Key Takeaways:
- Trade Policy Shift: The U.S.-U.K. deal establishes a tariff template, with potential inflationary effects as other deals follow.
- Revenue Shortfall Risk: Tariff and DOGE savings fall well short of offsetting planned tax cuts, raising fiscal sustainability concerns.
- Deficit Projections Widen: U.S. budget deficits are set to rise sharply, with markets responding via higher bond yields.
- Credit Rating Impact: Moody’s downgrade and rising global bond yields are applying upward pressure on U.S. Treasury yields.
- Canada Policy Pivot: Post-election, the Bank of Canada is expected to resume rate cuts as part of its economic support strategy.
Trade Deal and Inflation Implications
U.S. Treasury Secretary Scott Bessent has assumed a more visible role in articulating the Administration’s trade policy. The first major trade deal—struck with the U.K.—serves as a blueprint for roughly 100 upcoming negotiations. Though the U.K. is a minor trade partner, the deal introduces a 10% base tariff, with room for reciprocal and sector-specific adjustments. On average, the effective tariff rate could reach 15%.
Given that the U.S. imports approximately $3 trillion in goods annually, expected tariff revenue could total $450 billion. Paired with an estimated $200 billion in savings from DOGE-related layoffs, total fiscal gains may reach $650 billion. However, these are far from sufficient to fund tax initiatives, including extensions of the 2017 tax cuts and new policies like eliminating tax on tips—estimated to cost over $1 trillion.
There is further complexity:
• Higher tariffs may discourage spending, reducing expected revenue.
• Roughly half of surveyed businesses report plans to raise prices, regardless of direct tariff exposure.
• Rising “prices paid” indicators in purchasing manager surveys suggest renewed inflation pressures.
United States
ISM Prices
Source: ISM (Institute for Supply Management),
April 2025
If tariffs remain modest, revenues fall short. If aggressively implemented, the economic disruption is likely severe.
Fiscal U-Turn and Growing Deficit Concerns
Despite earlier ambitions to reduce the deficit to 3% of GDP, the Administration’s 2026 budget plan is projected to add $2 trillion in new deficits—approximately 8% of GDP. The Congressional Budget Office (CBO) forecasts a nearly $2 trillion deficit for 2025, with higher deficits expected beyond 2029, possibly exceeding $2.5 trillion annually.
These projections are based on optimistic assumptions. In reality, trade tensions and slower growth may reduce tax revenues further. The bond market has responded with higher yields, reflecting rising concerns over fiscal sustainability.
Adding to pressure, Moody’s has downgraded U.S. sovereign debt, joining S&P’s earlier move from 2011. While not unexpected, it may contribute to marginally higher borrowing costs. Simultaneously, rising Japanese bond yields are drawing investor attention away from U.S. Treasuries, weighing on demand and pushing yields higher.
U.S. Government Budget Balance (billions of U.S. dollars)
Source: U.S. Congressional Budget Office, Bloomberg
Canada’s Post-Election Outlook
Newly elected Canadian Prime Minister Mark Carney met with President Trump on May 6. Carney, a former Governor of both the Bank of Canada and Bank of England, brings credibility and experience, which resonated with the U.S. administration. While no formal agreements emerged, the tone was constructive—an achievement in itself.
With Canada’s political landscape now stabilized, the Bank of Canada is expected to resume its rate-cutting path to support the economy pre-emptively.
The commentaries contained herein are provided as a general source of information based on information available as of May 27, 2025 and should not be considered as investment advice or an offer or solicitations to buy and/or sell securities. Every effort has been made to ensure accuracy in these commentaries at the time of publication however, accuracy cannot be guaranteed. Market conditions may change and Caldwell Investment Management Ltd. accepts no responsibility for individual investment decisions arising from the use or reliance on the information contained herein. Investors are expected to obtain professional investment advice.
Published on May 27, 2025