In this week’s The Seven…

• Consumer retreat - Lower confidence hurting sales 
• Fed up? President Trump ‘on and off’ with Powell
• Creeping in - Tariffs already impacting U.S. prices
• Where to hide? Bullion hits new record
• Delayed - Dow’s Path2Zero project
• Interesting Facts: Advance voting and Fed Reserve independence
• Charts of the Week: Canada’s missing economic ingredient - Investment

This week, equity markets rebounded on news that President Trump is backing down on China and has eased up on earlier threats to fire Federal Reserve Chair Jerome Powell. We unpack the latest in the trade war, how consumers are reacting, Dow’s decision to delay construction on its Ft. Saskatchewan project, and a perennial issue in Canada (pre Trump 2.0)—weak business investment.

Less confident - Consumers expected to pull back

Consumer sentiment has soured with tariff threats, which doesn’t bode well for retailers.

But the impacts do not follow a straight line. In fact, the threat of tariffs could encourage spending in the near term. You may know people (like I do) who said they will make their vehicle purchase now, fearing that tariffs will add to the price tag later.

But so far the decline in confidence seems to have ‘trumped’ the rush to get ahead of tariffs.

Released today, retail sales declined in February in Canada (-0.4%) and Alberta (-0.5%). We don’t see signs of front-loading in the vehicle sales data either, with sales at new car dealers in Canada down by 3.0%.

February is an interesting month as there was a 30-day pause on the initial sweeping U.S. tariffs and Canadian counter-tariffs. At the same time, it was announced that steel and aluminum tariffs were coming in March while other tariffs, including on autos, were being threatened.

We may still get a front-loading bump in March, but it will be temporary. The advance estimate from Statistics Canada shows a 0.7% monthly increase.

The latest trade disruption is untimely for retailers, as consumers in Alberta were just starting to find their feet again. Stuck in a lull for about a year thanks to higher interest rates and prices, Alberta retail sales have been trending upwards since mid-2024.

Our forecast is that the slowdown will continue for retailers, given lower consumer confidence and the broader economic hit. Our consumer tracker using ATB Mastercard data (tracks non-auto retail sales closely) shows a pull-back in March. We are forecasting retail sales to increase only 1.7% this year, below estimated population growth of 2.5%.

Already in a tricky spot, U.S. Fed faces political pressure

U.S. Federal Reserve Chair Jerome Powell operates at arms-length from the government, but he’s getting some pressure from President Trump these days.

Last week, Powell said trade policies are making his job difficult: “We may find ourselves in the challenging scenario in which our dual-mandate goals are in tension.” Powell is referring to tariffs adding to inflation (pointing to higher interest rates) and increasing unemployment (pointing to lower rates).

Trump responded by calling for Powell’s dismal, arguing he’s politically motivated and should be cutting rates. White House economic advisor Kevin Hasset said they were looking at ways to remove Powell.

Then, on Tuesday, Trump changed his tone and said he has “no intention of firing” Powell.

Questions about Fed independence have added to market tumult. The U.S. dollar has been falling (against a basket of currencies) as investors seek out other options.

Where to next? The road to Fed rate cuts is paved with softer consumer price index (CPI) prints, which would give the President what he wants. But a tariff-induced inflation increase, which is what consumers now expect, will keep the Fed cautious. Inflation has come down, but it’s still above target.

The median projection among Federal Open Market Committee members in March 2025 suggested expectations for two rate cuts by the end of 2025. This would bring the federal funds rate to a range of 3.75% to 4.0%. As of this morning, interest rate traders are expecting a hold in May, but pricing in 3-4 cuts later in the year.

Spilling over - U.S. tariffs raising prices

U.S. tariffs have come with a warning—they will raise prices. But untangling the effects of tariffs from other factors (like energy prices, labour market conditions, etc.) can be tricky.

Enter a new study by three economists. They use a novel dataset of detailed daily retail prices linked by product, country of origin, and tariff classification.

They found the most rapid price responses were for imported goods, though domestic goods prices also increased due to spillover effects (higher input costs and demand for domestic goods). Price responses for imported Chinese goods were larger, which they attribute to expectations that they are likely to be more permanent than those applied elsewhere. While noticeable, they call the impacts “modest” so far relative to the size of announced tariff rates.

