Weekly Market Commentary June 2 2025

Canada Ray of Hope

At the end of the tunnel, there is some light for the Canadian economy, which has been feeling the full brunt of the U.S. trade war. Prime Minister Mark Carney confirming they are engaged in intensive negotiations with the U.S. on a new bilateral economic and security deal is a ray of hope for an economy struggling amid low interest rates.

The economy is reeling from a hefty 25% tariff on Canadian steel, aluminum, and assembled foods. The situation has been exacerbated by a plunge in oil prices to $60 a barrel, given that it is one of the country's main exports. Bank of Canada's governor, Tiff Macklem, has already warned that the economy will deteriorate further, unless there is a quick end to the current standoff with the U.S.

The situation could worsen, especially with U.S. President Donald Trump reiterating that the U.S. does not need energy, lumber, and cars produced in Canada. The president repeated that they prefer products from Canada to be made in the country, which presents a significant problem. Canada sends about 75% of its exports to the United States.

Nevertheless, Canada's economy has shown resilience amid a string of challenges triggered by the new world order. Trade uncertainties and tariffs have negatively impacted the economic forecast. If the economic landscape worsens significantly, easing fiscal and monetary policies may be necessary, provided that inflationary pressures linked to tariffs stay manageable.

Canada's productivity levels have fallen behind those of the top- performing OECD nations, and ongoing trade conflicts may exacerbate this issue. To enhance productivity, lowering internal trade obstacles and enhancing mutual acknowledgment of qualifications among provinces is crucial, facilitating greater labour mobility.

Additionally, Canada could improve its economic outlook by easing restrictions on foreign investment to stimulate sluggish investment activity. Lastly, simplifying research and development tax incentives for both small and large enterprises and increasing direct support would contribute to a rise in business spending on research and development.

According to a recent OECD report, structural policy reforms should prioritize addressing sluggish productivity growth, housing affordability, and climate adaptation. The most recent OECD Economic Survey of Canada anticipates a decline in GDP growth from 1.5% in 2024 to 1.0% in 2025 and 1.1% in 2026, mainly due to trade conflicts with the United States. There remains a high level of uncertainty concerning future tariff rates and their impact on the Canadian economy.

Meanwhile, the Canadian stock market faces the risk of another correction after a recent bounce back. A new poll by Reuters indicates growing concerns about a potential sell-off in the market, as the economy reels from the effects of the U.S. tariffs and trade war.

The country's main stock index, the Toronto Stock Index,bounced back 16% from its lowest level in April, on easing tensions between Canada and the U.S. However, the two countries' failure to reach an agreement could rattle market sentiments.

Amid the economic growth uncertainty, the Toronto Stock Exchange has outperformed major U.S. indexes, gaining 5.4% year-to-date. The impressive run has been fuelled by heavy weighting in metal mining and soaring gold prices as a haven in times of uncertainty.

The Markets

Nobody likes to balance the budget.

Some pundits said Moody’s rating downgrade of U.S. Treasuries was a nothing burger. After all, the rating change didn’t provide investors with any new information. Moody’s was the third rating service to lower U.S. government bond ratings. S&P Global downgraded U.S. Treasuries in 2011, and Fitch Ratings followed suit in 2023.

However, Moody’s decision focused attention on fiscal policy – the way the United States government taxes and spends. In 46 of the past 50 years, the U.S. government has run a deficit, meaning it has spent more than it received from taxes and other sources of revenue, reported FiscalData.

Every annual deficit adds to the public debt, which is about $36 trillion, according to the U.S. Debt Clock.

The U.S. government finances annual deficits (and the overall debt) by issuing Treasury bills, notes, and bonds. The U.S. promises Treasury buyers (a group that includes individuals, institutions, and governments) that it will pay interest for a specific period and then repay the amount borrowed.

When yields increase, so does the amount of interest the United States must pay

When government bond buyers have concerns about a government’s fiscal policy, demand for bonds may fall and yields may rise. That happened to U.S. Treasuries last week. The yield on the 30-year U.S. Treasury bond exceeded 5%. “The move above 5 [%] is striking because that has been the general cap on the 30-year for about two decades,” reported Karishma Vanjani of Barron’s.

While higher yields make U.S. Treasuries more attractive to investors, they may also create challenges for economic growth. “As the national debt grows and interest rates rise, the United States will spend more of its budget on the cost of servicing that debt – crowding out opportunities to invest in the economy,” reported The Peter G. Peterson Foundation.

The United States is already paying a hefty amount of interest. In 2024, interest payments on the U.S. debt were about $880 billion, more than the

U.S. budget for national defense, reported Michael Mackenzie, Liz Capo McCormick, and Ye Xie of Bloomberg.

The U.S. isn’t the only country where yields are rising. “From the U.S. to Japan, long-term borrowing costs for the world’s biggest economies have surged as investors question the ability of governments to cover massive budget deficits,” reported Alice Gledhill and Mia Glass of Bloomberg.

Over the week, major U.S. stock indexes moved lower, amid worries about rising yields and fiscal policy. Yields on longer maturities of U.S. Treasuries finished the week higher.

Source: FactSet

Weekly Focus – Think About It

“The true test of character is not how much we know how to do, but how we behave when we don’t know what to do.”

– John Holt, Educator

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Disclaimer:

Information in this article is from sources believed to be reliable, however, we cannot represent that it is accurate or complete. It is provided as a general source of information and should not be considered personal investment advice or solicitation to buy or sell securities. The views are those of the author, Eric Muir and Derek Lacroix and not necessarily those of Raymond James Ltd. Investors considering any investment should consult with their Investment Advisor to ensure that it is suitable for the investor’s circumstances and risk tolerance before making any investment decision. Raymond James Ltd. is a Member Canadian Investor Protection Fund.