The Weekly Bottom Line
Our summary of recent economic events and what to expect in the weeks ahead.
Date Published: August 22, 2025
- Category:
- Canada
Canadian Highlights
- Shorter-term core inflation metrics cooled in July, lifting the odds BoC rate cut on September 17th. However, the odds are still low, according to markets.
- Next week’s second quarter GDP report should show a sizeable contraction, indicating increased economic slack.
- However, the Canadian economy has been more resilient than initially feared, with this week’s housing starts and retail sales volumes reports adding to this narrative.
U.S. Highlights
- In his Jackson Hole speech, Fed Chair Powell highlighted that the downside risks to employment have risen. This shifts the balance of risks on employment and inflation, and opens the door for a September rate cut more widely.
- Odds of a September rate cut rose after his speech, boosting stock markets.
- Also this week, July housing data improved but did not change the overall slow market trend.

We have long believed that economic slack from a softening Canadian economy would help ease inflationary pressures, counterbalancing the upward push on consumer prices caused by retaliatory tariffs on U.S. goods, efforts to diversify exports away from the U.S., and Canadian firms seeking new suppliers. The July inflation data aligned closely with this narrative. Headline inflation remained mild at 1.7% year-over-year, with the continued effects of the April carbon tax removal and falling gasoline prices weighing on the overall number—though gasoline prices are on track to stabilize in August.
More crucially, core inflation trends have shown encouraging signs of cooling. The Bank of Canada’s (BoC’s) preferred measures of core inflation remained elevated on a year-over-year basis, but shorter-term momentum slowed notably. On a three-month annualized basis, the average of the BoC’s key metrics (CPI-Median and CPI-Trim) eased to 2.4%, the slowest pace seen in nearly a year. Similarly, more traditional core measures—CPI excluding food and energy, and CPIX—both dropped by over one percentage point to about 2.2%. These trends prompted a market reaction, with both bond yields and the Canadian dollar slipping, and modestly raised expectations for a possible BoC rate cut at the September 17th meeting.

Even with the CPI report, markets are still only assigning a 33% chance of a rate cut at the September meeting. And, the BoC has a chance to review another round of jobs and inflation data before its next rate announcement. Next week’s second-quarter GDP report is also highly anticipated; we expect an annualized contraction of about 1.5%, signaling increased slack in the economy and adding further downward pressure on inflation. This economic backdrop could pave the way for two more rate cuts this year (see our updated economic forecast here), given that the current policy rate still sits at the midpoint of what the Bank considers neutral for the economy. Trade was the main drag on second-quarter growth, with exports dropping due to softer U.S. demand (amid tariffs) and an unwinding of earlier gains prompted by anticipation of tariffs.
Despite an expected weak GDP report for the second quarter, the Canadian economy has shown more resilience than we expected a few months ago. This week offered more glimpses of this durability (Chart 2), with July housing starts reaching their highest level since 2022, as the rental market is receiving a tailwind from powerful past population growth and government programs targeting this sector. Meanwhile, retail sales volumes advanced 1.5% month-on-month, supported by gains in a broad range of categories. Encouraging as these results may be, significant uncertainty remains. The country also continues to face tariffs and a notable slowdown in population growth. Reports indicate that some progress may come on the tariff front, with the Canadian government to remove some retaliatory tariffs on U.S. goods to restart stalled trade talks. However, in the near-term, these factors remain in play, and the economy will be hard pressed to generate strong momentum in the third quarter.
Rishi Sondhi, Economist | 416-983-8806

Financial markets appeared set to finish slightly lower for the week. However, following Chair Powell’s keynote speech on Friday morning at the Federal Reserve’s annual symposium in Jackson Hole, Wyoming—where he indicated the possibility of rate cuts—equities rallied. The 10-year yield declined from around 4.33% earlier in the day to 4.26%, while the S&P 500 rose by 1.4% at the time of writing, surpassing last week’s close.
With few major data releases during the week (only two main housing reports), attention was focused on developments related to the central bank. The FOMC minutes provided additional context regarding the July decision not to cut rates. Participants highlighted risks associated with both sides of the Committee’s dual mandate, referencing “upside risk to inflation and downside risk to employment.” In July, most participants considered the inflation risk to be more significant, citing uncertain tariff effects and concerns about inflation expectations.

In his Jackson Hole speech this Friday morning, Chair Powell suggested a change in the Fed’s position. He noted that with policy currently restrictive, adjustments may be warranted given the outlook and balance of risks (see commentary). The key shift in Powell’s messaging relative to July reflects the recent jobs data and acknowledges that downside risks to employment are rising. This both tips the balance on the Fed’s dual mandate to greater concern about fostering maximum employment, and reduces the risks that tariff-driven inflation leads to a wage-price spiral. By emphasizing downside risks to employment and reduced risks of persistent inflation, Chair Powell has opened the door for a rate cut in September. There is still an employment and an inflation report for the Fed to parse before deciding whether to walk through the door. This is a key shift from Chair Powell, and not surprisingly market odds of a September rate cut jumped back up following his speech (Chart 1).
Lower rates can’t come fast enough for the housing market. Existing home sales increased moderately in July (up 2% month-over-month), but overall activity remained subdued, with sales levels near those seen during the Global Financial Crisis. Soft demand and some inventory growth have contributed to slower home price appreciation, particularly in the West and South Census regions (Chart 2). There was a notable rise in multifamily starts in July, primarily in the South, though this series is volatile and permitting data suggest a weaker outlook. Single-family starts showed little change from subdued levels, in tune with looser conditions in the new home market. Should the Federal Reserve lower rates later in the year as expected, mortgage rates should decline further, supporting housing activity in the future.
All told, barring any major surprises in payroll and inflation data, it is widely expected that the Federal Reserve will resume rate cuts in mid-September.
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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