President Trump Threatens 35% Tariffs on Canada

Trump tariff aggression pushes yields higher. US Treasurys sold-off today after President Trump threatened a 35% trade levy against some Canadian goods. The announcement continued this week’s tariff-heavy theme, and the uncertain outlook has led to diminished confidence in US assets. The yield curve steepened significantly, with the 2-year up 1 bp to 3.89% while the long-end climbed 6-8 bps. The spread between 2-year and 10-year yields is now 52 bps, ~12 bps off multi-year highs.

President Trump proposes a 35% tariff on Canada. President Trump announced the possibility of a 35% tariff on Canadian imports last night, which came alongside an announcement of 15% – 20% blanket tariffs on most other U.S. trading partners. The new tariff would take effect on August 1st and increase the current 25% tariff on Canadian goods that fall outside of the USMCA exemption. In response, Canadian Prime Minister Carney said that the Canadian government will defend its workers and businesses as it continues trade negotiations up until the August 1st deadline. He also said that Canada has made “vital progress” to stem the North American Fentanyl trade, which has been a key topic that the U.S. has used to justify tariffs globally. To that end, hope remains that Canadian tariffs could be more muted than the President originally announced. Just today, Trump said that he was “going to see” about possible Canadian tariff exemptions, and that a call from Canada today was “fairly well received.”

Inflation week awaits. Next week’s slate will be headlined by June CPI and PPI, where the former is expected to rise from May across all readings. Core CPI is expected to be 0.3% MoM (versus 0.1% in May) and 2.9% YoY (versus 2.8% in May). The expected acceleration could further delay rate cuts, as most Fed officials have emphasized concerns about tariff effects on price pressures. Meanwhile, core PPI is expected to be mixed, with the MoM measure forecasted to rise by 0.1% and the YoY reading to slow by 0.3%. Ahead of the data, Fed Funds futures have a July rate cut priced as 7% likely versus 70% by the end of September.