Market Insights | June 2025
Divergence Ahead:
Strong Markets,
Weak Growth, and Tariff Tensions
Key Takeaways:
- Labour Market Divergence: U.S. headline data remains strong, but alternative indicators point to deterioration; Canada shows rising recession risk.
- Tariff Escalation Likely: August 1 deadline looms, with broad-based tariff increases expected—though potentially softened from announced levels.
- Fed Leadership Tensions: Political pressure and internal dissent may reshape the FOMC dynamic ahead of Powell’s term expiry.
- Markets Outpace the Economy: U.S. equities continue to rally on global strength and fiscal support despite domestic softness.
- Rising U.S. Yields, Canadian Uncertainty: U.S. long-term rates are poised to rise further, while Canadian yields face mixed forces amid economic headwinds.
Employment Trends and Economic Signals
The U.S. June employment report surprised to the upside, with nonfarm payrolls rising by 147,000 and the unemployment rate falling to 4.1%. However, alternative measures signal a less optimistic trend. ADP data showed a decline of 33,000 jobs, while purchasing manager surveys pointed to weakening employment. The Bureau of Labor Statistics (BLS) data remains influential but may be overstating near-term labour strength.
In Canada, the unemployment rate is expected to rise from 7.0% to 7.1%, reflecting increased vulnerability to trade disruptions. With recession signals mounting, expectations for another Bank of Canada rate cut (from 2.75%) are growing.
Tariff Pressures and ‘TACO’ Sentiment
On July 8, President Trump extended trade negotiation deadlines to August 1 and threatened tariff increases from 10% to 20%. Only two trade deals have been finalized (U.K. and Vietnam), while many key relationships—including with China, the EU, and Japan—remain unresolved.
Vietnam’s deal includes a 20% base tariff and a 40% rate on “transshipped” goods. Similar terms are expected for other Asian exporters. However, a growing belief in “TACO” (Trump Always Chickens Out) has led many nations to delay serious engagement, anticipating softer outcomes.
Nonetheless, tariff increases appear likely by August 1, even if they fall short of the threatened levels. Revenue shortfalls from tariffs are pressuring the Administration to raise rates to support budget initiatives. Most foreign producers are passing costs through to U.S. consumers, pushing inflation higher and suppressing demand.
Powell Under Pressure
Internal tensions within the Federal Reserve are rising. President Trump and Trade Adviser Navarro have openly criticized Chair Powell, pressuring for rate cuts. Governors Waller and Bowman may dissent at the upcoming Federal Open Market Committee (FOMC) meeting, potentially disrupting consensus. With Powell’s term ending in May 2026, internal maneuvering has begun.
Equity Markets Rally Despite Weak Fundamentals
Since April 8, U.S. equity markets have surged—the S&P 500 is up 24.5%, and the S&P 500 Information Technology Sector ETF is up 41.2%. Despite this, the economic backdrop remains soft.
The disconnect is driven by factors such as:
• U.S. companies’ global revenue exposure.
• Massive U.S. deficit spending—7% of Gross Domestic Product (GDP).
• Continued corporate buybacks.
• A weaker U.S. dollar, boosting multinational earnings.
• The U.S. now accounts for 46% of global market capitalization, compared to just 26% of global GDP—a signal of disproportionate equity strength relative to underlying growth.
Bloomberg United
States Exchange Market Capitalization / Bloomberg World
Exchange Market
Capitalization
Source: Bloomberg
Interest Rate Outlook: U.S. Yields Up, Canada Diverging
Several forces are pushing U.S. long-term
yields higher:
• Expanding budget deficits and Treasury issuance.
• Diminished foreign demand from allies (e.g., Japan, Germany).
• Trade-driven USD liquidity constraints.
• Rising global defence spending and borrowing.
Forecasts suggest U.S. 10-year yields could breach 4.5%, with 30-year yields climbing above 5.0%.
In contrast, Canadian yields may trend lower due to weaker economic conditions. However, increased borrowing for infrastructure and defence could create a tug-of-war, leading to rangebound long-term yields.
U.S. 30-Year Treasury
Yield (RHS) vs
Government of
Canada 30-Year
Yield (LHS)
Source: Thomson Reuters
The commentaries contained herein are provided as a general source of information based on information available as of June 30, 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 July 10, 2025