(en anglais seulement)

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Hello and welcome to our latest video #MacroMemo. There's a lot to cover this time, as there seemingly always is. We will start with some discussion about the latest flare-up in tensions and outright conflict in the Middle East, and what that means for oil and perhaps for the economy. We'll take a look at the broader U.S. economy and acknowledge that economic fears seem to be fading. On the other hand the economic data actually does now seem to be starting to weaken.

00:00:30:00 - 00:00:57:02

We'll try to reconcile those two things. We will certainly delve into tariffs and tariff developments. We'll talk a bit about that big U.S. budget bill working its way through Congress and in particular section 899, which refers to some taxes that the rest of the world might face. We'll also deal with some economic adjacent topics, including U.S. polarization and U.S. academia under pressure and what that could mean for the economy over the long run.

00:00:57:04 - 00:01:15:19

Okay. So let's jump in. And so the Middle East, of course, is a source of tension again. Israel has attacked Iran and Iran is now responded. And a variety of motivations, the two have been long-time foes and Iran was weakened by earlier Israeli actions and Iran seemingly on the cusp of developing nuclear weapons.

00:01:15:19 - 00:01:32:21

I think that the confluence of those factors likely explains some of the timing of this action. I guess I'm more focused, though, on the implications side. And so from an implication standpoint, and again, very much through an economic and a market lens, anytime you talk about the Middle East, you're usually thinking about oil prices.

00:01:32:21 - 00:01:51:09

The price of oil has increased by about $10 a barrel, which is significant. And which is, I guess, on the net, is undesirable to the extent that higher oil is a bit like a tariff in the sense that it slows growth and adds to inflation. It's unfortunate because in fact, we had been enjoying the opposite trend previously.

00:01:51:09 - 00:02:10:06

Oil prices were actually fairly notably down from the start of April, and that was imposing some deflationary pressures and some, at least globally, growth-supporting pressures. We've now essentially lost that. We're back to more or less where we were at the start of April. So not a big blow, but nevertheless losing a helping hand, you might say.

00:02:10:08 - 00:02:31:10

And so that's been neutralized. In terms of other consequences, I think we'll just going to have to wait and see. There is the possibility of an Iranian regime change. That's hard to predict, but it's possible. Geopolitical uncertainty is obviously high. Maybe that's the most clear statement you can make. And so here we are, living in a dangerous world and seemingly with some extra danger added in.

00:02:31:12 - 00:02:51:23

I can say that we're not entirely shocked that this is a dangerous time in the world just because the world order is changing. The U.S. is stepping back and other countries are proving more assertive. The rule of international law has become somewhat weaker. And so, one does tend to see more actions of this approximate nature during such eras.

00:02:51:23 - 00:03:11:15

In terms of risks going forward, well, there's a downside risk, meaning lower oil prices risk. That would be, of course, the conflict cooling and things settling and oil prices presumably retreating back to something in the $60 per barrel range.

Conversely, though, of course, there is an upside risk. And I guess I'm using downside and upside purely in an oil price context.

00:03:11:20 - 00:03:42:09

Nevertheless, an upside risk in the sense that there's a chance this could broaden across the Middle East. Iran could pull other actors in, Iran could shut down the Strait of Hormuz, through which about 20% of the world's oil supply transits. And so there are scenarios in which oil prices go quite a lot higher.

I would say it doesn't seem to be in Iran's best interest to do that, though equally there is some evidence that the country is generating some sort of electronic interference that's affecting ships in the Strait of Hormuz and is complicating shipping, if not stopping it altogether.

00:03:42:09 - 00:04:00:01

So that's where we are right now. For the moment, higher oil prices is the main takeaway. But of course, we're going to need to track this closely because there was a chance that it pivots from here.

Okay. Let's shift from geopolitics. Let's get into the economy. And so on the economic front really, the first observation is that fears are fading.

00:04:00:03 - 00:04:22:07

And that's not unreasonable. Tariffs are not tracking the worst-case trajectory. Similarly, the initial economic damage from tariffs has been surprisingly slight, so that we do still think some is coming. So, not a shock that sentiment is starting to rebound. We've seen the National Federation of Independent Business metric, a small business confidence metric, rising . . . a CEO confidence metric still quite cautious, but beginning to rise.

00:04:22:07 - 00:04:44:02

Some of the classic measures of consumer confidence are also going up. They are still soft but they’re rising as well. And indeed, when we look at consensus GDP growth forecast for major nations for 2025, we are seeing more upgrades than downgrades right now. Still cautious forecasts but upgrading as things don't play up quite as badly as initially feared.

