In this week’s The Seven…

• Escalate then pause - U.S. reciprocal tariffs
• Softwood turmoil - Lumber duties set to rise again
• Fed up? U.S Federal Reserve in a tough spot
• A resilient patch - Canadian oil producers positioned to weather the storm
• Next week - Bank of Canada should cut, but will it?
• Interesting Fact: April 2 for the history books
• Chart of the Week: Don’t forget about productivity

How can I protect you in this

Crazy world?

It's alright

Yeah, it's alright

“Crazy World,” Aslan

How are you dealing with the trade turmoil? I’m back to my COVID habits—scrolling the news late into the evening and early morning (much to the chagrin of any expert on mental health).

Amid the confusion and noise, we continue to search for signals. Today's Seven covers the latest on tariffs, softwood lumber duties, the ATB Capital Market’s energy survey, and looks at a problem that pre-dates Trump tariffs - productivity.

We could dedicate this Seven to a tracker of all the tariff news. But that would take up way too much real estate. For the latest, I recommend the Peterson Institute’s Trump’s trade war timeline.

Escalate, pause, target - The latest in U.S. trade policy

One week after Trump escalated the trade war with broad-based tariffs on other countries, he paused them for 90 days and replaced them with a lower 10% tariff. Except China, for which he has raised the tariff to 145%. Canada and Mexico can avoid the 25% "fentanyl tariff” for goods that are compliant with the country of origin requirements in the Canada-U.S.-Mexico Agreement.

In short, the last two weeks have brought: 1) An escalation of the global trade war; 2) a pause in reciprocal tariffs but keeping 10% tariff; 3) targeting of China with extra high tariffs.

Markets cheered the 90-day pause, with the S&P 500 posting its greatest one day gain since 2008, but then moved lower yesterday with concerns over the escalation with China.

Did the tariff pause push us out of the woods? Not even close. This is a pause, not a reversal, and we don’t know what’s next. Canada didn’t get anything new added, or taken away. But, as we discuss below, existing softwood lumber duties are scheduled to increase, in addition to the existing steel, aluminum and auto tariffs.

It’s more than the tariffs. The unpredictability of trade policy is itself a headwind to growth with companies reluctant to hire and consumer confidence low. 

Why did Trump partially back down? We don’t know exactly, but he seemed concerned about the bond market. Normally the U.S., with the world’s main reserve currency, is a safe haven asset in times of trouble. However, the U.S. doesn’t seem as safe these days, and many investors have lost confidence, selling off U.S. Treasuries. The 10-year government yield spiked above 4.4% on April 10.

More duties  - This time on softwood lumber producers

Somewhat lost in the latest tariff talk is the lumber industry.

The U.S. Department of Commerce is set to more than double the existing anti-dumping and countervailing duties on Canadian softwood lumber. These duties are planned to increase from the current average of 14.4% to 34.45% this fall as part of an annual review process.

These are separate from the other tariffs and reflect a long-standing dispute that predates President Trump.

This is a lose-lose proposition. It reduces demand for Canada’s forest products (Canadian softwood exports to the U.S. totalled $7.7 billion last year*), but it also hurts Americans by increasing home prices. Alberta is the third largest producer of softwood lumber in Canada after B.C. and Quebec. Its share of Canadian production has increased over the last decade from 14.9% in 2014 to 18.7% last year, largely reflecting declines in B.C.

The U.S. needs Canada’s lumber. The National Homebuilders Association notes that the U.S. uses 50 billion board feet each year, but only produces 35 billion board feet. Most lumber imports come from Canada, which are considered high-quality for construction (tighter grains and high stability).

*HS code 4407

Calm before the U.S. inflation storm

Finally some better inflation data out of the United States. Consumer prices fell 0.1% last month, and the core reading posted its smallest gain in nine months. Year-over-year inflation was at 2.4%.

But does it matter? This is a pre-reciprocal tariff CPI print—the calm before the inflation storm. Yes there were tariffs in place in March, particularly on imports from China, but not the 27% currently estimated by the Yale Budget Lab.

The Fed is in a tricky position. Higher inflation is coming, but so is weaker growth (potentially even a recession). Think stagflation. The Fed’s dual mandate on growth and inflation means they need to watch both. But, unlike other recessionary scenarios, there is a limit to how much the Fed can cut as they watch the tariff pass-through to consumers.

