Week of June 23, 2025
Dec Mullarkey, CFA , Managing Director, Investment Strategy and Asset Allocation
As we hit the half year mark, most banks and asset managers have been busy updating their economic outlooks for the balance of 2025. Their mood can be broadly characterized as cautious with a tinge of optimism. Few forecasters expect a U.S. recession. But most see tariff-induced inflation hitting consumers in the second half of this year. Estimated GDP growth rates for this year and next are subpar. And most forecasters expect the U.S. Federal Reserve to cut rates either once or twice this year, and to settle at a fairly high terminal rate next year.
Meanwhile, U.S. equity markets are much more emboldened. An overall assessment of reduced tariff risk, cooling Middle East tensions and a renewed U.S. embrace of NATO have allowed equities to seek a new high. As geopolitical headlines abate, investors are getting back to focusing on cash flows and balance sheet health. And there is a lot to like, even though tariff effects have still to play out.
While global investors worry about sovereign debt levels and potential fiscal profligacy, by comparison business managers generally look like a disciplined crew.
Sources: Bloomberg, Financial Times, 2025.
Randall Malcolm, CFA , Senior Managing Director and Portfolio Manager, Public Fixed Income
While the U.S. government’s finances have been very topical in the news this year, the underperformance – and recent, surprising turnaround – in Canadian government bonds has been an interesting story behind the front page. Ten-year Canada bonds hit a nadir at a 150 basis-point (bp) spread to U.S. Treasuries in February but have since recovered to lag by only approximately 92 bps, with the Canadian yield curve steepening more than its southern counterpart so far in 2025. Despite the threats of both trade disputes and global armed conflicts escalating, we seem to have a “risk-on” atmosphere globally and credit markets are rallying.
With the Canadian economy more dependent than most on trade relations with the U.S. – and the issue of U.S. tariffs remaining unresolved – it might be surprising to see Canadian credit leading the way stronger. While U.S. credit markets are struggling to better the credit spread levels of late 2024, the Canadian credit market has been impressive even in the face of massive June corporate bond supply, with credit spreads now chasing early 2018 lows.
Just 1–2 rate cuts are priced in for the Bank of Canada (BoC) before year end. However, it may take a more significant slowing of the economy for the BoC to move to support easing measures when confronted with core inflation stuck around 3% and the so-called “animal spirits” reflected in sentiment-driven market movements running high.
Sources: Bank of Canada, Bloomberg, 2025.
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