Talking Points
April 02, 2026 | 12:59
To the Moon
Economics
Economics
Markets have been whipsawed by almost every twitch in the conflict with Iran; and, specifically, by every bounce in oil prices. After a brief head-fake lower, oil then made like Artemis II and rocketed higher late in the week, with nearby WTI briefly soaring above $113/barrel on Thursday morning. President Trump’s speech did little to soothe concerns that the war could drag on—”another two to three weeks”, but also “back to the Stone Age”—and thus the Strait may remain blocked for some time yet, with no new plans on that front. Accordingly, crude promptly vaulted to its highest level since June 2022 and nearly double the level prevailing in the first week of this year. This latest sprint follows a 41% surge in the monthly average price in March, which triggered a record 26% rise in U.S. retail gasoline pump prices. |
Now, we are all bracing for impact on the inflation readings, and the wait will not be long. U.S. CPI for March is the headline release for the coming week (due Friday April 10), with the spike in gasoline expected to drive overall prices up 1.0% m/m which will, in turn, lift the yearly inflation rate a point to 3.4%. The preliminary result from the Euro Area showed a broadly similar move in March, with prices jumping 1.2% m/m, lifting the annual inflation rate six ticks to 2.5%. Canada’s inflation rate will look very similar to Europe, with gasoline prices also rising by a record 21% last month, which could lift CPI by more than 1% in March alone, kicking the annual inflation rate to about 2.6% (from 1.8%). How long inflation stays at this higher level, or rises even further from here, of course all depends on how long oil prices remain elevated. With the turn of the calendar to April, we have carefully reviewed our scenarios this week (see Art Woo’s Focus Feature for the details), discarding the most optimistic outlook, and adjusting the weights on the various potential outcomes. As a result, we are lifting our assumption on average WTI prices this year by $10 to $85/bbl, and by almost as much next year to $77.5. To be clear, this change was in the works even prior to the latest spike in prices, although that move gave our call one last upward nudge, especially to next year’s projection. Given our estimate that every 10% rise in oil adds about 0.2 ppts to headline inflation, we revised up our call on U.S. and Canadian average inflation this year. Adding a bit of juice is the fact that oil is not the only commodity being heavily affected by the conflict, as fertilizer and aluminum prices have also jumped. Meantime, some product prices, such as diesel and jet fuel, have risen even more steeply than gasoline, in an echo of developments when Russia invaded Ukraine in 2022. Thus, we are now looking at average U.S. inflation this year of 3.4% (peaking at nearly 4% in the spring), up from 2.5% before the conflict began. We are a bit more contained in Canada, but even there, the estimate for this year is now above 3% versus 2.4% in the days of yore (five weeks ago). On the growth front, the impact on the outlook is a bit more nuanced. We have previously noted that the models suggest roughly a one-tick trim in GDP growth for every 10% rise in oil. But it’s not quite that linear—smaller moves have little impact (indeed, a modest increase in crude oil prices is arguably even a positive for Canadian growth). But as oil forges higher and global activity becomes more disrupted, as financial markets shudder on inflation concerns, and as consumers are rattled by rising gasoline prices, the hit to growth can deepen more seriously than the mechanical estimates may imply. At this point we have only been chipping away at our 2026 GDP growth calls, trimming Canada to 1% and the U.S. to around 2%. But the axe is poised above those estimates, and it may fall if financial markets and consumer sentiment truly crack in coming weeks. One reason we are holding our fire on large revisions on the growth front is that the economies are mostly holding up well, so far. Echoing the trend seen in the rest of the industrialized world, U.S. manufacturing activity actually firmed last month, with the factory ISM rising to a sturdy 52.7—the best reading in almost four years. Consumers have not turned tail either: March auto sales were solid at 16.4 million units, or in line with last year’s average. The job market seems to be holding up fine—noting that this is written a day before payrolls—with ADP reporting 62,000 new jobs and jobless claims easing to barely above 200k last week. As a result, we still look for U.S. GDP growth to hover around 2% in Q1, and dip just a bit below there in the next two quarters. Perhaps reflecting the muted impact on activity so far, the Conference Board found that consumer confidence somehow edged up last month, even amid all the grumbling around $4 gasoline. Today marks the one-year anniversary of so-called Liberation Day. Even with a serious spill in the immediate aftermath of the reciprocal tariffs, and despite the recent wobble, the S&P 500 is up 15% in that period, and global stocks are up a bit more than that. Long-term interest rates have swung about in a wide range but are actually barely above levels prevailing that day (10-year Treasuries stood at 4.20%; currently near 4.30%). And even with its recent bounce, the U.S. dollar index is down nearly 3% in the past year. In other words, despite all the trauma in the few days after the tariff announcements, and the war’s reverberations in the past month, the net move in markets has been quite unremarkable. Some of that modest impact reflects the fact that the tariff effect has been muted on the U.S. economy, in large part because of the lack of retaliation by most major economies. Real GDP rose 2.0% in the past four quarters, little different than the 2.3% in the prior year. On inflation, next week’s PCE deflator is expected to show core eased to 2.9% in February, barely budging from the year-ago pace. And the trade deficit on goods and services appears to have settled at around $60 billion per month, a bit smaller than the $75 billion norm in the year before the 2024 election. But while the trade war may have made little impact overall on markets and the economy, it’s tough to say it was a success either, given that U.S. manufacturing jobs have dropped by almost 100,000 in the past year and now account for a record low 7.9% of all payroll positions. Winning? Meantime, the trade war has left some visible scars in Canada, with almost no job growth in the past year and a notable sag in manufacturing output (down 4% y/y in the latest three months). The trade deficit has risen from near balance (or 0.1% of GDP) to $44 billion over the past 12 months (or 1.3% of GDP). And, in part exaggerated by gold sales to other countries, the share of Canadian exports to the U.S. has plummeted to 66.4%, or nearly 10 ppts below the 2024 average of 76%. Even so, the broader economy has hung in, with this week’s monthly GDP report posting moderate gains in the first two months of the year, and Q1 headed for growth of about 1.5%. As noted, we expect only modest growth for all of this year of around 1%, but the economy has managed to keep its head above water. And while Canada is not immune to the shockwaves from the war with Iran, it may be one of the more insulated economies to the conflict, given its status as a net exporter of almost every commodity currently being driven higher—oil, gas, fertilizer, and aluminum. That may help explain how and why the TSX has managed to soar 30% in the year since Liberation Day. |