What’s up? When markets are down

Following U.S. “liberation day” on April 2, we saw something unusual unfold: A sell-off in U.S. equities and bonds. Normally, sellers of stock will flee to safer assets, like U.S. Treasury bonds, during troubled times. It is widely believed the U.S. Treasuries sell-off, and corresponding yield jump, contributed to Trump’s decision to pause the higher reciprocal tariff rates for 90 days.

So what are investors buying these days? Gold. Considered a safe-haven asset, gold is also viewed as an inflation hedge. Investors are seeing this as a good choice given the stagflation risks. The price of gold hit an all-time high of US$3,434/troy ounce on April 22, 2025—that’s more than US$1,000 higher than the same time last year!

The cost of uncertainty - Major project delayed

Dow announced yesterday that it's delaying its massive $11+ billion Path2Zero petrochemical project in Ft. Saskatchewan. While the company reinforced its commitment to the project, it says construction will be delayed until “market conditions improve”, and revisit the schedule in late 2025. Dow President Jim Fittering cited uncertainty over tariffs as a key consideration.

The project was approved in late 2023 and engineering and ground work is well underway. So far, this only shifts the timing of the project with spending moving into subsequent years. While we had already lowered our estimate for Alberta capital spending amid tariff uncertainty, this announcement presents some additional downside risk for 2025.

Despite the near term bumps, we do see petrochemicals and hydrogen as growth areas for the province. The keynote at the Canadian Hydrogen Convention in Edmonton this week was by Seifi Ghasemi, CEO of Air Products. Construction is well underway at the Air Products’ Canada Net Zero Hydrogen Complex near Edmonton.

Interesting fact #1 - Record advance voting

Canadians see next week’s federal election as highly consequential judging by record early voting. 7.3 million Canadians went to the advance polls, up from 5.8 million in 2021.   If you haven’t already, don’t forget to vote! Here’s a useful summary of platform commitments from the Globe and Mail.

Interesting fact #2 - A brief history of Federal Reserve independence

The U.S. Federal Reserve has not always functioned independently. Between 1913 and 1935, the Secretary of the Treasury was also Chair of the Federal Reserve. During the world wars, the Fed accommodated the Treasury Department’s war-time spending by keeping interest rates low.

Independence increased in 1951 with the passage of the Treasury-Fed Accord, which allowed the Fed to pursue its own monetary policy goals and pursue price stability. Despite this, there have been re-occurring cases of political pressure, most recently from President Trump.

One famous example was during the lead up to the 1972 U.S. election. In the “Nixon Tapes,” there is evidence President Nixon pressured Fed Chair Arthur Burns to adopt expansionary monetary policies to boost the economy even though inflation was high.

Charts of the Week: Recapitalizing the Canadian economy

Canada’s next government will need to confront a longstanding issue: Canada’s sluggish productivity performance.

Much talk has focused on the related measure of GDP per capita. On this score, Canada has fallen far behind the U.S.

What’s been weighing on GDP per capita in recent years? Two GDP components—business investment and exports—stand out, as shown in our Charts of the Week. These are related: without investment today, it reduces Canada’s capacity to export in the future.

Real (inflation-adjusted) exports per capita remain below 2000 levels, while imports have continued to march upwards. Meanwhile, real business investment per person is down more than 20% from its peak in 2014Q4. Energy sector capital spending plummeted in 2015-16 and other sectors haven’t been able to fill the gap. The C.D. Howe Institute has shown that the U.S.-Canada gap on investment per worker has widened, most notably machinery and equipment, and intellectual property.

How can Canada reverse the weak GDP per capita trend?

It’s a tall order to ask households, already highly indebted, to do even more heavy lifting. Interest rates are falling, but nowhere close to COVID levels. Government spending has been rising, and with it deficits. Housing investment could improve further, but it’s not a productive asset in the same way a new factory is.

The answer, in our view, is reviving business investment and finding ways to bolster exports, especially to overseas markets.

Answer to the previous trivia question: There is no online voting option in this federal election.

Today’s trivia question: What is Canada’s largest federal riding by area?