By Michael O’Neill
This week delivered a jarring mix of diplomacy, dysfunction, and deterrence that left global markets in a holding pattern. Canadian Prime Minister Mark Carney made the trip to Washington to “reset” Canada-U.S. relations. China agreed to meet U.S. officials in Switzerland to discuss how they might begin talking about trade again. And the Federal Reserve finds itself straddling the uncomfortable middle ground between sticky inflation and the risk of softening growth.
It’s chaos. Traders are reacting to almost every soundbite or tweet suggesting an easing of trade tensions with enthusiasm while ignoring the risk of geopolitical tensions.
Carney in Washington: The Start of a Reset
Mark Carney’s meeting with Donald Trump was billed as a relationship reset, but it looked more like a one-man show. Trump—flanked by his ever-adoring entourage—did most of the talking, using the opportunity to revisit old gripes about Canadian trade practices and U.S. auto jobs.
The value of the meeting shouldn’t be ignored. Mr. Carney made it very clear to Trump that Canada is not, nor ever will be, the 51st State of the U.S. Carney’s pedigree as a Central Bank Governor for Canada and the United Kingdom, combined with being held in high esteem by numerous world leaders, government officials and senior corporate leaders, ensured that Trump adopted a more respectful tone than he ever did with Trudeau.
Prime Minister Carney’s post-Trump meeting press release said both countries would continue discussions about “Canada’s openness to building a new economic and security relationship with the United States – based on respect, built on common interests, and to the benefit of both nations.”
Canadian Consumer Reset
On March 27, Mr. Carney said words to the effect that Trump’s economic war and talk of annexing the country meant that the old “Canada and U.S. relationship is over.”
Canadians are responding to the new order with their wallets. Air Canada, WestJet and Porter have slashed routes to major U.S. cities including San Francisco and Miami and increased flights to Europe. Car trips to the U.S. plunged 32% in March, the lowest level since COVID.
Consumers are avoiding American goods and are even willing to pay more for products sourced elsewhere. On Monday, Bloomberg reported how U.S. border towns are being ravaged due to the Canadian boycott in response to Trump. It’s sad. A relationship that thrived for 157 years was annihilated by one man with a book of “Executive Orders.”
“Can We Make a Deal?”
Trump claims Chinese officials called him to talk trade. China says, “not true.” Nevertheless, someone spoke to someone and now Treasury Secretary Scott Bessent and U.S. Trade Representative Jamieson Greer will sit down with Chinese Foreign Minister He Lifeng in Switzerland.
The question is not “Who is hurting the most?” but “who can suffer the longest?” The short answer is China.
U.S. consumers will soon be facing a shortage of goods, sharply higher prices as manufacturers and importers raise prices to offset the Trump tariffs which are being levied on all goods entering the U.S. In effect, the tariffs represent the largest tax hike in history. The Peterson Institute for International Economics claim that Trump’s tariffs will add “hundreds of billions” of additional costs. Americans will feel duped after voting for the man who promised to slash taxes to 0% for individuals earning less than $150,000/year.
China has a different set of issues. The impact of tariffs on the average consumer is more muted because most daily used products are produced locally, and the Chinese government can easily limit price increases. However, luxury goods, some agricultural imports, cars and beef prices rose. The effective U.S. embargo on Chinese imports promises to sharply increase unemployment which is already a problem for Beijing. Youth unemployment was so bad officials stopped reporting the numbers in 2023 and only started again last August. The official unemployment rate for 16–24-year-olds was 16.5% in March.
Both sides need to talk, and both sides need to save face.
The Fed Sits on the Fence
The FOMC did not upset the apple cart. They were expected to leave rates unchanged and maintain a cautious outlook, and they did. They noted that the economic activity was expanding at a solid pace and that the unemployment rate stabilized at a low level. However, they were concerned about “somewhat elevated” inflation and about the increased uncertainty in the outlook. No surprises there.
Bottom Line: Don’t Bet the Farm on a Reboot
It’s tempting to see this week’s developments as the beginning of a broader reset—Canada mending fences, China engaging, the Fed threading the needle. But beneath the surface, the structural issues remain. Nationalism, protectionism, and policy divergence are not going away anytime soon.
For traders and investors, it means keeping positions tight, staying nimble, and treating every headline—good or bad—with a healthy dose of skepticism. The global system might be trying to reboot, but there’s no guarantee the software’s been debugged.
