MARKET UPDATE – February 24^th – March 7^th, 2025

In a Nutshell: Markets saw a significant pull back this week with the continued uncertainty about the longevity and economic impacts of tariffs imposed by President Trump on Tuesday. Volatility remained high even as markets saw some slight recovery at times throughout the week. All goods covered in the USMCA agreement have already received a 30 day pause from tariffs which means there may be more relief to come.

U.S. Labour Markets

In February, U.S. private payrolls grew at their slowest rate in seven months, adding only 77,000 jobs, well below economists' expectations. The slowdown was attributed to policy uncertainty, likely related to tariffs, and weakening consumer spending. Wage growth for job switchers moderated, while wages for those staying in their jobs remained steady.

The report aligned with declining consumer confidence in the job market. Businesses appeared hesitant to hire amid economic uncertainty. Additionally, initial jobless claims surged by 22,000 to 242,000, the highest jump in five months, possibly due to snowstorms and the Presidents’ Day holiday.

While there were no immediate signs of mass layoffs from the federal government, the rise in jobless claims suggested a gradually weakening labour market, which could influence the Federal Reserve’s interest rate decisions. The higher-than-expected claims were seen as negative for the U.S. dollar.

U.S. Economy

Tariffs continue to ebb and flow: President Trump has announced that tariffs on all products covered in the USMCA agreement will be delayed until April 2^nd, while Potash tariffs will be reduced to 10%. The USMCA agreement covers approximately 38% of Canadian Exports to the U.S.

U.S. Economic Growth and Trade Impact – GDP growth slowed to 2.3% in Q4 2024, down from 3.1% in Q3, with weaker consumer spending. Wholesale inventories rose sharply (0.7%), suggesting an unexpected stock buildup. Tariff-related concerns continue to weigh on businesses, potentially increasing costs and slowing economic momentum.

U.S. Inflation and Consumer Spending – Inflation slowed slightly in January, with the Personal Consumption Expenditures (PCE) Price Index rising 2.5% annually, down from 2.6% in December. Core PCE inflation (excluding food and energy) also eased to 2.6% from 2.9%, meeting expectations. Consumer spending unexpectedly contracted, complicating the Federal Reserve’s decision-making on interest rates.

U.S. Services, Manufacturing and Business Activity – Services sector growth accelerated, with the ISM non-manufacturing Purchasing Mangers Index (PMI) at 53.5 in February, up from 52.8. Factory orders rebounded (1.7% in January), but trade war concerns could hamper long-term recovery. Factory activity expanded slightly, with the ISM manufacturing PMI at 50.3 in February, down from 50.9 in January. New orders declined, and input prices surged, raising concerns about inflation. Business spending rebounded, with core capital goods orders rising 0.8% in January.

The U.S. economy presents mixed signals—inflation is cooling, but consumer spending is weakening. Manufacturing is seeing slight recovery, but tariffs threaten growth. Housing and consumer confidence are declining, while business investment and services remain resilient. Federal Reserve policymakers face a complex landscape as they decide on interest rates.

Canadian Economy

Canada Retaliates with Tariffs Against the U.S. – Canada imposed $30 billion CAD ($20.8 billion USD) in retaliatory tariffs on U.S. goods after President Trump implemented 25% tariffs on Canadian and Mexican imports and 10% duties on Canadian energy products on March 4. Prime Minister Justin Trudeau warned of additional measures, reaffirming the initial tariff list announced in February.

Canadian Economic Growth – Gross Domestic Product (GDP) grew by 2.6% in Q4, exceeding forecasts of 1.8%, driven by consumer spending, business investment, and exports. Q3 GDP growth was revised up to 2.2% from 1%, and December GDP rose 0.2% after November’s contraction, partly due to strong retail sales and a mid-December tax break.

Canadian Manufacturing and Services Sector Slowdown – Manufacturing activity contracted for the first time in six months, with the PMI falling to 47.8 in February from 51.6 in January, signaling a downturn. Output (47.5) and new orders (45.4) fell sharply, reflecting uncertainty over trade policies. The services sector also worsened, with the Business Activity Index dropping to 46.6 from 49.0, marking three consecutive months of decline.

