Equity markets were initially pressured by renewed U.S.-China trade tensions, including tariff hikes and mutual accusations of non-compliance, but regained footing midweek as softer U.S. labour data (notably a weak ADP report) raised expectations for Federal Reserve (Fed) rate cuts. However, Friday’s stronger-than-expected nonfarm payrolls and wage growth tempered those expectations, lifting yields and trimming rate cut bets. In Canada, equities were supported by resilient full-time job gains and steady wage growth, though a rising unemployment rate and a record trade deficit highlighted economic fragility, reinforcing the Bank of Canada’s (BoC) cautious stance. European markets rallied early on expectations of European Central Bank (ECB) easing, but turned lower after President Lagarde’s hawkish tone post-cut signaled the end of the cycle. In China and broader emerging markets, weak PMIs and fading stimulus support weighed on sentiment, though a late-week rebound in services data and signs of renewed U.S.-China dialogue offered modest relief.

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U.S. fixed income markets were driven by shifting rate expectations, with early-week dovish sentiment sparked by weak ADP employment data and soft jobless claims, only to reverse after Friday’s stronger-than-expected nonfarm payrolls and wage growth, which pushed yields higher and trimmed Fed cut pricing. In Canada, bond markets were anchored by the BoC’s decision to hold rates steady amid mixed economic signals, including a record trade deficit and resilient labour data, with the front end of the curve reflecting policy caution. European yields initially fell on the ECB’s widely expected rate cut, but rose sharply after President Lagarde’s hawkish tone suggested the end of the easing cycle. In emerging markets, rate moves were more muted, with sentiment shaped by soft Chinese PMIs and ongoing trade policy uncertainty.

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The Bank of Canada (BoC) held its key interest rate steady for the second consecutive time. Still, it acknowledged it may need to cut rates if prohibitive U.S. tariffs and uncertainty weaken the economy. The decision to keep the policy rate at 2.75% was in line with financial market odds, which favoured a hold after recent stronger-than-expected economic data. Governor Tiff Macklem said that faced with “unusual uncertainty,” the governing council is being less forward-looking than usual when it comes to its future rate decisions.

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The U.S. trade deficit dramatically decreased in April, as tariffs severely reduced imports. The trade deficit narrowed to a seasonally adjusted US$61.6 billion in April, the U.S. Commerce Department reported, its lowest level since September 2023. That was down sharply from the record US$138.3 billion it hit in March, when businesses were racing to bring in imports before U.S. President Trump’s “Liberation Day” tariffs, which were imposed on April 2.

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Inflation in the eurozone fell below the European Central Bank’s target in May, a big step toward becoming the first major central bank to secure victory over the spiralling inflation that followed the pandemic and the start of the war in Ukraine. According to the European Union’s statistics agency, Eurostat, consumer prices were 1.9% higher on the year in May, down from the 2.2% of April. Economists had estimated annual inflation at 2.0% for the month.

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^{1 S&P 500 Index CAD
2 S&P/TSX Composite Index CAD
3 Bloomberg Developed Markets ex N. America Large & Mid Cap Price Return Index CAD
4 Bloomberg EM Large & Mid Cap Price Return Index CAD}