Key Takeaways:
- Bank of Canada Poised to Cut: Markets expect another 25-basis-point rate cut as business confidence, hiring, and demand continue to soften.
- Inflation Pressures Persist: While tariff impacts keep inflation expectations elevated, limited pricing power among firms suggests disinflationary forces remain dominant.
- Labour Market Weakness: Declining job prospects and slower wage growth signal a cooling economy and raise the risk of a mild recession in Canada.
- U.S. Growth Moderating: Economic momentum in the U.S. is easing, with stable but above-target inflation and slower consumption and housing activity.
- Long Bond Opportunity: Canadian long bonds remain attractive, offering strong capital gain potential as yields move lower amid continued monetary easing.
The Easing Cycle Continues in Canada
The Bank of Canada’s Business Outlook Survey (BOS) and Canadian Survey of Consumer Expectations (CSCE), released on October 20, 2025, underscore persistent economic weakness. Both surveys reveal subdued outlooks from businesses and consumers, with few signs of recovery.
The BOS notes weak domestic and export demand, minimal hiring intentions, and reduced capacity expansion plans. Firms continue to face higher input costs due to tariffs but lack pricing power amid soft demand. Inflation expectations remain slightly above late-2024 levels.
The CSCE reinforces this sentiment, showing declining job prospects, particularly in the public sector, and elevated inflation expectations tied to tariffs. While spending intentions improved modestly, perceived labour market conditions remain negative—the weakest since the pandemic.
Taken together, these surveys point to a slowing economy and strengthen the case for an additional 25 bps policy rate cut at the Bank’s October 29 meeting.
Ongoing, widespread softness keeps the BOS indicator negative this quarter
Source: Statistics Canada
The CSCE indicator improved slightly but remains low
Source: Statistics Canada
Firms’ short-term inflation expectations are lower than their peak reached in early 2025
Source: Statistics Canada
Consumers report a lower likelihood of leaving or finding a job
Source: Statistics Canada
Signs of Recession
Labour market indicators are weakening across sectors. The share of firms citing binding labour shortages has dropped to its lowest level since 2020, while consumer confidence in employment prospects continues to deteriorate.
Combined with volatile Statistics Canada employment data, these surveys suggest the Canadian economy is approaching, if not already in, a recession.
U.S. Outlook: Slowing Momentum
Despite limited government data due to the U.S. shutdown, private-sector indicators show inflation stabilizing near 3%, with consumption and housing activity moderating. Income growth is slowing, and the housing sector, a leading indicator, is signaling softer growth ahead.
Political pressure and a cooling economy are expected to push the Federal Reserve toward further rate cuts, even as inflation remains above target.
Outlook and Implications
During recessions, investors typically shift to long-term government bonds to secure higher yields as central banks ease policy.
Currently, the Canada 30-year yield sits at 3.58%, roughly 119 bps above the 2-year yield at 2.38%. Should the Bank of Canada lower its policy rate from 2.50% to 2.00%, the 30-year yield could fall toward 2.50%, implying a potential capital gain of roughly 20%.
If the yield curve flattens further, as often occurs in recessions, the 30-year yield could approach 2.00%, amplifying returns. Current market pricing appears to underestimate the lagged effects of tariffs, suggesting an attractive opportunity in long-duration Canadian bonds.
The commentaries contained herein are provided as a general source of information based on information available as of October 23, 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 October 27, 2025