04:22 PM EST, 01/21/2025 (MT Newswires) -- The Toronto Stock Exchange rose for a sixth-straight session on Tuesday as easing inflation raised the odds for a Bank of Canada rate cut on Jan.29, while economists tried to assess the impact of Donald Trump's pledge to impose tariffs on Canadian imports.

The S&P/TSX Composite Index closed up 110.05 points to 25,281.63. Among sectors, Battery Metals, up 2.29%, and Technology, up 1.57% led gains, with Base Metals, down 1.32%, and Energy, down 1.30%, the biggest decliners.

Despite investor optimism, risks on price growth are still seen tilted to the downside due to the likelihood of a tariffs war with the United States, after Donald Trump said he will impose tariffs on imports on Canada on Feb.1.

CIBC today published a special report with a bottom up analysis on the potential impact of Trump's planned tariffs on Canadian Fixed Income and FX. CIBC provided four key tariff scenarios that could play out over the coming quarters, including: 1. a 10% tariff, with commodities and autos excluded; 2. a 10% tariff, with commodities excluded (autos included); 3. a 20% tariff, with commodities and autos excluded; and 4. a 20% tariff, with commodities excluded but autos included.

According to CIBC, the cost to GDP is estimated to range between 1.35% and 3.25%. It said the impact on the Bank of Canada's terminal rate ranges between 1.65% (Scenario 4) and 2.2% (Scenario 1). Current market implied terminal is 2.75%, suggesting a potential for 2 times to 4.4 times more cuts on unfavorable tariff outcomes, it added.

On FX, CIBC said the impact on USD-CAD ranges between 1.4610 and 1.4960 depending on the scenario. Currently, CIBC estimates there is a premium baked into USD-CAD exchange rate on tariff uncertainty. On implementation, CIBC suspects that CAD depreciation absorbs some 25% to 30% of the tariff -- the rest will be absorbed by importers, exporters and consumers.

RBC noted the tick lower in December inflation to 1.8% was above its own assumption for a 1.5% increase, but largely due to a smaller than assumed reduction in prices from the temporary GST/HST holiday in December, and still slightly below market expectations for a 1.9% read. "Controlling for the tax distortion, price growth was mixed but is still consistent with further signs of underlying easing in price growth," it said.

RBC noted the CPI data will be impacted by the tax holiday into February, but also said a weakened Canadian GDP and elevated unemployment rate, "with the potential for protectionist U.S. trade policy to make both worse", is pushing inflation expectations from businesses and households lower. That, the bank added, leaves the risks on price growth "tilted to the downside" and argue for further BoC interest rate cuts.

Meanwhile, Thierry Wizman, Global FX & Rates Strategist at Macquarie, believes that, in the final analysis, countries that are U.S .allies, Canada, Mexico, Europe, the UK, Japan, will make the requisite concessions to avoid permanent tariffs. He said: "Whether the US turns up the heat in interim negotiating period, or whether it institutes full tariffs to "show it means business" remains a source of uncertainty, of course. But within a definite period of time, those full or tentative tariffs that are put on to extract concessions will be reversed."

David Doyle, head of economics at Macquarie, noted separately that headline CPI today came in +0.2% MoM on a seasonally adjusted basis. Measures that exclude the effects of indirect taxes were slightly more elevated. This includes median/trim, where the average was +0.26% month-over-month and +2.45% year-over-year.

Doyle said the sales tax holiday should provide further relief to the headline during January's release, adding this should then unwind in February and March. Overall, in the first half of 2025 Macquarie suspects inflation data will be subdued in Canada given the size of the output gap and the deflationary impact from the immigration policy shift on shelter costs. In Macquarie's view, this is an "under appreciated trend" that is likely to shape the BoC's decision-making process in coming months.

Macquarie continues to anticipate four consecutive 25 bps cuts from the BoC in the first half of 2025, with the policy rate falling to 2.25%. Doyle said this baseline view assumes no substantial tariffs are imposed on Canada. Threats of tariffs may persist and could weigh on fixed business investment, a topic addressed in the BoC's Business Outlook Survey released on Monday, he added.

West Texas Intermediate (WTI) closed sharply as Donald Trump declared a national energy emergency on the first day of his return to the U.S. presidency and postponed to Feb. 1 plans to immediately impose a 25% tariff on imports from Canada, which supplies 60% of U.S. oil imports. WTI oil for February delivery closed down US$1.99 to settle at US$75.89 per barrel, while March Brent crude closed down US$0.86 to US$79.29.

Gold traded higher late afternoon on Tuesday as the dollar turned sharply lower after Donald Trump deferred a promise to impose punishing tariffs on Canada and Mexico to Feb.1. Gold for February delivery was last seen up $7.20 to US$2,755.90 per ounce.