Tariffs, rates and trade: markets navigated mixed signals
It was no surprise to the markets that Governor Tiff Macklem and the Bank of Canada (BoC) held the policy rate at 2.75%. However, the context around the decision was anything but calm. On the eve of the announcement, U.S. President Trump doubled tariffs on Canadian steel and aluminum to 50%, reigniting trade tensions just as talks were starting to look stable. Unsurprisingly, the BoC’s press release leaned heavily on global uncertainty, noting the U.S. administration’s “continued back-and-forth on tariffs” and the general fog that surrounds the trade landscape.
Despite that, the Canadian economy has held up reasonably well. First-quarter gross domestic product (GDP) came in at 2.2%, slightly above expectations, helped by stockpiling and export timing. That said, the BoC expects the second quarter to be much weaker, as inventories reverse, and final domestic demand remains soft. Inflation dipped to 1.7%, thanks largely to the carbon tax removal, but underlying inflation ticked up again, to 2.3% excluding taxes and even higher on core metrics.
The bottom line from Macklem was that there is no rush to cut the interest rate, no matter what the consumer thinks.
The European Central Bank (ECB) delivered its widely expected 25 basis-point rate cut (a quarter of a percentage point). While this was its eighth straight cut, the tone of the message caught some off guard. Despite lowering 2026 inflation forecasts sharply (from 1.9% to 1.6%), the ECB didn’t sound like a central bank in a rush to ease further. Wage growth remains elevated (albeit moderating), and policymakers noted that market volatility from April’s trade jitters has already subsided.
The ECB reiterated its meeting-by-meeting approach and pointed to “more favourable financing conditions” and robust labour markets as factors supporting growth resilience.
What’s the read-through? The ECB may have delivered a cut, but it’s not throwing the door open. Markets will be watching wage data and trade conditions closely before pricing in further easing.
In what can only be described as the tariff front-running hangover, U.S. imports collapsed in April, posting the largest monthly drop on record. The trade deficit shrank 55% month-over-month to $61.6 billion, the narrowest gap since 2023. Imports fell 16.3%, while exports rose 3%, meaning that trade will have a major positive impact for gross domestic product (GDP) in the second quarter, after being a massive drag in the first quarter.
Imports from China dropped to their lowest level since March 2020, and consumer goods shipments saw a $33 billion nosedive. Canada wasn’t spared either: our own export figures plunged by the most since 2008 (except for during COVID-19).
While this is textbook post-tariff behaviour (buy ahead of the deadline, then crash), the macro read-through is important. With inventories already built and imports reversing, the setup for a U.S. GDP rebound in the second quarter is real; some expect annualized growth of 3%.
Next week, we’ll have fresh inflation figures from the U.S. These should give us some interesting clues about the U.S. Federal Reserve’s next move.
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