'Trump doesn't have a lot of credibility with his day-to-day statements': Devlin on CUSMA threats

Key Concepts

• USMCA (United States-Mexico-Canada Agreement): The trade agreement governing North American commerce, currently subject to political volatility and threats of non-renewal.
• Confidence Channel: The economic mechanism where uncertainty regarding trade policy negatively impacts business investment and consumer spending.
• Headline vs. Core CPI: Headline CPI includes volatile items like energy and food; Core CPI excludes these to show underlying inflation trends.
• Stagflation: An economic condition characterized by slow growth (recession) and high inflation.
• Volcker Model: A monetary policy framework named after former Fed Chair Paul Volcker, prioritizing the aggressive suppression of inflation even at the risk of triggering a recession.
• Disinflationary Forces: Factors, such as Artificial Intelligence (AI) implementation, that exert downward pressure on price levels.

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1. Trade Policy and USMCA Uncertainty

Ed Devlin, founder of Devlin Capital, argues that President Trump’s rhetoric regarding the non-renewal of the USMCA is a significant "headwind" for the Canadian economy.

• Market Reaction: While markets initially reacted to the news, Devlin notes that investors have become accustomed to Trump’s unpredictable communication style, leading to a "look-through" effect where the long-term impact is prioritized over short-term volatility.
• The "Confidence Channel": Devlin asserts that the current Canadian economic slowdown is largely driven by Trump’s tariff policies, which have eroded business and consumer confidence.
• Legal Strategy: Devlin warns that even if the US Supreme Court limits the President's ability to impose illegal tariffs, the administration may use the court system to "run out the clock," creating prolonged uncertainty.

2. Inflationary Pressures and Monetary Policy

The discussion highlights the delicate balance central banks must maintain to prevent temporary price spikes from becoming entrenched.

• The Volcker Precedent: Devlin suggests that Tiff Macklem (Bank of Canada) and the US Federal Reserve are following the "Volcker model." This involves a willingness to accept a recessionary environment to prevent a "nasty inflation cycle" where headline inflation (energy/supply chain) bleeds into core inflation and long-term expectations.
• Bond Market Guidance: Devlin notes that bond markets have largely respected the guidance provided by central banks, indicating that the market trusts their commitment to fighting inflation.

3. Economic Outlook and Recession Risks

Devlin provides a nuanced view of the Canadian economy, noting that it is weaker than the Bank of Canada’s previous projections.

• Variables in Growth:
  • Government Spending: A recent weak GDP report was attributed partly to an unexpected decline in government spending.
  • Labor Market: Despite economic headwinds, Canada has seen positive employment reports.
  • Artificial Intelligence (AI): Devlin identifies AI as a potentially significant "disinflationary" force that could help lower service costs, even as commodity prices remain elevated.
• Policy Stance: Devlin supports the Bank of Canada’s "wait-and-see" approach, arguing that given the conflicting variables (weak GDP vs. strong employment), it is prudent to avoid aggressive forecasting and instead monitor market data closely.

4. Notable Quotes

• On the impact of trade rhetoric: "It’s definitely a headwind to the Canadian economy."
• On the strategy for inflation: "When in doubt, fight inflation."
• On economic forecasting: "I wouldn’t be so arrogant as to try to tell you exactly what’s going on. I think we just have to watch the markets and the economy very closely."

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Synthesis and Conclusion

The primary takeaway is that the Canadian economy is currently navigating a period of high uncertainty driven by US trade protectionism and global inflationary pressures. While the threat of a recession remains a concern, the Bank of Canada is prioritizing the containment of inflation over immediate growth, mirroring the historical "Volcker" approach. Devlin concludes that while the situation is not a "hair on fire" crisis, the combination of trade policy volatility and shifting economic indicators necessitates a cautious, data-dependent monetary policy.