Economic and trade policy uncertainties have led to reallocation of global capital, causing a weaker U.S. dollar, rising gold prices, and U.S. Treasury bond yields widening. Consumer confidence and business investment intentions have been affected by economic and trade policy uncertainty. This in turn has triggered a reallocation of global capital out of the U.S. with global investors seeking out alternative safe-haven assets to U.S. Treasuries, supporting the gold market. Canada’s close economic ties to the U.S. have been negatively impacted. On June 27th President Trump announced that the United States would terminate all trade discussions with Canada, over the country’s plan to begin collecting digital services taxes from U.S. technology giants. In June we maintained our twelve-month forward outlook of six months of Stagnation (U.S. Real GDP growth less than 2.5%) followed by six months of Recession (negative GDP growth) over the next twelve- month period to three months of Stagnation and nine months of Recession.
China’s consumer prices dropped by 0.1% year over year in May 2025, the fourth straight month of consumer deflation, highlighting challenges from ongoing trade risks with the U.S., sluggish domestic demand, and concerns over job stability.1 Unemployment in China decreased to 5% in May.2 China’s trade surplus widened sharply to USD 103.22 billion in May, up from USD 81.74 billion a year earlier, as exports rose while imports dropped by 3.4%.3 The Eurozone economy grew by 0.6% in the first quarter of 2025, driven by Ireland’s exceptional 9.7%.4 Eurozone consumer price inflation was confirmed at 1.9% year-on-year in May, down from 2.2% in April.5 The unemployment rate in the Euro Area edged down to 6.2% in April. Among the bloc’s largest economies, Germany (3.6%) and the Netherlands (3.8%) reported the lowest unemployment rates, while Spain (10.9%), France (7.1%), and Italy (5.9%) continued to post higher levels.6
The U.S. economy contracted at an annualized rate of 0.5% in Q1 2025, the first quarterly contraction in three years. The weaker GDP figure was largely driven by significant downward revisions to consumer spending and exports. The sharp rise in imports reflected a rush by businesses and consumers to stockpile goods ahead of anticipated price increases stemming from a series of tariff announcements. Federal government spending dropped 4.6%, the steepest decline since Q1 2022.7 The annual inflation rate in the U.S. rose for the first time in four months to 2.4% in May.8 The U.S. unemployment rate held steady at 4.2% in May.9 The U.S. trade gap narrowed sharply to $61.6 billion in April. The biggest trade deficit was recorded with China ($-19.7 billion), although it decreased sharply from a $24.2 billion gap in March.10 Canadian GDP expanded by 0.5% from the previous quarter in the first three months of 2025. The concentration of growth in net foreign demand and inventory accumulation was supported by firms front-running tariffs from the U.S. on aluminum, steel, and auto industries instead of core economic strength.11 The annual inflation rate in Canada was at 1.7% in May,12 while the unemployment rate in Canada rose to 7.0%, signaling that businesses may be starting to feel the impact of tariffs imposed by the United States.13 Sales to the U.S. contracted 15.7% while exports to countries other than the United States rose 2.9%.14
U.S. equities staged a recovery in May, thanks to optimism surrounding easing tariff tensions, with the S&P 500® up 6.3%. Although the fiscal deficit, inflation concerns, and ongoing geopolitical uncertainties continue to linger, volatility declined with the S&P Mid Cap 400® and S&P SmallCap 600® both up 5.4% and 5.2% respectively. Following a disappointing 20-year Treasury note auction and ongoing concerns about the fiscal deficit, long term Treasury yields surged. Major Canadian equity indices finished the month on the upside. The S&P/TSX Composite increased 5.6%. The S&P Europe 350® gained 4.9%. The U.K. was the biggest positive contributor to the S&P Europe 350, with +1.03% contribution. Pan Asia equities witnessed a strong rally in May as tariff-related tensions eased. The USD denominated S&P Pan Asia BMI recorded a 5.0% gain, bolstered by the strengthening of Asian currencies against the US dollar.
In June, we maintained exposure to investment-grade mortgage-backed pass-through securities issued and/or guaranteed by U.S. government agencies. 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. Central bank buying is a big factor in gold’s strength as gold’s performance in periods of crisis is at play. For about a decade, as real interest rates rose, gold was inversely correlated. Since 2022, as real rates rose, that inverse correlation has been counterbalanced, supported by investors seeking to mitigate a variety of risks and by central bank buying. We maintained exposure across all models to U.S. Large Caps.
The impact on inflation from tariffs has likely been slow to show up because of lags between when imports face tariffs, and when an imported good hits store shelves. Many final goods sold in stores through May were likely ordered pre-tariffs. The pass-through of tariffs therefore will only become evident over the next 2-3 months. 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. June 9, 2025.
2 Trading Economics. China Unemployment. June 16, 2025.
3 Trading Economics. China Trade. June 9, 2025.
4 Trading Economics. EU GDP. June 6, 2025.
5 Trading Economics. EU Inflation. June 18, 2025.
6 Trading Economics. EU Unemployment. June 3, 2025.
7 Trading Economics. U.S. GDP. June 26, 2025.
8 Trading Economics. U.S. Inflation. June 11, 2025.
9 Trading Economics. U.S. Unemployment. June 6, 2025.
10 Trading Economics. U.S. Trade. June 5, 2025.
11 Trading Economics. Canada GDP. May 30, 2025.
12 Trading Economics. Canada Inflation. June 24, 2025.
13 Trading Economics. Canada Unemployment. June 6, 2025.
14 Trading Economics. Canada Trade. June 5, 2025.
Index return data from Bloomberg and S&P Dow Jones Indices Index Dashboard: U.S., Canada, Europe, Asia, Fixed Income. May 31, 2025. Index performance is based on total returns and expressed in the local currency of the index.
