Market Insights | December 2025
Late-Cycle Signals: Slowing Growth, Policy Tension, and Opportunity in Long Bonds
Key Takeaways:
- Canadian Growth Is Deteriorating: Broad-based sector weakness and labour disruptions point to rising recession risk not yet reflected in bond markets.
- U.S. Strength Masks Emerging Cracks: Headline GDP remains strong, but labour and tariff-related indicators suggest softening beneath the surface.
- Tariffs Are a Latent Economic Drag: Early evidence indicates higher costs and reduced hiring, with broader impacts still to come.
- The Federal Reserve Retains Easing Optionality: Payroll revisions and slowing employment trends provide cover for additional rate cuts despite political noise.
- Long-Duration Bonds Offer Asymmetric Upside: Steep yield curves and underpriced recession risk create compelling capital gain potential in Canadian long bonds.
Canadian Economic Conditions
Canada’s economy showed clear signs of strain in October, with Gross Domestic Product (GDP) contracting 0.3%, driven by widespread labour disruptions and new trade barriers. Eleven of twenty industrial sectors declined, with weakness spanning both goods-producing and services industries.
Manufacturing fell 1.5%, led by a sharp contraction in wood products following U.S. lumber tariffs. Mining and energy output declined 0.6%, while retail trade and construction also weakened. Service-sector disruptions were significant, including a collapse in postal services tied to Canada Post labour action. Offsetting these pressures, the financial sector reached a record high, supported by elevated equity and debt issuance.
Statistics Canada’s early estimate points to a modest 0.1% rebound in November, though the Bank of Canada remains in a cautious holding pattern. Importantly, delaying further policy easing risks deepening the slowdown, reinforcing disinflationary forces and increasing downward pressure on long-term yields; conditions that historically support long-duration government bonds.
Canada October GDP, Components
Source: Statistics Canada
United States: Growth Remains Resilient, Beneath the Surface
U.S. Q3 GDP expanded at a 4.3% annualized pace, though the composition was less inflationary than the headline suggests. Nearly 1.6 percentage points of growth came from an improved trade balance, reflecting higher energy exports and softer goods imports. Government spending contributed modestly, while consumer spending remained solid at 2.4%.
The report points to continued economic resilience, though not overheating. The Atlanta Federal Reserve’s GDPNow continues to track above-trend growth, reinforcing the contrast between U.S. and Canadian economic momentum.
Labour Market Risks and the Impact of Tariffs
While headline U.S. employment data remain stable, private-sector indicators point to material slowing. ADP data show job growth close to zero since the summer, while Paychex small-business payrolls continue to contract year over year.
At the same time, concerns are rising that tariffs intended to reshore manufacturing may instead raise operating costs and suppress hiring. Surveys from the Institute for Supply Management and commentary from corporate executives highlight early signs of workforce reductions and offshoring adjustments in response to tariff uncertainty.
The “K-Shaped” Economy
Source: University of Michigan, S&P, Bloomberg
Federal Reserve: Independence, Data Revisions, and Policy Flexibility
Political pressure on the Federal Reserve (Fed) intensified following public criticism of Chair Powell, though the Fed has strongly reaffirmed its independence. Despite the controversy, monetary policy remains guided by evolving labour data.
Following the December rate cut, Chair Powell acknowledged that nonfarm payroll growth has likely been materially overstated, implying that employment has been flat to modestly negative since spring. This admission strengthens the case for further policy easing, even as inflation remains a secondary concern.
Capital Gain Potential in Canadian Long Bonds
Canada’s fixed income market has yet to fully price in recession risk. The yield curve remains steep, with the 30-year Government of Canada yield near 3.80%, well above short-term rates that closely track policy expectations.
Historically, recessions are associated with curve flattening or inversion as investors move aggressively into long-duration bonds. Even modest policy easing could drive a substantial decline in long yields, creating meaningful capital appreciation. Current market pricing appears to underestimate both the lagged impact of tariffs and the vulnerability of domestic growth.
CHART – Government of Canada 30-year yield (brown LHS) vs 2-year yield (green RHS)
Source: Thomson Reuters
The commentaries contained herein are provided as a general source of information based on information available as of November 25, 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 January 19, 2026