Week of February 17, 2025
Dec Mullarkey, CFA, Managing Director, Investment Strategy and Asset Allocation
The future of U.S. tariff policy remains highly uncertain, leaving lots of room for speculation on what the ultimate system will look like. However, that will likely become clearer on April 1 when a formal report, recommending trade changes, arrives on the desk of the U.S. President. Initial expectations were for the report to support some flavor of universal tariffs. But last week, the President seemed to back reciprocal tariffs.
On the face of it, reciprocal tariffs seem potentially balanced. If you put a 2% tariff on my autos, then I will apply the same to yours. But the fine print tends to be complicated. These tariffs usually look to not only offset direct effects but also hit back at other non-tariff barriers. For example, if a country has higher quality standards for imports than for locally produced products, the aggrieved side could look to equalize through a tariff equivalent. Without clear rules this can quickly become transactional and unpredictable.
Over parts of the 19th and 20th centuries the U.S. had a reciprocal tariff system. But constant haggling over a growing range of products proved unstable for business and consumers, and the system was abandoned by Congress for one with clearer rules. For now, equity markets reacted positively to the prospects of reciprocal tariffs as opposed to universal. And markets seem to be assuming such tariffs will target a narrow range of important products and be subject to close negotiation.
Sources: Bloomberg, Financial Times, 2025.
Matthew Boehner, Associate Director, Derivatives & Quantitative Strategy
Since the decision to cease real return bond (RRB) issuance in late 2022, some Canadian-based investors in need of inflation-linked exposure have been searching for alternatives. Many investors have considered U.S. Treasury inflation-protected securities (TIPS) as a natural substitute, due to the highly intertwined nature of the U.S. and Canadian economies, similar Consumer Price Index (CPI) basket constructions and a large market size relative to RRBs.
Recent experience has highlighted the importance of being mindful of non-inflation related factors (such as real rates and currency) that can impact return differentials between the two markets. This also calls for having a precise approach when using U.S. instruments to replicate Canadian inflation. Canadian inflation replication strategies can be designed to minimize the impact of these factors.?
Sources: Government of Canada, Bloomberg, 2025.
The information may include statements which reflect expectations or forecasts of future events. Such forward-looking statements are speculative in nature and may be subject to risks, uncertainties and assumptions and actual results which could differ significantly from the statements. All opinions and commentary are subject to change without notice. SLC Management is not affiliated with, nor endorsing, any third parties mentioned within this article.
Market insights are based on individual portfolio manager opinions and market observations. These are observations only and are not intended to provide specific financial, tax, investment, insurance, legal or accounting advice and should not be relied upon and does not?constitute a specific offer to buy and/or sell securities, insurance or investment services. Investors should consult with their professional advisors before acting upon any information posted here.
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