Q3 2025 market update: Hopes rising for interest rate cuts

Highlights

• The U.S. Federal Reserve Board (Fed) lowers interest rates
  • The Fed reduced its federal funds rate by 25 basis points (bps) to 4.00%-4.25%.
  • The Fed cut its rate because of a weaker labour market and slowing economic growth.
  • U.S. equity markets reached new highs as investors believed the Fed would lower interest rates.
• Trade issues weigh on Canada’s economy  
  • Canada’s economy shrank over the second quarter of 2025 because of a sharp drop in exports.
  • Tariffs are having an impact on certain sectors of the economy.
  • The federal government announced billions of dollars of support while negotiating a trade deal with the U.S.
  • The Bank of Canada (BoC) lowered interest rates at its last meeting of the quarter.
• North American labour markets slow
  • The Canadian economy lost jobs over the quarter, while job growth in the U.S. slowed.
  • Tariffs are also weighing on business confidence, which is slowing hiring activity.
  • If Canada can reach a new trade deal with the U.S., it could ease pressures and boost hiring.

Sorting out trade issues

The 90-day pause on tariffs ended in early August. U.S. President Donald Trump reinstated tariffs on countries that weren’t able to finalize a trade deal with the U.S. The U.K., Europe and Japan reached deals but still faced some tariffs as part of the agreement.

The U.S. and China agreed to a framework for a trade deal at the end of the second quarter, which included a tariff truce. That truce was extended through the third quarter as the two sides worked towards a trade deal. Both sides were also working on a deal for the U.S. operations of the popular app TikToK.

Canada faced tariffs from the U.S., which affected the automotive, steel and aluminum industries. While Canada was trying to negotiate a deal with the U.S., it announced support to help these hard-hit sectors. Canada also tried to improve its trade relationship with other countries, which was helpful for the aluminum industry. Quebec, which produces most of Canada’s aluminum, said its aluminum exports to Europe increased in the second quarter. Canada’s government and businesses are showing their resiliency.

How are large economies doing?

• The U.S. economy grew at an annualized pace of 3.8% in the second quarter (as reported in the third quarter).
• China’s economy grew by 5.2% year-over-year.
• Europe’s economy grew by 0.1%.
• The U.K. economy grew by 0.3%.
• Japan’s economy expanded by 2.2%, annualized.

Equity markets advance

• Global equity markets rose over the quarter.
• North American equity markets gained and reached new record highs.
• Equities in Canada, the U.S., EAFE, emerging markets, Europe, the U.K., Japan and China gained.
• Global bond prices moved higher while bond yields were largely unchanged. Global bond investors are earning much higher income than they were pre-pandemic.
• Canadian bond prices also increased while bond yields declined.
• Oil prices moved lower. The Organization of the Petroleum Exporting Countries said it would keep raising production to help avoid a potential supply shortage. Lower oil prices could provide Canadians with some price relief at the gasoline pumps.
• Gold prices rose and reached a new record high over the quarter.

Central banks lower interest rates

Several major central banks lowered interest rates over the quarter to support their economies. North American central banks said there could be more rate cuts this year.

• The BoC lowered its policy interest rate by 25 bps to 2.50%.
• The Fed reduced its federal funds rate to 4.00%-4.25%.
• The European Central Bank held steady.
• The Bank of England reduced its policy interest rate by 25 bps.
• The Bank of Japan held its key interest rate steady at 0.50%.
• The People’s Bank of China held its loan prime rates steady.

How is Canada’s economy doing?

Canada’s economy contracted in the second quarter because of a drop in exports. Prime Minister Mark Carney and his team have strengthened trade ties with other countries and regions. Consumer spending picked up but could come under pressure as labour market conditions weaken. 

• Canada’s economy shrank by 1.6%, annualized, over the second quarter.
• Trade tensions with the U.S. dragged down trade activity. The economy posted a sharp decline in exports. Business investment also declined.
• Consumer spending remained resilient, increasing over the second quarter despite softer consumer confidence.
• The federal government continued its talks with the U.S. administration to try and reach a trade deal.
• Canadian Prime Minister Mark Carney pledged billions of dollars to support sectors hurt by trade disruptions.
• Canada’s unemployment rate rose to 7.1% in August, its highest level since 2021.
• Canada’s inflation rate was 1.9% in August, below the BoC’s 2% target.
• Canadian equities gained and reached a record high. The Materials and Information Technology sectors were the strongest performers. The Industrials sector posted the weakest return and was the only sector to decline over the quarter.
• The yield on the benchmark 10-year Government of Canada bond declined, finishing the quarter at 3.18%. Canadian bonds are providing investors with higher income than before the pandemic.

What can investors expect in the future?