Canada responds with tariffs on U.S. goods

Author: Portfolio Specialist Group

June 4, 2018

AGF Weekly Perspectives

“A recap of last week’s top economic news and what’s to come”

Canada responds with tariffs on U.S. goods

  • Previously set exemptions on steel and aluminum tariffs against Canada, Mexico and the European Union expired during the week. The U.S.’s decision not to extend the exemption drew fire from Prime Minister Trudeau, saying the “totally unacceptable” tariffs will harm both countries.
  • In response, Canada announced retaliatory tariffs on $16.6 billion of U.S. steel, aluminum and a broad range of other products. Iron, steel and related items will be subject to 25% duties, while the remaining goods impacted, largely food and household products, will receive 10% duties.
  • The Canadian tariffs will go into effect on July 1 if the two countries fail to reach a compromise before the deadline.

U.S. labour market charges ahead

  • The U.S. labour market beat expectations with 223,000 jobs added in May, well above the trailing 12-month average of 197,000. Services hiring drove the gain with 171,000 jobs added, while goods sectors added 47,000 positions.
  • A dip in the participation rate, attributed largely to retiring baby boomers, along with May’s strong jobs report trimmed the unemployment rate to 3.8%, an 18-year low. Average hourly earnings rose 0.3% in the month to a 2.7% annualized pace of growth.
  • The strong labour conditions are supportive of a Fed rate hike next week, which is now fully priced into market expectations.

Canadian economy slows growing pace

  • Canadian GDP rose 1.3% annualized in the first quarter of 2018, the slowest quarterly pace in nearly two years. Business investment grew 10.9%, including an 18.1% climb in machinery and equipment investment. However, consumer spending slowed with growth of only 1.1%, and housing fell 7.2% following new mortgage rules.
  • After reaching GDP growth of 3.8% in mid-2017, the Canadian economy has now slowed to a 2.3% year-over-year pace.
  • Positively, 0.3% GDP growth in March leads to strong momentum heading into the second quarter. 15 of 20 major industries grew in the month with the mining, oil and gas sector leading the advance.

Other economic news

  • The Bank of Canada held interest rates unchanged at 1.25%, though alluded to further policy tightening by omitting key references to caution that were previously included in accompanying statements. The central bank noted stronger exports and investments, as well as expectations that housing activity will pick up after a pull-back experienced to start the year. Expectations for a June hike increased following the comments, with a 25bps increase reaching an implied probability of 75%.
  • Eurozone inflation rose sharply to 1.9% annualized in May, from 1.2% previously, to reach the highest level in over a year. A 6.1% annualized increase in energy prices drove much of the headline gain. Core inflation grew to an eight-month high of 1.1%. Also reported, the eurozone unemployment rate returned to near-decade lows of 8.5% in April, with Germany and the Czech Republic leading the strong labour conditions.

What’s to come

Canadian employment update

  • An update on the Canadian labour market is due Friday with job gains and unemployment reported Friday. Canada will also report housing starts and building permits during the week. Elsewhere, the eurozone will report first quarter GDP growth on Tuesday.

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Written by

Portfolio Specialist Group

AGF Investments Inc.

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