For now, interest rate traders are pricing in three more rate cuts this year. But it’s unlikely the Fed will come to the rescue anytime soon: a pause at the next meeting in May is the current market expectation.

Survey says - ATB Capital markets talks to Energy CEOs

Our colleagues at ATB Capital Markets released results from the Spring 2025 Energy Sector Survey* this week. Here is what it found:

• Resilient outlook. When the survey was conducted (prior to the April 2 U.S. tariffs announcement and the April 3 OPEC oil production announcement), producers were still expecting a modest increase in spending and further production gains this year. The battle-tested oil and gas industry has reduced costs, positioning it to deal with market volatility. 
• Top opportunity - market access. For the sixth consecutive survey, West Coast LNG ranked as the top medium-to-long-term opportunity for the industry. The survey shows a strong consensus that both the LNG Canada phase two project and the Ksi Lisims LNG project would receive positive final investment decisions.  There is more skepticism on reviving major oil pipelines. Northern Gateway was viewed as significantly more probable than Keystone XL or Energy East.
• Top risk - policy. “Federal energy and environmental policies” ranked as the top risk. Canadian retaliatory tariffs on U.S. imports were perceived as a more substantial threat to activity levels than U.S. tariffs on Canadian exports.
  

*The survey was conducted March 13, 2025 to March 27, 2025. That is, before the broadening of the global trade war and a surprise oil production hike announced by OPEC sent prices sharply lower. It garnered responses from executives representing 26 energy services companies, 34 exploration and production (E&P) companies, and 40 institutional investors.

Next week: Bank of Canada should cut…but will they?

We were on the fence, but April 2 pushed us slightly over. Canada now faces a softer-than-expected touch on U.S. tariffs via CUSMA exemptions, but a much bigger global economic problem. If current policy holds, we could see less inflationary pressures from Canadian countertariffs than previously feared (the Bank’s January scenarios had full retaliation). We think the Bank can justify a 25-basis point cut next week, bringing the policy rate to 2.5%. But this one is not a slam dunk. If they don’t cut, it will because they want more dust to settle (and more data) before moving.

Interesting Fact:  Another important April 2nd

Where were you on April 2? I was glued to my screen watching President Trump’s press conference from the Rose Garden and then spending the rest of my afternoon and evening figuring out what it all meant.

I think April 2, 2025 will go down in history as a defining moment. It sent shock waves through the global trading system, leading to the largest stock market correction since the pandemic.

But it’s not the only significant April 2 in economic history.

On April 2, 1792, the U.S. Congress passed the Coinage Act, which officially established the United States Mint. This created a system for national currency and laid the groundwork for its financial infrastructure. A standardized currency was crucial for facilitating trade and economic growth within the newly formed nation and with international partners.

Chart of the Week: Pre-Trump 2.0: Canada’s Productivity Struggles

What were we talking about before the trade war? Inflation, interest rates, housing, population growth and productivity. This week’s Chart of the Week puts productivity—the key determinant of long-run living standards—back on your radar.

The Bank of Canada called Canada’s productivity struggles an ‘emergency’ last year. The problem still exists. As our Chart of the Week shows, Canadian labour productivity has finally stopped falling, but hasn’t moved much over the last decade (up only 2.1% between 2014Q4 and 2024Q4).* This coincides with a large drop in business investment over the same period, and tracks a similar trend in GDP per capita.

As for Alberta, we don’t have 2024 data yet, but we have shown there has been a marked slowdown in labour productivity in Alberta, coinciding with a pullback in both workers and investment in the energy sector. Alberta still has the highest level of labour productivity among provinces, but the gap with the national average has narrowed.

Labour productivity boosts wages and makes an economy more resilient to shocks. It’s also something that pre-dates Trump 2.0 and is much more within our control. As we have discussed, there is not one single reason Canadian productivity has lagged, but contributing factors include low business investment (still well below 2014 levels), lack of scaling of companies, and skills-mismatches.

*The temporary spike during the pandemic reflects a massive drop in hours worked, particularly in service industries.

Answer to the previous trivia question: Angus cattle originally came from Scotland.

Today’s trivia question: What is the total area (land and water) of China?