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It’s an old meme, but a good one.

The US dollar rallied earlier but has now given it all back and more. The new month begins on Monday.

This article was written by Adam Button at www.forexlive.com.

Canada is running a large fiscal deficit than a year ago and it got worse in November at -8.21 billion compared to -$4.01 billion a year earlier.

All that said, Canada is running a much smaller fiscal deficit than the US and virtually every other developed country (as a percentage of GDP). Canada does have some firepower if there is a tariff war.

This article was written by Adam Button at www.forexlive.com.

• Direction of travel is clear, pace is pragmatic
• ECB should exercise agile pragmatism in pacing future cuts
• Rise in long-term yields limiting the easing of overall financial conditions

This is some clear communication. The market sees about 75 bps in easing this year to 2.00%.

This article was written by Adam Button at www.forexlive.com.

About 10 months ago, the Canadian government announced it was raising capital gains taxes.

However the government never passed the legislation and now the government is on the brink of falling. Normally, the tax agency implements changes based on announces and assumes the legislation will come. That has had them telling people they need to pay the higher tax rate.

That’s led to some blowback and confusion. Now the government has released a statement saying the capital gains hike is dead.

The whole thing is a bit of a fiasco. I’m certainly not complaining about the outcome though and it’s something that many Canadian companies, executives and entrepreneurs have complained about.

Officially, this is just a ‘deferral’ but given the polls and the positions of Trudeau’s potential successors, it’s assuredly dead.

Separately, Canada’s carbon tax will die a similar death, no matter the results of the election.

This article was written by Adam Button at www.forexlive.com.

There is an interview with Bill Gates in Wired today and he says he ‘absolutely’ believes that artificial general intelligence is coming in ‘the next few years’.

He also has a warning for what it will mean.

Anybody who analogizes this to electricity, tractors, microcomputers,
they don’t get it. This is not a productivity aid for humans. This is
something that exceeds human capability. It is not bounded in any way,
and it is happening very, very quickly. Just looking back on previous
tech revolutions and saying, “OK, that all worked out,” is no guide for
this one.

He goes onto say that there is no mechanism to slow it down.

I think all this talk about tariffs and interest rates and what’s happening in the market right now is woefully myopic because a huge storm is approaching for everyone and every part of the economy.

Unfortunately, Gates isn’t given an opportunity to elaborate on the macro impacts but the answer is: No one knows how it will work out. I’m sure it will be the biggest economic disruption in human history.

See: Don’t bet on an AI utopia.

This article was written by Adam Button at www.forexlive.com.

In a competitive environment, consumers win.

In response to DeepSeek, Wired reports that OpenAI is rushing out its o3-mini model and will make it free to everyone.

“OpenAI is preparing to launch a new model today, ahead of its originally
planned schedule. The model, o3-mini, will debut in both API and chat.
Sources say it has o1 level reasoning with 4o-level speed.”

The report also touches on some interesting internal debates and friction at OpenAI around releasing products.

This article was written by Adam Button at www.forexlive.com.

It’s three months until we will get the first look at Q1 GDP.

This week, the final GDPNow reading was revised down 0.9 pp on the day before the release. Following this indicator has some value in the final stretch before the GDP release but it’s way too early to follow it for Q1.

This article was written by Adam Button at www.forexlive.com.

The WSJ late yesterday cited some ‘Trump advisors’ who offered little in the way of insight but outlined some of the possible outcomes on the weekend to consider:

• the administration appears undecided on whether to impose tariffs on all imports from those countries
• administration officials are preparing to opt for more targeted measures instead
• Trump is still likely to announce some sort of trade action by Saturday, but it may only affect steel and aluminum
• Broader tariffs could include major exemptions like oil
• administration could also announce new tariffs by Saturday, but with a grace period before they are implemented
• Some in administration question the legality of using International Emergency Economic Powers Act, especially in this case
• A Canadian official said negotiations were ongoing on creating a joint “North American fentanyl strike force.”

The lack of any real plan from the US administration this late in the game makes me highly confident that across-the-board tariffs are a bluff. The market is also priced that way with just 50 bps in Canadian easing priced in for the remainder of this year, despite BOC modelling showing that tariffs would cause a 2.5% contraction in GDP.

