Americans are heading home for the ritual Thanksgiving feast. And this year, they are more thankful than ever that even after President Trump’s unprecedented (and mostly illegal) tariff barrage on the rest of the world, the tariffs did not wreak the economic havoc many feared.

The levies still left a mark and it is an ugly wound that spans the country. Consumers are paying more for goods, which taxfoundation.org estimates was akin to a $1,200 tax hike. Lower income families bore the biggest burden because tariffs hit essentials like apparel, furniture, electronics, car parts, and food. Americans who liked to start their day with a take-out coffee from Dunkin’ saw prices rise between 10–20%, depending where they lived. Starbucks clients avoided the tariff price hike because they were already charging around $1.00 more for a medium drink.

The Worst is Yet to Come

Tariffs also hit the supply side of the economy. American manufacturers pay more for imported metals, components, raw materials, and almost anything sourced from outside the United States. The importer pays the tariff, not China, Europe, Canada, or any other country. So when Trump slaps a 50 percent duty on Canadian steel, American companies suddenly face steel that is 50 percent more expensive. It does not take a rocket scientist or even an AI to see what happens next. Production costs rise, final prices increase, and no management team or investor wants to watch profit margins shrink. Fed officials want you to believe otherwise.

Fudging the Facts to Fit the Narrative.

Fed Governor Christopher Waller claims that “inflation through September continued to show relatively small effects from tariffs and support the hypothesis that tariffs are having a one-off effect raising price levels in the U.S. and are not a persistent source of inflation.” He then goes on to say that if you ignore the tariff effects, inflation is closer to the Fed target of 2.0%.
His argument is flawed. A policymaker can ignore the tariff effects but consumers do not have that privilege and the proof is in the Consumer Confidence report released yesterday.

Households are Unhappy

The confidence survey painted a downbeat picture. Its headline index dropped 6.8 points to 88.7, one of the weakest readings since spring, and people are feeling it. Views on current conditions slipped as fewer households felt good about business prospects or the job market. Expectations took an even bigger hit. That index slid to 63.2 and has now spent ten straight months below the level that often hints at recession trouble.

Americans blamed the usual suspects. Prices are still high, tariffs are adding strain, political uncertainty is everywhere, and the federal shutdown exacerbated the situation. Inflation expectations are sticky at 4.8 percent, and people are less confident about their financial situation today and down the road. Big purchases suddenly looked less appealing, and even discretionary spending plans were trimmed as recession worries nudged higher.

Rate Cut Odds Soar

Traders have been jumping on and off the easier monetary policy bandwagon like tourists aboard Vancouver’s Big Bus Tours. Rate cut odds were over 91% a month ago, then they plummeted to just 30% last week. Today they are sitting at 83%. How is that for conviction?
Comments from New York Fed President John Williams suggesting that further monetary policy easing may be appropriate, alongside weak and disappointing economic data, provided the catalyst for the latest rally. The remarks also served to drive the US dollar lower and boost the Canadian dollar by default.

Loonie Down But Not Out

The Canadian dollar is the second worst performing major G-10 currency this year, rising just 1.8% since the beginning of the year. The worst is the Japanese yen, which has gained a mere 0.2% as of November 27. The Swiss franc and euro are the top with gains above 11.0%.

But what sets the Canadian dollar apart is the rapid and unprecedented deterioration in the trade relationship with its biggest, closest, and most important trading partner. President Trump has a “hate-on” for Canada, which may be residue from his testy, if not hostile, relationship with the previous government. Trump is known to hold a grudge and his animosity is now aimed at Prime Minister Mark Carney.

Mr. Carney has concluded that the trade relationship with the US is so damaged it may never return to its former glory, and he is taking measures to alleviate the damage. His government is actively pursuing strategies to develop Ontario’s mineral-rich Ring of Fire, supporting a new oil pipeline from Alberta to the West Coast, while rebuilding bilateral relationships with India and China.

It’s a long-term strategy and in the short term it is US monetary and trade policy that is driving currency markets. That suggests USDCAD will remain in a 1.3860–1.4400 range for the foreseeable future.

Thanksgiving leftovers from this trade war will be on next year’s economic lunch.