Tariffs Take Center Stage As Banks Hold the Line

Key Takeaways

• Fed, BoC keep rates steady
• Macro uncertainty still high
• More stimulus possible in China

In honor of National Intern Day in the United States and Canada, Kartik Arora, a summer intern on the investment strategy team, hosted this week’s edition of Market Week in Review. Arora explored the recent rate decisions from the U.S. Federal Reserve (Fed) and the Bank of Canada (BoC). He also reviewed the latest global trade developments as well as highlights from China’s Politburo meeting.

Arora began by noting the Fed left interest rates unchanged after its meeting on Wednesday. This was the fifth time in a row the central bank made no adjustments to monetary policy, although two members of the voting committee were in favor of a rate cut.

“Fed officials refrained from providing a timeline for when a cut could occur, but we think September is a likely timeframe. We also think the door is open to another cut later in the year,” Arora said. He added that with the U.S. labor market remaining resilient, the decision is more likely to hinge on the inflation backdrop.

The Bank of Canada also opted to keep rates steady this week, Arora said. He explained that uncertainty over U.S. tariff policy played a role in the decision.

“The BoC is in a tough spot, with a weak labor market and slumping economic growth. From our perspective, we think when they start cutting rates, a more aggressive pace will probably be needed,” he said. 

Shifting to trade, Arora noted the United States has struck agreements with a majority of its key trading partners, including the European Union and South Korea.

The challenge, he said, is the tariff rates in these deals are higher than the 10% baseline rate announced in April. “This makes today’s effective U.S. tariff rate the highest since the 1930s. So, although short-term trade uncertainty has been reduced, macroeconomic uncertainty remains elevated,” Arora explained.

Overall, the strategist team expects tariffs to have a modest drag on U.S. growth this year, with an economic “soft landing” still the most likely outcome, he added.

Pivoting to China, Arora said the country’s top leadership re-emphasized their commitment to economic growth during a recent Politburo meeting.

However, the government’s 5% annual growth target may be difficult to achieve in light of macroeconomic headwinds. “China is confronting a struggling property sector, elevated youth unemployment and a slowdown in manufacturing,” Arora remarked.

This strengthens the case for potential stimulus in the months ahead, he said, adding that Chinese stock valuations still look relatively attractive when compared to their U.S. counterparts.