Canada’s strong Q4 GDP growth contrasts with its weakening manufacturing and services sectors, as businesses remain cautious due to trade tensions with the U.S. The mutual tariff escalation is expected to further strain economic activity, raising concerns over future growth and trade stability.

Eurozone and UK Economy

Eurozone Economic Trends – The European Central Bank cut interest rates by 25bps yet again, while officials also lowered their growth forecast for 2025. Eurozone inflation fell slightly to 2.4% in February, driven by lower services inflation (down to 3.7%). The Eurozone’s manufacturing sector showed signs of recovery, with the PMI rising to 47.6 in February, though still below the 50.0 growth threshold. The services sector weakened, with the PMI dropping to 50.6, indicating slow expansion.

UK Defense Spending & Retail Trends – UK Prime Minister Keir Starmer announced a plan to increase defense spending to 3% of GDP in the next parliament (starting 2029). To fund this, the foreign aid budget will be cut from 0.5% to 0.3% of GDP by 2027. Meanwhile, UK retail prices declined for the second consecutive month in February (-0.7% YoY), mainly due to heavy discounting in response to weak consumer demand.

Eurozone Inflation & National Economic Trends – Germany’s economy contracted by 0.2% in Q4 2024, marking a slowdown due to declining exports (-2.2%) and weak manufacturing demand. Inflation in Germany stood at 2.3% in February 2025, with core inflation at 2.6%. Employment figures remained stable, with slight month-to-month fluctuations. France’s inflation fell below 1% (0.9%) for the first time since 2021, signaling easing price pressures.

The Eurozone's economy remains fragile, with mixed signals from manufacturing and services. Inflation trends suggest some relief, particularly in France and Germany, but economic growth remains slow.

Energy

U.S. Crude Oil Inventories volatile – The (EIA) reported a 2.3 million-barrel decline in U.S. commercial crude oil inventories, contrary to the forecasted increase of 2.5 million barrels. The EIA’s subsequent report this week showed a 3.6 million-barrel increase in U.S. crude oil inventories, far surpassing the forecasted 0.600 million-barrel increase, though American Petroleum Institute’s weekly report indicates a significant drop in U.S. Crude inventory levels, presenting mixed signals and a volatile environment for oil demand.

Oil Prices Rise Amid Supply Concerns – Oil prices rose by over 1.5%, driven by supply concerns, particularly after President Donald Trump revoked a Chevron license to operate in Venezuela, potentially reducing Venezuela's oil production. Chevron’s exit could force U.S. refiners to incur higher procurement costs if Venezuelan oil previously exported by Chevron is now unavailable. Gains in oil prices were partially limited by signs of a potential peace deal in Ukraine and an unexpected rise in U.S. gasoline and distillate stocks.

 

Reuters Market Updates http://www.reuters.com

Bloomberg Market Updates - https://www.bnnbloomberg.ca/markets

 

 

Market Data	S&P/TSX	S&P 500	DOW	NASDAQ	STOXX EU	WTI	GOLD
Last Week	1.0%	-1.0%	1.0%	-3.5%	0.6%	-0.9%	-3.5%
This Week	-2.5%	-3.1%	-2.4%	-3.5%	-1.4%	-3.9%	2.4%

Market data taken from https://www.marketwatch.com/

 

 

 

The Year Ahead for Equities, 2025 – Presentation by Greg Colman, Managing Director and Head Equity Research, National Bank of Canada

Tariffs (Surprise, Surprise)

The Tariff threat will continue possibly through the entirety of 2025. A blanket 25% across-the-board tariff is not the most likely outcome long term owing to the potential impact of such Tariffs on the U.S. economy and equity markets (Trump is pro equity markets). A more likely is a combination of blanket 10%-ish tariffs or rifle shot 25% on specific sectors. While Blanket tariffs rolled out on Tuesday, there already appears to be negotiating of these tariffs, whereby specific sectors may be excluded or have reduced Tariffs.

Is there a silver lining to Tariffs for Canada?

Much of our trade and productivity challenges are self-imposed. In particular focus is the existence of costs on inter-provincial trade, on average totaling and equivalent of 21%, much higher than U.S. tariffs prior to the Trump Administration and recent changes. Removing these costs could lead to greater domestic trade between provinces and less cost to the consumer as well:

 

Below you will see a chart of our Real GDP per capita, which tells us that our productivity as a nation per person is the same as it was a decade ago. Tariff threats can drive de-regulation, pro-investment policies which can largely offset tariff impacts and result in a more globally-competitive Canadian economy.

