At the core of his view on macro risks are the correlations between nominal GDP growth and bank revenues and the possible impact on credit. Tariffs, he notes, could negatively impact GDP and revenue growth for the banks, and potentially add to loan losses as well. . All of that would be bad news for the banks.
Despite that, the market has not fully priced in the GDP shock that would come with tariffs. Wessel says that this seems to reflect a degree of consensus that a deal could be struck between the US and Canadian governments. Should tariffs come, and if no agreement is made, there may be a correction in Canadian financials stocks, but Wessel notes that the market’s current stance is informed by history. During the first Trump administration he made bellicose tariff threats only for policy to manifest as something more muted and digestible. Right now, markets appear to be expecting a similar outcome.
The threat of tariffs has also spurred a degree of consideration around Canadian policy makers adopting more pro-growth fiscal policy, including removing internal trade barriers, and other means of stimulating economic growth like a more favourable regulatory environment for the energy sector. Wessel argues that some of those policy shifts may help support the banks should they be successfully implemented.
There are also calls to shift Canadian fiscal policy more fundamentally, cutting deficits. Wessel described Canadian fiscal policy for the past decade as “terrible” and argues that a more pro-growth fiscal policy could spur economic growth and support Canadian bank stocks. Possible cuts to Canadian spending, he notes, might provoke some short-term pain for the economy and for the banks.
“There could be some very painful cuts and depending on how those cuts are arranged and what their impact is on GDP growth, they could impact the financial sector,” Wessel says. “Many have argued that the current government has adopted a short-term gain, long-term pain approach, and the next government, by necessity, will have to adopt a short-term pain, long-term gain approach.”
