MONTHLY MARKET MUSINGS

July 2025

The Deadline is Approaching

The tariff deadline is nearing and while some trade deals have been agreed to, there are still quite a few that we have yet to hear any positive developments on. The self-imposed deadline for the tariff pause is July 9^th although it is possible that it gets extended. If we assume that it does not get extended, then many countries will be pressed to come to some sort of agreement. According to some sources, the Trump team is no longer having discussions on big trade issues and is attempting to secure smaller agreements.^[1] The reason for this could be to signal to the markets and President Trump that while all the deals have not been finalized that there has been some progress made with their trading partners.

On the Canadian front, the recent decision to get rid of the Digital Service Tax has allowed the trade talks between the U.S. and Canada to resume. We believe that some progress will be made between the two trading partners before July 9^th, but it is doubtful that the talks will be concluded by that point given how far apart they seem to be. One thing that we would expect with some level of certainty is that volatility will likely increase as we near the deadline but we don't expect April-like levels of market swings. The key reason for this is that, for one, the market has had time to digest the news, and companies have had time to strategize for the worst-case scenarios. Secondly, the U.S. has made a deal with China which was one of the biggest concerns for the financial markets. While a lack of clarity has been a hallmark of the current administration, the U.S./China agreement's scarce details almost seem to be an intended omission. Given the amount of damage each country has been able to do to each other's economy, it seems likely that both countries had to concede on their end, and both prefer to publicly claim victory and avoid communicating the shortcomings on their side of the bargaining table. Perhaps more details will be communicated but the general view from the markets is that the tensions have moderated, an agreement was made, and uncertainty has diminished with the de-escalation of a major market overhang. China is apparently proceeding with caution however, as they have warned other countries to not reach deals with the U.S. at the expense of its interests.^[2]

The further resolution of trade agreements and lowering of tariffs, should give the U.S. Federal Reserve (Fed) more reason to begin cutting interest rates once again. In fact, Fed Chair Powell noted that they would have cut rates and eased monetary policy further at this point in 2025 had it not been for the tariff situation.^[3] While the market is currently expecting rate cuts at the Fed to resume in September, Fed Chair Powell has mentioned that a July cut is still possible but will be data dependent which could be his way of saying that "it depends on what Trump does with his tariff deadline". In any case, more cuts are likely in the U.S. while in Canada, some economists are beginning to think the Bank of Canada (BoC) may be done for the year^[4]. The argument is mostly that inflation is trending too high and that the overnight rate is already sitting within the BoC's neutral range. While the BoC overnight rate is still likely to head lower the timing of the cuts seems to be less certain and the tariff negotiations are the main contributing factor in that regard.

As noted above while we expect an increase in volatility in the near term, we continue to maintain our preference for equities and believe that U.S. equities, in particular, are well positioned. The prospects of further rate cuts in the U.S. will help equities and the overall economy. Furthermore, many economists and strategists have noted that the current proposed U.S. tax bill, despite the deficit concerns, will provide a strong tailwind to the U.S. economy for the coming years and that should help equities continue their upward trajectory.^[5]

JAY SMITH, CIM®, FCSI

Senior Portfolio Manager & Senior Wealth Advisor

jay.smith@cibc.ca

BRAD BROWN, MBA, CFA
Portfolio Manager & Associate Investment Advisor

brad.brown@cibc.com