Weekly Digest

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February 3rd, 2025

Bank of Canada – Jan 29th

With the economy doing better “recently”, the Bank of Canada’s decision to cut by 25bps on Wednesday might have been a closer call were it not for the looming threat of tariffs.

The Bank’s decision to lower the policy rate to 3.0%, from 3.25%, was no surprise, with markets putting the implied probability at over 99% ahead of the announcement.

Prime Rate is now 5.20%, a 2.5 year low.

The Bank also confirmed the end of quantitative tightening (QT).

Tariffs Explained

The Bank’s rate cut last week has now been overshadowed by confirmed Tariffs announced this weekend.

It is important to understand what a tariff is, and who pays for it.

The strategy behind tariffs is regulating international trade and for shielding domestic industries from foreign competition. At the simplest level, tariffs are taxes placed on goods made overseas that are imported into the country. It is important to understand, foreign companies are not responsible for paying the duties. Instead, U.S. businesses directly pay the tariffs on their imported goods to the federal government.

Because American businesses are on the hook for paying the tariffs on imports, they historically have passed on those costs to consumers. At the same time, tariff proponents like President Trump argue that such levies can help protect manufacturers at home. For instance, consumers may opt to buy made in the U.S.A products rather than those made in other countries, while companies may choose to avoid tariffs by opening new manufacturing in the U.S.

The problem is, buying “home made” products is still sometimes far more expensive than goods made overseas, even with tariff costs added. Hence why free trade is cheaper for all parties.

Example:
A Canadian producer exports a backpack to the United States that costs $50.
The wholesaler, lets say Costco, sells that product for $65 to make a 15$ profit.

Now, the importer of the product, Costco, must pay a tariff of 25%, or $12.50. Would they sell the same product for $65 to make $2.50? Of course not. They would raise the price to offset the cost of the tariff so they can still make similar profit. 

So are Tariffs inflationary? Yes. In the simplest view, it causes prices to go up.

Tariff Justification

White House press secretary Karoline Leavitt when confirming the tariffs justified that it was based on border scrutiny including drugs and illegal immigration. Canada’s has been blamed for a flow of “illegal immigrants” and “illegal fentanyl” that has been “sourced and allowed to distribute into” the U.S.A.

To note, U.S. agents intercepted approx. 19 kg of fentanyl from Canada last year versus approx. 9,600 kg from Mexico.

It is also estimated, 1.5% of total U.S. illegal entries come through Canada.

Tariff Impacts

This decision to impose 25% tariffs on Canada and Mexico and an additional 10% tariff on China starting Tuesday, is just the first strike in what could become a very destructive global trade war. The only partial exemption is for Canadian energy imports that will be subject to a lower 10% rate.

These measures will surely cause a recession in both Canada and Mexico this year and is destructive for Canada’s economy.

Just when you things couldn’t get worse, we don’t even have Parliament to convene on the issues.  

These and other future measures will cause a surge in US inflation. The window for the Federal Reserve to resume cutting interest rates at any point over the next 12 to 18 months is all but gone.

Vacationing in the US just got a lot more expensive as our loonie has no sign of rebounding anytime soon. It’s the lowest it’s been since 2002.

In dollar figures:

Canada ($419bn), China ($427bn) and Mexico ($475bn) together account for 43% or $1.3trn of the $3.1trn value of goods imported into the US in 2023. Imports from Canada includes $124bn of energy & minerals.

A breakdown by major industries is listed below with the US being heavily reliant on Wood & Paper products along with Energy and Minerals.

Impact on Canada’s GDP

The estimated impact to our GDP cannot be overstated. Even allowing for a further depreciation in the Canadian dollar, it is estimated that this will result in a 2.5% to 3.0% decline in GDP.

A breakdown by US state is provided below, with northern states to bear bigger impacts.

Canada’s Response

Effective February 4, 2025, the government is imposing 25% tariffs on $30 billion of goods imported from the United States. Further measures will see $155 billion worth of goods subject to further tariffs by February 25^th.

These counter measures are effective immediately and will remain in place until the U.S. eliminates its tariffs against Canada.

The first list is overwhelming and found here; https://www.canada.ca/en/department-finance/news/2025/02/list-of-products-from-the-united-states-subject-to-25-per-cent-tariffs-effective-february-4-2025.html

Some major items from the list include:

• Meat
• Dairy Products
• Fruits, Vegetables
• Coffee
• Spices, Wheat, Barley
• Beer, Wine, Tobacco
• Soaps
• Tires
• Wood / Particle Board
• Carpets, Furniture
• Papers
• Plastics
• Clothing, Footwear and Linens
• Tools, Machinery
• Aircraft, Motorcycles, Vehicles
• Firearms

Development Charges – Mississauga

In other news, to aim in the reduction of costs for end users, the City of Mississauga has dropped residential development charges by 50% and for 3 bedrooms units, by 100%. As well, the City will defer the collection of residential development charges for all residential developments and collect them at occupancy instead.

Before the incentives were enacted, development charges amounted to 10% of the final cost of a home in Mississauga, with 25% of a GTA home price stemming from fees, taxes, and charges from all levels of government.

In Mississauga, development charges for residential apartments have now dropped from $38,316 per unit to $19,158 per unit.

Nvidia & Fixed Rates

Global investors dumped tech stocks last week as they worried that the emergence of a low-cost Chinese artificial intelligence model would threaten the dominance of AI leaders like Nvidia.

In 24 hours, the news evaporated $593 billion of the chipmaker’s market value, a record one-day loss for any company on Wall Street.

Last week, Chinese startup DeepSeek launched a free AI assistant that it says uses less data at a fraction of the cost of incumbent services.

By Monday, the assistant had overtaken U.S. rival Chat GPT in downloads from Apple’s app store.

Investors fled to quality purchases (bonds). More bond demand = lower bond yields. We are now sitting at a 52 week low in Canada’s 5 year bond, with a significant drop off down to 2.5% as the sentiment is we are in for a rocky year in Canada.

Fast Facts

• $9.1 billion – Losses that Canadian retailers took last year from organized theft, up from $5 billion in 2018. About 45% of all retail thefts involved violence against staff or customers.
• $63 billion USD – Revenue that sports betting company FanDuel is projected to bring in annually by 2030, driven in part by an increase in the number of long-shot bets being placed.
• $150 million USD – Price tag of Tom Brady’s Florida island mansion unofficially dubbed “Billionaire Bunker”. Amazon CEO Jeff Bezos has bought three homes on the same island.
• $8.8 billion – What tourists collectively spent in Toronto last year, a record for the city. Visitors from within Canada drove the splurge, accounting for $5.4 billion of the spending.
• $5.1 billion – What Canada’s video game industry contributed to the country’s GDP last year. There are currently 821 active video game studios across Canada