This article was written by Adam Button at www.forexlive.com.

There are separate comments from Mexico’s economy minister:

• Tariffs would impact millions of American families, would be a ‘strategic error’
• Tariffs would make fruit, vegetables, meat, beer, cars, household appliances and medical equipment more expensive in the USA

We’ve heard all of these talking points before but today’s trade will very much be about tariffs with Trump’s self-imposed deadline coming on Saturday.

Separately, Canada’s Trudeau:

• Any Canadian response to tariffs would be purposeful, forceful and immediate

This article was written by Adam Button at www.forexlive.com.

There is plenty of optimism about the US economy and the stock market in 2025, especially with the potential for a big corporate tax cut but the biggest source of optimism should be from the Fed.

They have plenty of dry powder with rates at 4.25-4.50% and inflation is coming down.

Core PCE y/y is at 2.8% and headline is at 2.6% but short-term readings highlight that the trend is lower, especially when combined with real-time metrics like falling rent.

On core inflation, the 6-month annualized rate ticked down to 2.3%, the lowest in 2024 while the 3-month annualized rate dropped to 2.2% from 2.6% in November.

On the headline side, the 6-month annualized rate was 2.2% (vs. 1.9%), while the 3-month annualized rate was 2.5% (vs. 2.2%). Those ticked up on base effects and energy but aren’t problematic numbers.

At the same time as the PCE data, we also got a speech from the Fed’s Bowman, who is the biggest hawk among Fed governors. Despite her stance, she said she still expects rate cuts this year.

Add all that up and market pricing for Fed cuts moved up to 50 bps this year from 47 bps today.

Now there are a world of concerns and uncertainties around politics but if you ignore all of that, the Fed is sitting in a wonderful position — maybe the best position it’s been in since the financial crisis. It has a good economy, slowly declining inflation that’s only modestly above target, and abundant dry powder.

If the US economy was ever faced with some kind of shock, it could easily cut 200 basis points and still have plenty of ammunition left. That’s a strong Fed put for risk assets.

S&P 500 futures are up 22 points, or 0.4%.

This article was written by Adam Button at www.forexlive.com.

• Inflation still elevated with upside risk
• Still expect inflation to moderate but need data to confirm that before more rate cuts
• Rate cuts still expected this year but future moves should be cautious and gradual with time to assess data
• Current policy in a good place for Fed to monitor data, be clear on economic impact of Trump administration policies before moving rates again
• Fragility of supply chains, geopolitical tensions, release of pent-up demand post election, other factors could also feed inflation
• First quarter data important to how quickly inflation will improve going forward
• Labor market not especially tight but wage growth still inconsistent with 2% inflation target
• Watching long-term Treasury yields as possible sign markets are expecting tighter policy will be needed to control inflation
• Not clear monetary policy is exerting much pressure on economy, with easy financial conditions and high asset prices possibly slowing progress on inflation

Bowman is the hawk at the Fed and these comments aren’t exactly staking out a truly hawkish position.

This article was written by Adam Button at www.forexlive.com.

Core PCE (excluding food & energy):

• Prior was +2.8%
• Core m/m +0.2% vs +0.2% exp
• Unrounded core PCE +0.156% vs +0.1149% m/m prior
• PCE excluding food, energy and housing +0.2% m/m vs +0.1% m/m prior

Headline PCE:

• Headline PCE +2.6% y/y vs +2.6% expected
• Deflator +0.3% m/m vs +0.3% expected
• Unrounded headline +0.2557% vs +0.128% m/m prior

Consumer spending and income for December:

• Personal income +0.4% vs +0.4% expected. Prior month +0.3%
• Personal spending +0.7% vs +0.5% expected. Prior month +0.4% (revised to +0.6%)
• Real personal spending +0.4% vs +0.3% prior
• Savings rate 3.8% vs 4.4% prior

The unrounded core PCE number almost made it to +0.1% but overall these numbers are in-line with estimates. The other standout is the strength in the consumer, which also isn’t a big surprise given the high consumption reading in yesterday’s PCE report.

Overall, the US dollar is little changed on the report.

This article was written by Adam Button at www.forexlive.com.