00:04:44:02 - 00:05:12:23

So sentiment is improving. On the other hand we are getting hints of actual economic weakness here at least starting to come. Examples of that would be, in fact, just hot off the press as I record this, U.S. retail sales came in looking fairly soft for the month of May. U.S. payrolls were fine at the headline level, but we're a little bit soft when you factor in revisions. Our Focused Economic Surprise Index has five of its seven key inputs with negative surprises right now.

00:05:12:23 - 00:05:35:02

So we are seeing more disappointment than happy surprise there. Similarly, the Citibank data change index for the U.S. has fallen pretty substantially and is now more negative as well. And so we are getting some weakness.

We can see it in high frequency data. So jobless claims, it's a weekly indicator, low but definitely rising right now.

00:05:35:08 - 00:05:52:16

The Dallas Fed is a weekly economic index. That doesn’t look too bad, but it’s definitely falling now, having been more normal beforehand. Even the Beige Book, which the Fed runs, a sort of a qualitative assessment of what companies are thinking, it does show that, in fact, half of U.S. districts were reporting a slight to moderate decline in activity. It tends to be a bit glum.

00:05:52:16 - 00:06:11:09

I don't think that means the U.S. is in recession, but it does mean the U.S. economy's weaker than it was. I guess the takeaway is we are still looking for some economic weakness. We think it starts to show up a bit more clearly in some of the June numbers. We think the second half of the year could be somewhat visibly weaker, but not necessarily recessionary in our view.

00:06:11:09 - 00:06:31:10

We are looking for growth, but less growth. And then just trying to reconcile the more optimistic sentiment versus the weaker data. I think they're meeting in the middle. You saw such a profound drop in sentiment that it's bouncing and yet still cautious. Economic data had held up but it's now starting to weaken. Those are actually converging on each other as opposed to diverging away from each other.

00:06:31:11 - 00:06:47:12

Let's move to tariffs for a moment. Just thinking back over the last few weeks, as it's been a few weeks since we did one of these, I guess the tariff bad news would be that steel and aluminum tariffs have now increased to 50%. Of course, that's particularly problematic for countries with big such exports to the U.S.

00:06:47:12 - 00:07:10:02

Top of the list would be Canada, then Mexico, then Brazil, then South Korea. For context, the average U.S. tariff on Canada has now risen as a result of that from 4.1% to 5.8%. It’s still pretty low, but certainly affecting the industries that are being hit by those tariffs. The average U.S. tariff on the world rises from 13.5% to 14.7%.

00:07:10:03 - 00:07:32:23

That's actually around where we think tariffs eventually settle – not with these exact tariffs in these exact places. But with some extra sector tariffs, some extra carve outs, you end up with something around 15%, we think.

On the positive tariff side, I guess the main story would be further de-escalation between China and the U.S. So in principle at least, Chinese rare earth materials will be provided more readily to the U.S. and to the rest of the world.

00:07:33:01 - 00:07:51:00

Chinese students regain access to U.S. universities, but still seeing some real damage from the tariffs that remain in place in that relationship. And, as the April data, which is a bit stale, but as the April data came out for Chinese exports, it did show quite a sharp drop in Chinese exports to the U.S.

00:07:51:00 - 00:08:13:10

On other tariff fronts, do note that July 9th is approaching quickly. Let's flag that. That is the deadline for striking a deal with the U.S. or reciprocal tariffs will fully reassert themselves. So that is going to be a narrative, at least in the coming weeks. My suspicion is that we will see an extension and we probably won't see those tariffs fully come back, but we can't say that with certainty.

00:08:13:12 - 00:08:33:20

It seems to me that other countries may be dragging their heels as they negotiate with the U.S., in part because they don't love the UK deal, which is the one real deal that's been struck, in part because there is power in numbers. The U.S. probably doesn't want to level high tariffs on everybody all at once. And so if it would have to do that, it is more likely to delay that increase in tariffs.

00:08:33:20 - 00:08:52:18

And so we're thinking that's probably what happens here. Canada U.S., we'll see, maybe this news will become stale quite quickly. But at least as the G7 event proceeds, there were Canada-U.S. negotiations. They did not culminate in a deal. And indeed, President Trump has now returned to Washington.

00:08:52:20 - 00:09:12:17

But Canada has set a target of a deal with the U.S. in the next 30 days. Hopefully that's a realistic number. It does appear to include significant Canadian security commitments, possibly including things like Canadian military procurement of U.S. products, possibly including Canada participating in this U.S. Golden Dome plan, a missile defense shield for North America, in that scenario, not just for the U.S.

