February 2025

U.S. trade policy represents a clear and significant risk to our macro-economic forecast. Open trade between Canada and the United States has benefitted both countries, increasing efficiency, spurring investment, boosting productivity, and raising standards of living. The imposition of tariffs will kick this into reverse. Tariffs on Canadian goods would lead to higher gas and other goods prices for U.S. consumers and higher input costs for corporations. The impact on the Canadian economy would be larger, reflecting the high share of exports to the U.S. relative Canada’s GDP. As Canadian goods become more expensive, U.S. demand for those goods would decline. A lower Canadian dollar would provide a partial offset. Negative indirect effects will occur, as lower exports weigh on Canadian firm profitability, leading to lower employment, private investment, and consumption. And as the U.S. also targets China and Europe, broader country tariffs will weigh on global growth.

China’s annual inflation rate climbed to 0.5% in January 2025 from 0.1% in December.¹ The Eurozone’s annual GDP growth rate was confirmed at 0.9% in the fourth quarter of 2024. Spain led with a robust 3.5% growth, followed by the Netherlands (1.8%), France (0.7%), and Italy (0.5%). In contrast, Germany, the Eurozone’s largest economy, remained in contraction, shrinking by 0.2%.²  The consumer price inflation rate in the Euro Area was confirmed at 2.5% in January,³ while the unemployment rate in the Euro Area ticked up to 6.3% in December 2024.⁴

Final sales of domestic products in the United States increased by an annualized 3.2% in the fourth quarter of 2024.⁵ The annual inflation rate in the U.S. edged up to 3% in January,⁶ while the U.S. unemployment rate dipped by 0.1 percentage points to 4.0%.⁷ The U.S. trade deficit in goods widened to a record $122.11 billion in December 2024. Imports surged 3.9% to $289.6 billion, as U.S. companies rushed to secure goods ahead of potential Trump administration tariffs. Exports dropped 4.5% to $167.5 billion.⁸ As expected, the Bank of Canada cut its policy rate by 25 bps at the end of January, noting that past cuts are helping to cushion the economy. The Canadian annual inflation rate inched higher to 1.9% in January of 2025, below the Bank of Canada’s midpoint target of 2%.⁹ The unemployment rate in Canada fell to 6.6% in January.¹⁰ Canada posted a trade surplus of C$0.7 billion in December of 2024, swinging from the upwardly revised deficit of C$1 billion in the previous month. The rise in trade turnover was supported by the sharp depreciation in the Canadian dollar.¹¹ 

Thanks to relatively strong earnings results and robust consumer spending, the S&P 500 concluded the month with a 2.8% gain. Mid and small caps outperformed their large-cap peers, with the S&P Mid Cap 400 and S&P Small Cap 600 up 3.9% and 2.9% respectively. Canadian equities finished the month on the upside with the S&P/TSX Composite up 3.5%. Cheered by interest rate cuts and unbothered by AI wobbles, European equities started the year impressively as the S&P Europe 350 surged by 6.5% to close at an all-time-high. Most countries contributed positively to the pan-European Index’s returns in January with heavyweights France and Germany leading the way. Denmark was the sole detractor. Pan Asia equities began the new year on a positive note, with the S&P Pan Asia BMI (USD) rising by 0.9% in January.

In February, in response to pending U.S. tariffs, we removed exposure to U.S. mid caps across all models and split the proceeds equally between gold and the 3-to-7-year Treasury Bond. We use diversifiers including short duration U.S. fixed income exposure as yields are expected to respond to renewed inflation. Gold is held across all models as a long-term strategic asset, playing a role as an effective hedge against the heightened geopolitical uncertainty and market volatility that is currently in play.  While Gold is not a direct target of tariffs, market reactions to trade uncertainty has driven a significant shift in trading behaviour and positively impacted the gold price.

After World War II, the allied nations created the Bretton Woods institutions and progressively reduced tariffs. They wanted to avoid the protectionism and instability of the Great Depression. The danger of the current tariff threats is that negative economic policies will have impact before any positives are enacted. Moreover, the main probable positive – tax cuts – is already assumed, and the other – de-regulation – is intangible. A protracted trade conflict would sharply reduce exports and investment. It will cost jobs and boost inflation in the next few years and lower the standard of living in the U.S. and all countries targeted. The uncertainty alone is causing harm. Our approach to portfolio management is nimble, opportunistic, and deliberate in identifying asset classes that are best placed to generate returns in a new world order. Our focus is on protecting portfolios from downside risk, and we believe that our investment process is working to achieve that goal.

Deborah Frame, President and CIO

Drew Millard, Portfolio Manager

¹ Trading Economics. China Inflation. February 9, 2025.

² Trading Economics. Euro GDP. February 14, 2025.

³ Trading Economics. Euro Inflation. February 24, 2025.

⁴ Trading Economics. Euro Unemployment. January 30, 2025.

⁵ Trading Economics. U.S. GDP. January 30, 2025.

⁶ Trading Economics. U.S. Inflation. February 12, 2025.

⁷ Trading Economics. U.S. Unemployment. February 7, 2025.

⁸ Trading Economics. U.S. Trade. January 29, 2025.

⁹ Trading Economics. Canada Inflation. February 18, 2025.

¹⁰ Trading Economics. Canada Unemployment. February 7, 2025.

¹¹ Trading Economics. Canada Trade. February 5, 2025.

Index return data from Bloomberg and S&P Dow Jones Indices Index Dashboard: U.S., Canada, Europe, Asia, Fixed Income. January 31, 2025. Index performance is based on total returns and expressed in the local currency of the index.