The Weekly Bottom Line
Our summary of recent economic events and what to expect in the weeks ahead.
Date Published: October 31, 2025
- Category:
- Canada
Canadian Highlights
- The Bank of Canada delivered a quarter-point interest rate cut, but indicated it is comfortable with the current policy rate, making further cuts unlikely in the near term.
- Export-reliant sectors continue to struggle in the face of U.S. tariffs.
- The federal budget is due next week and expected to lay the groundwork for diversifying exports through infrastructure development – potentially supporting medium-term growth.
U.S. Highlights
- With no end in sight, the government shutdown is nearing the longest in U.S. history.
- A meeting between President Trump and President Xi led to a further easing in U.S.-China trade tensions. The administration also announced trade agreements with Thailand, Malaysia and Cambodia.
- The Federal Reserve delivered another quarter-point rate cut – bringing the target range to 3.75%-4%. It will also end its quantitative tightening program as of December 1st.
As was widely expected, the Bank of Canada (BoC) delivered another quarter point interest rate cut this week. However, yields backed-up on the news as the accompanying statement showed that the Bank is comfortable with where the policy rate now stands – shrinking the odds of further rate cuts. The decision comes ahead of a much-anticipated Federal Budget next week, where PM Mark Carney is looking to address the structural challenges facing the country. As Governor Macklem has pointed out before, the BoC’s single blunt policy instrument, changing the overnight rate, can’t address the structural damage caused by the trade conflict. Fiscal policy is better suited for this task, and so we look forward to seeing the strategy and implementation plan in the budget, which could have a material effect on medium-term growth.
The headline of the week was the BoC signalling it was now time for a pause on interest rate moves. As we wrote, the policy rate is now at the lower end of the Bank’s neutral rate range – the rate at which interest rates are neither stimulating nor restricting the economy. Our view remains that given the current balance of risks, a pause here is warranted.
On the downside, August’s industrial GDP data showed the economy shrank 0.3% month-on-month, completely offsetting July’s gain. A small 0.1% increase is expected in September but, bigger picture, this all reflects an economy facing down a structural change as trade with the U.S. is upended. Industries highly reliant on access to the U.S. market are losing momentum, opening a wedge with domestic oriented sectors (Chart 1). Moreover, with trade uncertainty expected to persist, the outlook here remains fraught.
The labour market also remains soft. Last month’s jump in employment was a welcome development but did little to arrest the steady erosion in the labour market (Chart 2). The unemployment rate is still elevated (at 7.1%) and being restrained by stall-speed population growth. The only silver lining here is that due to the slower growth in the labour force the economy doesn’t need to generate as many jobs as in the past to prevent the unemployment rate from rising - a fact highlighted in the Monetary Policy Report that accompanied the rate announcement.
At the BoC press conference Governor Macklem highlighted that “structural damage caused by tariffs is reducing the productive capacity and adding costs”, limiting “the ability of monetary policy to boost demand while maintaining low inflation.” Hence the outlook for stable inflation despite weak growth.
However, this brings us to the upside to the outlook. The hope is the new government’s first budget next week will confront the challenges the economy is facing. Among the objectives is diversifying Canada’s trade relationships to double non-U.S. exports in the next decade. To accomplish this, large, near-term investments in trade-facilitating infrastructure are expected, on top of a substantial commitment to lift defense spending to 5% of GDP by 2035. The timing and scale of the outlays could provide a lift to growth in the medium-term as funds start to flow.
The government shutdown entered its 31st day on Friday, and if it extends past November 3rd, will become the longest in U.S. history (Chart 1). At the time of writing, there is no offramp to end the shutdown. On Tuesday, Senate Democrats rejected (for the thirteenth time) a House-passed stopgap measure to fund the government through November 21st, while Senator Thune pushed back on the idea that Republicans were considering piecemeal bills that would reopen portions of the government. Elsewhere, President Trump traveled to Asia this week, which culminated in three new trade agreements and a further easing in trade tensions with China. Stateside, the Federal Reserve delivered another rate cut and signaled an end to its quantitative tightening program. Powell’s remarks that a December rate cut “is not a foregone conclusion” led to some firming in Treasury yields, as market pricing for a December cut fell to 70%. A healthy slate of earnings reports capped off the week, pushing the S&P 500 up 1.0%.
In a further move to de-escalate trade tensions with China, President Trump agreed to cut the fentanyl tariffs from 20% to 10%, suspend the increase of its reciprocal tariffs (scheduled to rise from 10% to 35% on November 10th) and ease restrictions on blacklisted Chinese firms. In return, China eased its restrictions on rare earth exports and said it would increase purchases of U.S. soybeans. Both countries also agreed to suspend their port fees, which came into effect earlier this month.
The U.S. also reached trade agreements with three other counties this week, including Thailand, Malaysia and Cambodia. Trade to these countries account for roughly 3% of total U.S. annual imports, but combined with the other seven agreements, 30% of U.S. trade is now covered by a new trade deal (Chart 2). Details of this week’s agreements remain vague, but based on White House fact sheets, each country will face a 19% reciprocal tariff rate and have agreed to reduce tariffs and trade barriers on U.S. imports along with making commitments to purchase energy products and aircrafts.
The Federal Reserve’s move to cut its benchmark rate by another 25 basis points – bringing the target range to 3.75-4.0% – came as little surprise. However, Powell’s remarks in the press conference regarding a December rate cut being far from guaranteed offered a shot in the arm to market odds, which had another cut as a near certainty. Indeed, the statement showed a growing divide among FOMC members. Recently appointed Stephen Miran dissented in favor of larger (50bps) cut, while Jeffery Schmid voted to hold rates steady. Given the data fog created by the government shutdown, Powell noted that there was a “growing chorus to at least wait a cycle” before making another cut, particularly given today’s policy rate is at the upper end of some estimates of neutral. We interpret Powell’s hawkish tone as a way of bringing more balance into market expectations. Another cut in December remains our base case, but we acknowledge that a flurry of data releases once government reopens could quickly shift views on the economic outlook and reshape the Fed’s thinking on its policy adjustment.
Disclaimer
This report is provided by TD Economics. It is for informational and educational purposes only as of the date of writing, and may not be appropriate for other purposes. The views and opinions expressed may change at any time based on market or other conditions and may not come to pass. This material is not intended to be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice. The report does not provide material information about the business and affairs of TD Bank Group and the members of TD Economics are not spokespersons for TD Bank Group with respect to its business and affairs. The information contained in this report has been drawn from sources believed to be reliable, but is not guaranteed to be accurate or complete. This report contains economic analysis and views, including about future economic and financial markets performance. These are based on certain assumptions and other factors, and are subject to inherent risks and uncertainties. The actual outcome may be materially different. The Toronto-Dominion Bank and its affiliates and related entities that comprise the TD Bank Group are not liable for any errors or omissions in the information, analysis or views contained in this report, or for any loss or damage suffered.
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