Market Insights | July 2025
Trade War Ripples: Diverging U.S. and Canadian Outlooks
Key Takeaways:
- Canadian Sentiment Remains Fragile: Businesses plan limited hiring and investment, while consumers show weaker spending intentions and financial confidence.
- Tariff Effects Still to Come: The delayed pass-through of tariffs suggests inflation and growth impacts will intensify later in 2025.
- U.S. Growth Signals Mixed: Retail sales improved, but real consumption remains flat; housing and consumer confidence are weakening.
- Labour Market Cracks Emerging: ADP data shows job losses even as BLS reports moderate growth, with revisions highlighting a slowing trend.
- Canada More Vulnerable: The open economy and lack of cohesive trade strategy leave Canada at greater risk, likely pushing long-term yields lower.
Canadian Business and Consumer Sentiment Weakening
The Bank of Canada’s Q2 Business Outlook Survey (BOS) highlights persistent caution among firms. While outlooks are slightly improved compared to the first quarter, most businesses plan to maintain staffing levels and restrict investment to basic maintenance over the next year.
Business Outlook Survey Indicator
Source: Bank of Canada
Similarly, the Canadian Survey of Consumer Expectations (CSCE) deteriorated further. Spending intentions fell, labour market confidence remained weak, and the financial health index worsened—reflecting fragile consumer sentiment amid housing market softness.
The CSCE indicator declined further because of weakening spending intentions
Source: Bank of Canada
Tariff pass-through effects are uneven. Prices for fast-moving goods, such as food, have already eased, while more complex goods like autos will take longer to reflect higher costs. Businesses and consumers are expected to limit spending once the one-time tariff impacts flow through, but the elevated prices will weigh on discretionary spending.
With many low-rate pandemic-era mortgages up for renewal, pressure is mounting on the Bank of Canada to cut rates further to support households.
U.S. Economy: Resilient on the Surface, Risks Building
U.S. retail sales rose 0.6% in June, rebounding after months of stagnation. However, as retail sales are reported in nominal terms, real consumption growth remains negligible year-to-date. Tariff uncertainty continues to weigh on both sentiment and activity.
Tariff-related inflation impacts have been limited so far, as businesses absorb some of the costs. However, the effect is likely delayed—shipping times and pre-tariff inventory stocking mean the bulk of tariff costs will appear in September and beyond, assuming no policy reversal.
Other economic indicators point to slowing momentum. Housing activity is moderating, with the National Association of Home Builders (NAHB) Housing Market Index at 33, near recent lows. Consumer confidence continues to decline, and migrant deportations—totaling 500,000 so far—are reducing labour supply, posing another drag on growth.
Housing Market Index and Consumer Confidence
Source: NAHB, Conference Board
Employment data divergence underscores uncertainty: while June’s BLS report appeared solid, ADP data showed a 33,000 decline. BLS figures rely on surveys subject to revisions, which have recently trended negative, signaling a gradual labour market slowdown.
Outlook
Both economies have yet to feel the full impact of tariffs, but Canada remains more exposed due to its trade-dependent structure. Efforts to unify Canada’s trade strategy, including the “One Canadian Economy Act,” have produced little progress.
Weakening conditions are likely to drive Canadian long-term interest rates lower, creating potential capital gain opportunities in long-dated Government of Canada bonds.
The commentaries contained herein are provided as a general source of information based on information available as of July 29, 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 August 5, 2025