Canada: Total GDP (bluer line) vs Real GDP per capita (red line) –

Productivity per capita has not changed in over a decade

Canadian Banks

National Bank of Canada’s Head of Equity Research sees upside for certain Canadian Banks even with the headwinds of tariffs – in fact, the thesis is in part related to those banks that have a greater exposure of revenues outside of Canada. Last year, the banks that won were those that had a greater exposure to Canada – this year it could very much be the opposite, with greater exposure to the U.S. being a boon. BMO and Bank of Nova Scotia have the lowest share of Canadian Loans.

Year to Date (YTD) Stock performance versus % Share of Canadian Loans

Other notable things to consider with Canadian Banks are Provisions for Credit Losses (PCL) and Exposure to Mergers and Acquisition. If we consider that current forecasts for PCL are too pessimistic, then BMO and Bank of Nova Scotia have the largest provisions, so the greatest potential for upside in the Earnings Per Share (see chart below). If investment banking picks up through mergers and acquisitions, Royal Bank and TD have the greatest proportion of their revenue come through their advisory channels compared to wholesale lending (see chart below) and will likely benefit disproportionately.

 Impact of a 10% reduction in Provisions for Credit Losses (PCL) for each bank (Left) and Ratio of Advisory Revenue to Whole Lending revenue for each bank (right)

 

MacroMemo – March 4 – 24, 2025 by Eric Lascelles Link to Article

Recent softening of the U.S. economy can be evidenced by a significant drop in the Economic Surprise Index, marking the sharpest decline since early 2022.

U.S.-focused Economic Surprise Index shows sharp drop in economic surprises

Economic Slowdown – All seven variables in the focused Economic Surprise Index are negative, including weak results in the National Association of Home Builders (NAHB) survey and a slight miss in payrolls. However, periods of negative economic surprises tend to be brief, as expectations adjust.

ISM Indices – Both the ISM Manufacturing and Services indices remain above 50, suggesting continued growth, though the Manufacturing Index showed weakness in new orders, employment, and rising prices.

Consumer Spending and Sentiment – While personal income grew significantly in January (up 0.9%), personal spending shrank by 0.2%. Walmart warned of more cautious consumers, and U.S. consumer confidence measures have fallen to pre-election levels, impacted by concerns over tariffs, inflation, and the soft housing market.

Small Business Sentiment – Small businesses remain positive post-election but have seen some decline in enthusiasm, especially with the introduction of new tariffs. Economic sentiment indicators like the Goldman Sachs Twitter Economic Sentiment Index are down but still higher than pre-election levels.

Tariff Official

President Trump implemented new blanket tariffs this week, most notably on China, Canada, and Mexico (and rolled these back as previously mentioned). Some key details on the imposed tariffs are as follows:

Canada and Mexico – Both countries face a 25% tariff from the U.S. (USMCA goods exempt till April 2^nd, and Potash reduced to 10%), with likely retaliatory tariffs. Canada is also dealing with a near-tripling of anti-dumping duties on softwood lumber.

Steel and Aluminum Tariffs – Starting March 12, these tariffs will be expanded, affecting a broader set of products and raising costs, especially for Canada, the U.S.'s largest supplier of these metals.

Canada led Iron, Steel (left) and Aluminium (right) exports to the U.S. in 2024

 

China Tariffs – The U.S. has imposed an additional 10% tariff on China starting March 4, on top of previous tariffs, with potential extra charges on Chinese-made ships visiting U.S. ports.

Reciprocal Tariffs – Proposed tariffs against countries with high trade barriers or trade surpluses with the U.S., such as China, India, and South Korea, could impact numerous nations. This broader approach includes non-tariff barriers and currency valuation concerns.

Weighted average effective Tariff rate shows China, India and South Korea have greatest advantage over the U.S. and will therefore see most significant reciprocal Tariff

Economic Impacts – The potential global economic damage is significant, with rising tariffs expected to reduce corporate earnings in the U.S. and disrupt international trade. Negotiations are likely to be difficult, and there’s a growing risk of prolonged tariffs and economic contraction, especially for Canada and Mexico.