Category: Market Action

I was pleased to see the following:

When European Union head Ursula von der Leyen sat alongside Donald Trump at his Turnberry golf resort in Scotland last year, she promised Europeans that accepting a blanket 15 per cent U.S. tariff on EU exports would buy the continent “predictability and stability.”

Some critics now see the trade deal as a one-sided capitulation that instead paved the way for an ongoing cycle of American economic coercion.

First came U.S. efforts to reclassify certain European industrial goods to impose higher tariffs. Now, a fresh battle has emerged over European efforts to levy a digital services tax on U.S. tech giants — a dispute that echoes Washington’s recent attempts to dictate tax terms to Ottawa.

No sooner was the Turnberry deal ratified by the European Parliament than Trump was on Truth Social, threatening to override the entire accord by slapping 100 per cent tariffs on any European nation that implements or expands tech taxes.

As European resistance to Trump’s demands stiffens, some lawmakers are looking at Mark Carney’s dramatic exit from the U.S. trade table not as a reckless gamble but as a lesson in how to stand up to a bully.

Former French ambassador to the U.S. Gerard Araud posted that “Canada should show the way to the EU: with Trump, only firmness pays off.”

I thought we gave up on the Digital Sales Tax too easily – lots of US states have one! We should be bringing it back in and coordinating our efforts, rates and definitions with the EU.

Strange goings-on in the preferred share market today, with the index plummetting at the close with TXPR (price) down 41bp on the day – on nothing but little puffs of air:

• BMO.PR.E down 1.47%
• CM.PR.S down 1.22%
• ENB.PR.T down 0.88%, almost all of it on 407 shares traded on the close
• ENB.PR.Y down a mere 0.38%, all of it on 490 shares at the close
• IFC.PR.A down 1.63%, all of it on 401 shares at the close
• NA.PR.C down 1.23%, most of it on 500 shares at the opening
• TD.PF.A down 1.22%, a big chunk of it at 4pm on 601 shares
• TD.PF.I down 1.37%, about a third of it at 4pm on 481 shares at 4pm

There’s not a lot of depth to this market!

PerpetualDiscounts now yield 5.65%, equivalent to 7.34% interest at the standard conversion factor of 1.3x. Long corporates yielded 5.24% on 2026-08-26. Therefore the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has widened to 210bp from the 200bp reported August 19 to 200bp.

The Boston Fed has published a paper by Philippe Andrade, Omar Barbiero and Alvaro Silva titled How Much Did Labor Productivity Gains Offset the Inflationary Impact of the 2025 Tariffs?:

In 2025, the average realized tariff on U.S. imports rose from about 2.5 percent to about 10 percent. The resulting increase in U.S. firms’ input costs had the potential to raise inflation significantly and explain why inflation remained significantly above the Federal Reserve’s 2 percent target last year.

On the other hand, as the tariffs took hold, U.S. workers’ productivity grew, which could have helped companies reduce their costs and thereby mitigate inflationary pressures from the tariffs. To study the extent to which productivity gains may have offset the tariff-driven cost increases, the authors construct measures of sectoral increases in input costs induced by the new tariffs and compare them with sectoral labor productivity gains.

Key Takeaways:

• In 2025, the sectors that were more affected by tariffs relative to other sectors experienced significantly greater labor productivity growth, mitigating the cost increases induced by the new trade policy.
• The sectors that were more exposed to tariffs also experienced a decline in the labor share—the proportion of a sector’s value-added that’s allocated to worker compensation—implying relatively higher profits and return to capital in these sectors.
• Mapping production costs to aggregate core inflation indicates that on net, tariffs and labor productivity gains contributed an estimated 0.5 percentage point to core PCE inflation in 2025. Wage growth added another 1.9 percentage points.
• If these cost components’ combined contribution to inflation was only 2.4 percentage points, then tariffs alone may not explain the persistence of 3 percent core PCE inflation last year.

The BoC published two new Staff Analytical Papers today.

The first, How Do Interest Rates Spur the Housing Market: Exploring Nonlinear Effects, is by Benjamin Straus, Stéphane Surprenant and Kerem Tuzcuoglu:

In this note we examine how monetary policy affects housing demand, supply and prices in Canada, and whether these effects vary with labour market conditions. Using state-dependent local projections identified with narrative monetary policy shocks, we find that lower interest rates have larger effects when unemployment is low. Easing boosts resales quickly, raises housing starts with a delay, and increases house prices persistently. Because demand tends to respond more strongly than supply, monetary policy appears unable to alleviate housing affordability pressures and may instead intensify them when labour market conditions are strong.

