The Fast-Changing Landscape

U.S. and Global Growth Downgrades

The Atlanta Fed’s First Quarter (Q1) GDPNow (a nowcast of GDP = gross domestic product) fell from 3.9% in late January to a low of -2.8% near the end of February. The dramatic drop initially caused grave concerns. Digging deeper, the downward move was the result of large imports of gold and imports that front run the tariffs. Under GDP calculation, imports are deducted from GDP. Excluding those items, Q1 GDP likely grew in the 1.3% to 1.8% range (calculated with all the incoming data so far, being a nowcast).

Another growth concern in the U.S. is the DOGE (Department of Government Efficiency) layoffs. Table below shows the range of outcomes based on the February unemployment rate of 4.0%.

The Federal Reserve (Fed), however, is not ready to pre-emptively cut the Fed funds rate, saying that they will need to see the impact of these policies first.

The Organization for Economic Co-operation and Development (“OECD”) downgraded global growth as concerns mount over the negative effects on growth from tariffs and retaliatory tariffs.

U.S. Inflation Sticky and Heading Higher

U.S. February Consumer Price Index (“CPI”) excluding food and energy, or core CPI, eased from 3.3% in January to 3.1%. However, the components (mostly services) that will go into the calculation of core ‘personal consumption expenditure price index’ (“PCE”) all edged higher. Core PCE is the series that the Federal Reserve focuses on, another development that has the Fed dragging its feet in pre-emptive easing.

The deportations of migrants reduced the U.S. workforce. Since they were mainly in the lower paying jobs, the average pay of the remaining U.S. workforce will go up, underpinning inflation.

Political Re-alignment and New Direction of Investment Flows

One of the legitimate complaints from the Trump administration is that the rest of NATO (North Atlantic Treaty Organization) had not been doing their part on defence spending. As the chart below shows, the average spend per member country is well below 1.5% of its respective GDP. Thus, the U.S. has been giving them a free ride, spending about 3.4% of GDP on defence to support NATO.

Germany and the U.K. are the first to respond. Germany is now pushing for a defence spending of up to 10% of GDP. So, while the U.S. stock markets are correcting lower, German stocks, especially defence manufacturers, are soaring, attracting foreign inflows.

The Canadian dollar

The Canadian dollar has stabilized versus the U.S. dollar, for the time being.

• U.S. economic outlook has been clouded by tariffs and deficit reduction policies.
• The Canadian economy has shown moderate improvement, but the prospect of tariffs looms large.

The immediate outlook is more balanced but long-term challenges remain.

• The two economies face policy uncertainties. Canada is much more vulnerable.
• Pricing out of future Fed cuts (now 75 basis points (bps) for 2025).
• U.S. strives to be energy-independent, dimming the prospects of Canadian energy exports. Same for key metals.
• Unusually large interest rate differentials between the U.S. and Canadian yield curves.
• 10-year bond yields: U.S. at 4.21%, Canada at 2.98% (123 bps differential).
• 2-year bond yields: U.S. at 3.93%, Canada at 2.49% (144 bps differential).

The commentaries contained herein are provided as a general source of information based on information available as of March 26, 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 March 26, 2025