May 2025 Market Update

Introduction

Global equity markets ended higher over May as trade talks between major economies and the delay of tariffs against several economies lifted investor sentiment. The U.S. and China agreed to pause higher tariffs for 90 days, while the U.S. agreed to delay tariffs on the European Union (“EU”) as talks move forward. Near the end of the month, a U.S. court blocked the additional tariffs, requesting they be removed in 10 days. However, the U.S. Presidential Administration immediately appealed the decision. An appeals court temporarily removed the earlier ruling. Tariffs are still in place, but their legality is being considered by the court system. At the end of the month, U.S. President Donald Trump announced he would raise the tariff on aluminum and steel from 25% to 50% in early June.

 

The economic landscape remains uncertain. Trade negotiations are underway, but higher tariffs could be on the horizon if trade deals aren’t reached. Canada’s economy saw relatively robust growth in the first quarter, expanding by 2.2%, annualized. In the U.S., the economy contracted in the first quarter, largely owing to a surge in imports.

 

In Canada, the S&P/TSX Composite Index advanced, led by the Industrials sector. Canada’s main index reached a new record high closing price over the month. U.S. equities also gained in May. Government of Canada 10-year bond yields increased. U.S. Treasury bond yields also increased, due in part to Moody’s lowering its rating on U.S. government debt. Gold prices inched higher. The price of oil rose over the month.

 

Canada’s economy expected to slow

Fitch Ratings is waving the cautionary flag on Canadian economic growth this year. The ratings agency projects the Canadian economy to eke out a 0.1% expansion in 2025 but fall into a recession over the year. Trade tensions with the U.S. and slowing global economic activity are expected to weigh on Canada’s economy. In the meantime, however, Statistics Canada reported that Canada’s economy expanded by 2.2%, annualized, over the first quarter of 2025. A surge in exports boosted growth over the quarter. Conversely, household spending slowed during the quarter. The labour market is showing signs of weakening. The Canadian economy added just 7,400 jobs in April. The unemployment rate increased to 6.9%. Inflation subsided in April, but this was largely in response to the end of the carbon tax. Markets are expecting higher inflation in response to tariffs from the U.S. and Canada’s own retaliatory tariffs.

 

Last week, the Throne Speech was given to kick off the new parliamentary session. In it, Prime Minister Mark Carney committed to maintaining Canada’s sovereignty and transforming Canada’s economy by improving trade relationships with other countries. The Organisation for Economic Co-operation and Development released its Canadian Outlook survey, which noted that Canada must improve productivity by strengthening interprovincial trade and labour market mobility, and must help make housing more affordable. Those changes could help Canada’s economy grow over the long term, despite tensions with the U.S.

 

Fed expresses caution for the U.S. economy

The U.S. Federal Reserve Board (“Fed”) held the target range for its federal funds rate steady at 4.25%–4.50% at its May meeting. This marked the third straight rate hold from the Fed. The Fed noted that inflation is still above target and the labour market remains relatively strong. The Fed expressed its desire to take a wait-and-see approach to the impact of tariffs on the economy. A second estimate showed the U.S. economy shrank by 0.2%, annualized, in the first quarter of 2025. The Fed noted that the contraction was mainly due to the surge in imports as companies frontloaded purchases before tariffs came into effect. Still, the outlook is muddled by trade tensions, particularly with China. Despite both sides agreeing to pause higher tariffs for 90 days, tariffs remain in place and are disrupting trade between the world’s two largest economies. The Fed cautioned that tariffs could push consumer prices and the unemployment rate higher. Thus, the Fed felt it necessary to hold steady at current levels, which will also allow it to adjust monetary policy in a meaningful way going forward. Fed Chair Jerome Powell spoke about the Fed’s policy framework in May. Powell said price stability could be harder to achieve with more frequent supply shocks, yet the Fed is committed to its 2% inflation target. For now, markets are expecting the Fed to sit on the sidelines, but a rate cut later in the year is on the table.

 

The People’s Bank of China lowers interest rates

China’s economy continues to struggle under the weight of soft domestic demand, a troubled property market and a challenged industrial sector. Growth in retail sales and industrial production both slowed in April compared to March, due in part to tariffs coming into effect. The economy is also facing the challenge of a difficult trade relationship with the U.S., which could weigh on trade and economic activity. Beijing announced it would help support its economy through this difficult period with monetary and fiscal policy measures. The People’s Bank of China (“PBOC”) lowered the reserve requirement ratio and seven-day reverse repo rate early in the month in an effort to boost liquidity in the system. Later on, at its May fixing, the PBOC lowered its one- and five-year loan prime rates by 10 basis points to 3.00% and 3.50%, respectively, marking a new low for each policy rate. U.S. and Chinese leaders met in Switzerland to talk trade and other critical matters. Both had refused to back down from the enormous tariffs put on one another. However, both sides agreed to lower tariffs for 90 days to allow for effective communication in the hopes of reaching a trade deal that is satisfactory for both sides. This delighted financial markets, which are fearful that a prolonged trade war between the world’s two largest economies could bring down global economic activity.

 

U.S.-Europe trade tensions heat up

Trade tensions between the U.S. and EU picked up in May as both sides prepared for a prolonged trade war. However, cooler heads prevailed later in the month, with both groups willing to negotiate to reach a satisfactory agreement. The EU faced new tariffs from the U.S. This prompted the EU to create a list of U.S. imports that would be charged a levy. At the same time, the EU prepared a trade proposal to increase trade and investment between the two economies. However, U.S. President Donald Trump did not find the proposal or talks sufficient, thus threatening a 50% tariff on European imports beginning in June. This was quickly delayed until July after European Commission President Ursula von der Leyen had a conversation with President Trump. Both agreed to continue trade talks, easing tensions, at least in the near term. The EU is hoping a satisfactory agreement can be reached, as ongoing U.S.-EU trade tensions could be detrimental to its economy. The European economy isn’t in a particularly strong position to handle a prolonged trade battle with the U.S. Growth has been relatively muted. The European Central Bank makes its next interest rate decision in early June. The central bank has stated its concern for Europe’s economy and noted it will closely monitor the impact of tariffs ahead of any rate decisions.

 

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This commentary represents Canada Life Investment Management Ltd.'s views at the date of publication, which are subject to change without notice. Furthermore, there can be no assurance that any trends described in this material will continue or that forecasts will occur; economic and market conditions change frequently. This commentary is intended as a general source of information and is not intended to be a solicitation to buy or sell specific investments, nor tax or legal advice. Before making any investment decision, prospective investors should carefully review the relevant offering documents and seek input from their advisor. You may not reproduce, distribute, or otherwise use any of this article without the prior written consent of Canada Life Investment Management Ltd.