US-Canada Trade War Escalates

In focus today

In the US, the July PCE inflation figures, the Fed’s preferred measure, will be released in the afternoon. In June, PCE inflation was 3.7% y/y, still way above the Fed’s target. Core inflation also remains elevated and was at 3.3% in June. Keep in mind that US Bureau of Economic Analysis will update their methodology for their calculation of PCE at the September release, which is expected to decrease core PCE by 0.2 percentage points for the August PCE figures.

In Sweden, producer prices for July will be published this morning. PPI leads consumer prices by around 3 months, so the summer statistics provide signals about how inflation may develop in the autumn. In June, producer prices were unchanged m/m, but over the past year they have risen by more than 7%.

Economic and market news

What happened overnight

In US-Canada relations, trade tensions have escalated further after Canada announced retaliatory tariffs of up to 50% on USD 20bn of imports from the US, following Trump’s plan to raise taxes on cars and auto parts from Canada. The measures appear proportional and aimed at strengthening Canada’s negotiating position, but they add uncertainty for businesses on both sides of the border and risk further pressure on prices and supply chains. As Canada goes “tit-for-tat” the Trump administration is said to be weighing additional measures against it.

In commodities, Brent crude fell toward USD86 per barrel on Wednesday, extending losses into a third consecutive session following reports that Iran and Oman discussed the establishment of a “temporary joint maritime corridor” in the Strait of Hormuz. Technical talks between the two sides are set to continue as they work toward a permanent maritime corridor. Oil prices have come under pressure this week after Washington’s latest measures to intensify economic pressure on Iran proved less aggressive than markets had expected, with the US stopping short of imposing secondary sanctions on Iran’s trading partners.

What happened yesterday

In Sweden, the Riksbank minutes were more hawkish than the press release and monetary policy update suggested. The board is unanimous that the next step will be a rate hike, but the timing remains uncertain. Compared with the June meeting, members now see the economy and resource utilisation approaching normal levels, while the current policy stance is viewed as somewhat expansionary. Several members also highlighted still-strong inflation momentum, which we expect to be a key focus ahead of the September meeting. Overall, the board appears more concerned about the outlook and more ready to act, but not in a hurry. Unless inflation or price plans surprise on the upside, the first hike could be delayed from September to November.

In the US, consumer confidence weakened further in August, with the Conference Board’s Consumer Confidence Index falling to 89.4, below consensus expectations of 91.2 and the previous reading of 90.8. The assessment of the current situation improved, while expectations for the future declined. Labour market perceptions also strengthened, as more respondents viewed jobs as plentiful, although overall labour market sentiment remains on the weak side. Plans for major purchases were mixed, with intentions to buy cars and homes declining, while planned vacations increased. Overall, the release does not provide a clear market signal.

In the euro area, The German Ifo index rose by more than expected in August. The current assessment index rose to 88.5 (cons: 87.0, prior: 86.6) which is the highest level since 2024. Expectations rose to 89.1 (cons: 87.5, prior: 86.6) and are thereby almost back at the pre-war level. The evidence of a clear rebound in the German economy is thus piling up, particularly driven by the manufacturing sector. We expect the rebound to continue going forward as orders are up markedly and fiscal policy supports activity.

In Denmark, retail sales for July increased by 1.3% m/m. This is the third consecutive month with increases of 1.0% and 0.2% in May and June, respectively. This indicates strong private consumption growth, but must be seen from a low level and the average propensity to consume is still on a historically low level. Hence, there is room for even more consumption.

In Hungary, the Central Bank of Hungary cut rates by 25bps to 5.50% in line with our expectation. This is the third consecutive quarter-point reduction, driven by July inflation falling to a decade-low of around 1.2%, well below the bank’s target.

Equities: Equities advanced across regions and most sectors yesterday, although it was hardly a session destined for the history books. Beneath the surface, the dominant factor was the 3% decline in oil sending the energy sector lower. The cyclical rotation continued, with cyclicals moving higher again while defensives lagged, including another decline in Consumer Staples.

The VIX remains anchored around 15, where it has traded for some time, and many traders will probably describe the market as increasingly dull. In our view, that is no cause for disappointment. If both oil and rates can settle down, equities should be able to grind gradually higher over the coming months. Asian markets are firmer again this morning, while US and European futures are trading broadly around yesterday’s levels.

FI and FX: US yields and oil prices moved lower yesterday, with Brent falling below USD90, as rumours stirred that there might be renewed hope for diplomacy between the US and Iran. EUR/USD was little changed however, as European rates declined as well. USD/CAD continued its recent drift higher as US-Canada trade tensions have resurfaced yet again. In Scandie markets, the Riksbank minutes were not enough to move markets, but potential profit taking in NOK/SEK nevertheless took the SEK for a rollercoaster ride yesterday.