35;04 - 00;39;54;01
It has higher interest rates than the rest of the developed world, which bond investors generally like. The U.S. bond market is very deep now. That's a clever way of saying it owes a lot of money, which doesn't sound quite so good. Nevertheless there's plenty of liquidity and plenty of room for people to hold so-called risk-free assets in the U.S. market.
00;39;54;04 - 00;40;13;13
There could be a political reversal and many of the concerns about the U.S. could reverse at some point in the future election cycles. China is much discussed as a potential substitute with the renminbi to be the next reserve currency but it is not ready for prime time. It still has capital controls. You need the free flow of capital to be a reserve currency.
00;40;13;16 - 00;40;32;02
It does not have the sort of risk-free assets that investors are looking for with the necessary liquidity. Its rule of law maybe isn't quite stable enough or clear enough. And so China is not about to replace the U.S. dollar. The U.S. dollar in our view then is still a reserve currency. Even if that status is starting to fray to some extent.
00;40;32;02 - 00;40;54;28
Maybe the question is, okay, if you believe the view that the U.S. dollar can incrementally soften over time, over a multi-year period, what does that mean?
Well, we’d see a lower U.S. dollar from an investment standpoint. Generally speaking, you would think that the U.S. stock market would underperform, at least in, in local currency terms. Foreign investors would see higher yields in general, as capital is withdrawn from the U.S. market.
00;40;54;28 - 00;41;11;08
So those are kind of the big three conclusions. U.S. does become a bit more competitive. A weaker currency makes a country's exports cheaper. And that, of course, has the opposite effect on the rest of the world.
Incrementally over time, U.S. inflation should be a little bit higher than otherwise. So they will be importing things at a higher cost.
00;41;11;08 - 00;41;34;23
And so that's more inflation for them, less for the rest of the world. The rest of the world, investments and profits into the U.S. will likely underperform. The money they're getting back is less than it might have been because the U.S. dollar is falling. Conversely, for U.S. investments and companies, profits from overseas operations grow by more, and so flatter the balance sheets of American companies and American investors.
00;41;35;00 - 00;41;55;27
And then it's worth mentioning a weak U.S. dollar is actually very good in general for emerging markets. You see inflows of capital into emerging markets during these kind of times. Their stock markets very strongly tend to outperform, when they borrow in dollars. Of course, those loans are suddenly effectively cheaper to them as well. So emerging markets quite like this as well.
00;41;55;27 - 00;42;13;00
So all sorts of swirling forces. Forecasting currencies are hard. I won't make any guarantees here, but we do think that we could be in for a period in which the dollar is more inclined to weaken than strengthen over a period of several years.
Okay, well, that's it for me. And so I'll if you found this useful, as always, feel free to follow along online on Twitter or Now X or on LinkedIn as these as these indicators show or best of all, rbcgam.com/insights on our website.
00;42;13;00 - 00;42;31;04
And so I'll say again, thanks so much for your time. I wish you well with your investing. And please consider tuning in again next month.
