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Rate Cuts Resume Amid Tariff Fallout and Labour Market Strains

Key Takeaways:

  • Rate Cuts Restarted: Both the Bank of Canada and the Federal Reserve resumed easing, reflecting deteriorating economic conditions.
  • Canadian Weakness Deepens: Falling Gross Domestic Product, rising unemployment, and productivity losses highlight vulnerability
  • U.S. Labour Market Softening: Revisions and rising unemployment confirm growing strain, with tariffs adding to pressure.
  • Fed Independence in Question: Political influence is reshaping the Fed, with implications for future policy direction.
  • Canadian Bonds Attractive: Fiscal discipline and weaker growth create opportunities in long-dated Government of Canada bonds.


Canada and U.S. Rate Cutting Cycle Resumes

On September 17, 2025, the Bank of Canada (BoC) lowered its policy rate by 25 basis points (bps) to 2.50%, followed later the same day by the Federal Reserve (Fed), which reduced the Fed funds rate range to 4.00%-4.25%. Both moves reflect mounting economic pressures at home.

Canada Q2 GDP, Components

Source: Statistics Canada


Canada’s Worsening Economic Outlook

Canadian Q2 Gross Domestic Product (GDP) contracted by 0.4%, with exports down 2.5% as tariffs took a toll. Inventory accumulation added to GDP, though much of it appeared involuntary—signaling weak demand. Imports also declined, which contributed positively to GDP but underscored faltering domestic demand, compounded by a nationwide boycott of U.S. goods.

Labour market weakness deepened:

  • August unemployment rose to 7.1%, the highest since 2016 (excluding pandemic years).
  • Job losses totaled 66,000 in August, following 41,000 in July.
  • Productivity fell 1.0% in Q2, highlighting deteriorating efficiency.

  • Sectors most exposed to tariffs, such as manufacturing and transportation, were hardest hit. With labour and output weakening, further BoC cuts appear likely.


    U.S. Economy Softens

    The U.S. unemployment rate rose to 4.3% in August, with the broader U6 measure climbing to 8.1%. While nonfarm payrolls by 911,000 for the 12 months ending March 2025, adding to evidence of a slowing labour market. Tariffs are contributing to job losses across industries, reinforcing downside risks to growth.

    Job growth negative in tariff-impacted sectors

    Source: Apollo


    Federal Reserve Independence Questioned

    Political influence over the Fed is increasing. With Stephen Miran’s appointment as the third Trump-aligned Governor and ongoing legal pressure on Governor Lisa Cook, the balance of power on the Board of Governors may soon tilt toward a Trump-appointed majority. Such a shift would give the Administration significant influence over monetary policy and Federal Open Market Committee composition.

    Markets currently price in two additional 25 bps cuts by early 2026, with up to five more quarter-point cuts expected through 2027 as political influence expands.


    Fiscal Pressures and Bond Market Dynamics

    Large-scale fiscal spending continues to pressure global bond markets, particularly at the long end of the curve. Canada and Australia remain less vulnerable to these concerns, supporting relative stability in their long bonds.

    Prime Minister Carney is set to present Canada’s budget on November 4, 2025. Despite plans to cut operational spending in coming years, deficits are expected to remain elevated due to tariff impacts, North Atlantic Treaty Organization commitments, and income tax reductions.

    Our Fiscal Space Composite Indicator Suggests AUD and CAD Can Be Shielded From Fiscal Concerns

    Source: CIBC Capital Markets


    Outlook and Implications

    Tariffs continue to ripple through both economies with a lag, and current market expectations for rate cuts may understate the full impact. Central banks are likely to accelerate easing cycles as data weakens further. Canadian long bonds, in particular, present attractive value given the trajectory of growth, inflation, and fiscal dynamics.

    The commentaries contained herein are provided as a general source of information based on information available as of September 19, 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 September 25, 2025

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