The second, 2025 Methods-of-Payment Survey Report: Cash in an Increasingly Digital and Mobile Economy, is by Marie-Hélène Felt, Saika Pacouloute and Angelika Welte:

The Methods-of-Payment (MOP) survey provides key insights into Canadians’ cash management and payment behaviour. In 2025, more than three in four adults report keeping cash on hand. Perceptions of cash remain positive and stable, and most Canadians do not plan to stop using it. At the same time, several indicators in the 2025 data suggest that patterns of cash use may be changing. Contactless card payments dominate in-person payments, with growing use of mobile devices.
…
Key perceptions that influence payment behaviour and choice relate to acceptance, ease of use, cost and security. Overall, trends in perceptions are stable and continue the patterns observed in recent years (Chart 4). In 2025, consumers considered cash to be the least costly and most secure payment method. By contrast, contactless card payments were seen as easier to use but less secure than cash or chip and PIN card payments. Cash also continued to be viewed very positively in terms of ease of use and acceptance. However, consumer perceptions of cash have gradually declined from the post-pandemic rebound levels observed in 2022.

I’m surprised that privacy did not warrant a mention a motivation for using cash!

The US Treasury is resurrecting Operation Twist:

The Treasury Department made a surprise move Wednesday after bond yields hit their highest levels in almost two decades, doubling its planned purchases of longer-term bonds and easing pressure on the market.

Bonds rallied, driving yields lower, after the announcement, providing some relief after a sell-off earlier this week sent yields around the globe to their highest levels in years.
…
The Treasury Department said it will at least double the size of buybacks from September to early November, focusing on longer-dated bonds from 10-year to 30-year Treasuries, according to a statement.

The 30-year yield dropped nine basis points to 5.2% after the announcement, providing short-term reprieve. The drop comes one day after the 30-year yield rose above 5.3%, hitting its highest level since 2007.

Buybacks from the Treasury Department are a standard operation in bond markets, but the timing of the announcement after a major sell-off highlights the Trump administration’s sensitivity to the rise in yields.

PerpetualDiscounts now yield 5.60%, equivalent to 7.28% interest at the standard conversion factor of 1.3x. Long corporates yielded 5.28% on 2026-08-18; allowing for 1bp decrease in yield due to ZLC price gains on 2026-8-19 results in 5.27% on 2026-08-19. Therefore the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has remained constant at the 200bp reported August 12 to 200bp.

Bond markets are getting indigestion:

Long-term borrowing costs from the U.S. to Germany and Japan hit their highest in decades on Tuesday due to ​ballooning government debt and geopolitics, raising borrowing costs for companies and households and complicating ‌policy.

Bond markets are entering an era where the inflation and interest rate outlook is more uncertain and the upside risks are greater, as U.S. President Donald Trump’s policies — from tariffs to war — upend the global order.

Debt levels in developed countries are reaching thresholds that look increasingly unsustainable, with the U.S. debt pile nearing US$40-trillion. The war in Iran is dragging on, ⁠pushing up ​oil prices and inflation and hitting global growth.

In addition, massive borrowing by technology companies to fund a buildout of artificial intelligence infrastructure is competing with demand for government bonds.
…
Thirty-year bond yields in the United States, the world’s deepest ​and most systemically crucial government bond market, hit their highest since 2007 as oil prices rose back above $90, ‌fanning inflation worries as U.S.-Iran peace hopes faded.

Their yields pulled back in early afternoon trading with U.S. 30-year yields last down 2.4 basis points at 5.286 per cent.

In Japan, inflation angst and expectations that the central bank could hike interest rates as early as September pushed 10-year borrowing costs to a three-decade high just under 3 per cent..

In Europe, Germany’s 10-year Bund yield touched its highest since 2011, French yields were at their highest since 2008 and Britain’s 30-year borrowing costs neared peaks hit in May that marked the highest levels since 1998.

Sorry about the delay for this post – a routine update of the WordPress software turned out to be exceptional!