Reignited trade tensions dampened inflation data boost
Canada’s unemployment rate hit 7% in May, the highest since 2016 (excluding during the pandemic). Only 8,800 jobs were added last month, a figure that fell far short of what’s needed to absorb population growth. Most of the gains came from full-time private sector hiring, while the public sector shrank, and key industries — like manufacturing and transportation — continued to bleed jobs.
Regions tied to trade — such as southern Ontario — are feeling the pain from U.S. tariffs. The Bank of Canada (BoC) kept interest rates on hold at 2.75% last week, but the trend in joblessness will be hard to ignore going forward.
Softer-than-expected U.S. consumer price index (CPI) data sparked a widespread rally. Stocks bounced on the news, turning the market slightly positive, after it had looked like being negative; 10-year Treasury yields dropped by five basis points (0.05 of one percentage point); the dollar softened; and gold spiked. Traders quickly added back two full rate cuts to the U.S. Federal Reserve (the Fed) outlook.
Markets were primed for signs that the Fed’s rates would come down soon. Anything below 0.25% was seen as a green light for investors who were optimistic about the bond market’s performance; the drop in Treasury yields suggests investors expect to see rate cuts on the horizon. But while CPI data gave a boost, the mood didn’t last long…
This was because U.S. President Trump reignited trade tensions by stating that he plans to impose new unilateral tariffs within weeks. Tensions in the Middle East also escalated, leading to a spike in oil prices.
Market participants are growing increasingly concerned, not just because of tariffs themselves, but due to the uncertainty surrounding them. Right now, it seems that market participants are reluctant to take on more risk before second-quarter information arrives. The feeling is that these tariffs will eventually show up in the growth numbers.
Next week, the event to follow is the latest Fed decision on rates. Right now, markets are pricing in a very low likelihood of cuts. Therefore, U.S. Fed Chair, Jerome Powell’s speech (which will accompany the decision) will be more important.
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