May 2025
Earlier than expected U.S. trade agreements with China and the U.K. are trimming downside economic growth risks although the average U.S. tariff rate at above 13% remains the highest since the 1930s. Falling demand for the US dollar, stemming from geopolitical tensions, lack of trust in the US government’s ability to borrow, falling demand for U.S. Treasuries, and fears of an actual default as Congress deals with its debt ceiling contribute to our view that the U.S. economy continues to slide towards recession. In May we revised 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-on-year in April 2025,1 while China’s surveyed unemployment rate edged down to 5.1% in April.2 China’s trade surplus jumped to USD 96.18 billion in April 2025, up from USD 72.04 billion in the same period a year earlier. The sharp increase was largely driven by an 8.1% year-on-year rise in exports, as shipments to the U.S. were dampened by Trump’s tariffs.3 The Eurozone economy grew by 0.3% in the first quarter of 2025. Among major economies, Germany expanded by 0.2%, while Spain and Italy outperformed. In contrast, France and the Netherlands posted more modest gains, each growing by just 0.1%.4
The U.S. economy contracted at an annualized rate of 0.3% in the first quarter of 2025, marking the first decline since the first quarter of 2022. This was a sharp reversal from 2.4% growth in the previous quarter. A 41.3% surge in imports contributed to the slowdown, as businesses and consumers rushed to stockpile goods in anticipation of higher costs following a series of tariff announcements by the Trump administration.5 The annual inflation rate in the U.S. eased to 2.3% in April,6 while the U.S. unemployment rate was at 4.2%, the same as in March.7 The U.S. trade deficit in goods widened sharply to $162 billion in March of 2025, the biggest on record.8 The threat of significant international trade disruptions is overshadowing what would have been a substantially improving Canadian economy. The annual inflation rate in Canada fell to 1.7% in April of 2025 from 2.3% in the previous month,9 while the unemployment rate climbed to 6.9% from 6.7% in the previous month.10 Canada posted a trade deficit of C$0.51 billion in March, narrowing from the C$1.41 billion shortfall recorded in February. The improvement came as imports declined more sharply than exports, driven by Ottawa’s reciprocal tariffs in response to new U.S. levies, as well as a voluntary boycott of U.S. products by Canadian retailers and households.11
The S&P 500® declined by 0.7% in April, marking its third consecutive month of losses. Mid and small-caps fared worse than their large-cap peers, with the S&P Mid-Cap 400® and S&P SmallCap 600® falling by 2.3% and 4.2% respectively. Thanks to safe haven demand for Gold, Precious Metals led among Commodity indices, gaining 4.8% in April and closing the month with an impressive 23.9% YTD increase. The S&P/TSX Composite decreased 0.1%. The S&P Europe 350® slipped 0.8% in April. Germany was the biggest positive contributor, whereas the U.K. and France had negative contributions. The USD-denominated S&P Pan Asia BMI recorded a 2.8% gain, bolstered by the strengthening of local currencies against the U.S. dollar. Chinese equities, as measured by the S&P China 500, saw the largest decline of 3.9% amid escalating trade tensions between the U.S. and China.
In May, 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 that is currently in play. We maintained exposure across all models to U.S. Large Caps.
Any discussion related to the global role of the US dollar and whether it will recede over time as the world’s reserve currency leads to a circular reference. On the one hand, levels of debt to GDP and a worsening budget deficit facilitated by an accommodating Congress, coupled with an ever-expanding money supply in probable disconnect with actual economic needs, reducing demand for the US dollar and resulting in a loss of its reserve currency status. On the other hand, the fact the US dollar has maintained its status as the world’s only true global reserve currency is a de facto leadership guarantee conferred to the US government by the rest of the world. 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. May 10, 2025.
2 Trading Economics. China Unemployment. May 19, 2025.
3 Trading Economics. China Trade. May 9, 2025.
4 Trading Economics. EU GDP. May 15, 2025.
5 Trading Economics. U.S. GDP. April 30, 2025.
6 Trading Economics. U.S. Inflation. May 13, 2025.
7 Trading Economics. U.S. Unemployment. May 2, 2025.
8 Trading Economics. US Trade. April 29, 2025.
9 Trading Economics. Canada Inflation. May 20, 2025.
10 Trading Economics. Canada Unemployment. May 9, 2025.
11 Trading Economics. Canada Trade. May 6, 2025.
Index return data from Bloomberg and S&P Dow Jones Indices Index Dashboard: U.S., Canada, Europe, Asia, Fixed Income. April 30, 2025. Index performance is based on total returns and expressed in the local currency of the index.