00:09:12:22 - 00:09:40:11

It’s not clear what Canada would get back in terms of trade concessions, but we may learn more over the next month. Canadian markets are feeling a bit more optimistic as they've even just gotten a sense for this.

Okay, so onto this U.S. budget bill and specifically the clause that would raise taxes on foreign investors and foreign businesses operating in the U.S. if foreign countries don't get rid of their own, quote, “discriminatory taxes” against U.S. interests.

00:09:40:11 - 00:10:02:18

Essentially, the U.S. is objecting that other countries have digital services taxes, which hurt U.S. tech firms, and have global minimum taxes which in principle could hurt U.S. multinational corporations. And so they're threatening this tax on the rest of the world. Itoesn't seem like the U.S. really wants to apply this tax. It would suffer capital outflows and the U.S. economy would be weaker and businesses would be weaker.

00:10:02:18 - 00:10:22:16

If this were implemented, people would just invest in other countries instead of the U.S. We think it's a pressure tactic to get other countries to change their tax policy. It's telling, in my mind that the Senate is proposing to delay implementation of this from 2026 to 2027. So they're not looking really for this to apply. They're trying to make sure countries have enough time to change their tax rules if that’s what it takes.

00:10:22:16 - 00:10:42:15

For Canada, really only the digital services tax in Canada is considered problematic by the U.S. We've actually thought from the get-go that this tax was probably going to be removed as part of negotiations with the U.S. We'll see. The global minimum tax that Canada has implemented isn't the severe form that the U.S. objected to.

00:10:42:15 - 00:11:05:01

And so Canada, we think, can probably avoid higher taxes for investments into the U.S. But we will see.

Let me finish with two quick really more social policy-type thoughts. One would be higher polarization. We've seen a great degree of polarization in the U.S., in particular in recent years. It is both high and we think rising.

00:11:05:02 - 00:11:22:13

It has entered, you would argue, a new extreme over the last decade. And we can actually measure that by voting differences by party in Congress. We've also seen that there is increasingly a distortion in terms of how each party's supporters view the economy. And so when your party’s president is in power, people think the economy is great.

00:11:22:17 - 00:11:49:16

When your party’s president isn't in power, people think the economy is awful. That didn't used to be the case. It's really come to the fore over the last 10 or 15 years. Arguably, this does start to eat away and nibble away at the U.S. economy. And so if people are making investment and hiring decisions and spending decisions because they think the economy is great, or they think the economy is awful, and it's neither of those things, then you're seeing a mis-allocation of resources, and that's an economic inefficiency.

00:11:49:18 - 00:12:13:06

Similarly, as we've seen a term premium and a risk premium built up in U.S. borrowing costs recently given fiscal excesses, but also a loss of trust, and that is something that wears on the economy. It's just a higher hurdle rate that businesses need to clear when they're deciding whether to make big investments. The point is, we think we are seeing at least some subtle economic damage that may be accumulating over the long run.

00:12:13:08 - 00:12:32:20

Let's talk about academia under pressure, the other societal type of thought. And so, the White House is fighting with U.S. universities right now. Many are under investigation. Some elite universities, mostly Ivy League universities, are experiencing sharp funding cuts, largely to their research funding. The White House has gone further with Harvard, trying to block its international students.

00:12:32:20 - 00:12:59:03

And so obviously very disruptive to these schools. There are economic effects potentially as well. The direct effect would be just funding cuts to the schools, resulting in less research and so subtly undermining innovation occurring in the U.S. economy. Maybe the second order effect is just as relevant though, which is just if foreign students and foreign professors are discouraged from coming to the U.S. and engaging with U.S. schools, they presumably go elsewhere.

00:12:59:03 - 00:13:24:22

And conceivably American professors who can't access research funding could go elsewhere as well. And so you could see a sizable brain drain if the next generation of innovators and risk takers don't contribute as substantially to the U.S. as in the past. And so, really, both forces threatening to undermine long-run U.S productivity growth and thus economic growth. Equally, you could say an opportunity for other countries if they can capture a significant flow of this displaced talent.

00:13:24:22 - 00:13:54:17

And that's whether the countries are the countries these students are coming from who instead stay at home. Some of that might be China and India, though certainly others, including countries like the UK and Canada, where they might instead alight. Again, these are subtle forces. These are potentially long-term forces. We'll see if this pressure on academia persists in particular, but there is the risk that the U.S. economy is somewhat diminished over the long run by recent actions, whether it's the higher polarization or whether it's the challenges against academia.

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Okay, I'll stop there as I'm losing my voice. And so I'll say, thanks so much. Hope you found this interesting and useful. And please tune in again next time.