Market Watch: March 2025

Equity markets saw notable declines in March, marking their worst monthly performance since December 2022. Investor sentiment was rattled by growing fears of a global trade war, fueled by President Trump’s announcement of sweeping new tariffs. The move raised concerns over rising production costs and the potential onset of stagflation, a mix of sluggish economic growth and elevated inflation. As a result, expectations of weaker corporate earnings triggered a broad-based sell-off across equity markets.

Canada

​In March 2025, Canada’s S&P/TSX Composite Index TR declined by 2.23%, reflecting rising market uncertainty. Persistent inflationary pressures, a cooling housing market, and escalating trade tensions drove this downturn. Below is an overview of the key developments shaping Canada’s near-term economic outlook.

Growth: Canada’s GDP grew by 0.4% in January, the strongest monthly gain in nearly a year, due to strength in goods sectors like utilities and mining, signaling early-year momentum. However, with February expected to be flat and trade tensions rising, confidence and activity have since cooled. While Q1 growth is still on track, the outlook for Q2 is much weaker, and ongoing tariff uncertainty may weigh further on the economy, keeping the Bank of Canada cautious about future policy moves.

Inflation: Canada’s inflation rose 1.1% in February, lifting yearly inflation to an eight-month high of 2.6%. This was mainly driven by the end of a tax holiday and broad-based price increases across key categories like recreation and food. Even excluding taxes, prices rose significantly, showing underlying strength. Shelter costs slowed, but core inflation metrics stayed firm, pointing to persistent price pressures. The data complicates the Bank of Canada’s rate-cut decisions, especially with further price volatility expected in the coming months.

Source: Statistics Canada. 12-month change in the Consumer Price Index (CPI) and CPI excluding energy

Monetary Policy: The Bank of Canada cut its key interest rate by 25 bps to 2.75%, marking its seventh straight reduction amid growing trade tensions. Despite stronger-than-expected growth at the end of 2024, BoC highlighted weakened consumer and business confidence due to tariff uncertainty. While inflation remains near target, concerns over job security and spending have intensified. The Bank signaled more cuts might follow, emphasizing the need to manage inflation expectations while acknowledging it cannot fully shield the economy from the effects of a trade war.

Labor Market: Canada’s job market was mostly flat in February, adding just 1,100 jobs after strong gains in previous months. Due to a shrinking labor force, the unemployment rate stayed at 6.6%. Full-time employment declined, and harsh weather likely impacted hours worked, though they’re still trending up for Q1. Wage growth picked up slightly to 3.8% year-over-year.

Housing Market: Canada’s housing market cooled in February, with sales and prices both declining amid harsh weather and weakened consumer confidence from trade tensions. Existing home sales dropped nearly 10% month-over-month, while new listings also fell. Despite lower mortgage rates, buyer activity hasn’t picked up meaningfully, and further insights will depend on spring data. Housing starts also eased slightly, reflecting softer demand and slowing population growth.

United States

In March 2025, US equity markets experienced heightened volatility, largely triggered by rising trade tensions and the introduction of new tariffs by President Donald Trump. The S&P 500 Total Return Index fell 5.63% for the month, pulling its year-to-date performance down to -4.27%. The following is a summary of key economic indicators released during the month:

Inflation: US consumer inflation cooled in February, with CPI rising just 0.2%, the slowest pace in four months and below expectations. Annual inflation eased to 2.8%, helped by declines in gas, airfare, and vehicle prices, while core inflation also moderated to 3.1%. On the other hand, core PCE inflation, the Fed’s preferred gauge, rose 0.4% in February, marking the third straight monthly increase and signaling persistent inflation pressures. Year-over-year, core PCE climbed to 2.8%, driven by gains in both durable goods and services.

Source: bea.gov

Retail Sales: US retail sales showed mixed results in February, rising just 0.2%, well below expectations, while January’s figures were revised further downward. Although core retail sales (excluding autos, gas, and other volatile components) improved by 1.0%, the overall trend points to weakening consumer momentum. Discretionary spending dropped notably, with declines in dining, department stores, and clothing, reflecting growing caution amid economic uncertainty.

Labor Market: February’s US jobs report showed a cooling labor market without signaling an imminent recession. Nonfarm payrolls rose by 151,000, slightly above expectations but slower than late 2024’s pace, while the unemployment rate ticked up to 4.1%. Household employment dropped sharply, and broader unemployment measures also rose, reflecting growing financial stress.

Monetary Policy: At its March 19 meeting, the Fed held rates steady but acknowledged rising uncertainty in the economic outlook, removing prior language suggesting balanced risks. While the median forecast for rate cuts in 2025 remained unchanged, sentiment within the Committee shifted more hawkish, with fewer cuts now expected due to persistent inflation and slowing growth. The Fed also revised its projections, lowering GDP growth and raising both inflation and unemployment forecasts.

Housing Market: US housing started to surge 11.2% in February, rebounding from a weather-related slump in January. However, future activity may slow as building permits dipped and homebuilder confidence hit a seven-month low. US existing home sales rose unexpectedly by 4.2% in February, offering a rebound ahead of the spring selling season, though activity remains muted due to high mortgage rates and poor affordability.

International

Europe: ​​In February 2025, European equity markets exhibited resilience amid global economic uncertainties, bolstered by robust corporate earnings and a notable surge in defense stocks, which helped offset apprehensions surrounding US trade policies. ​Preliminary data for February showed that Germany’s inflation rate remained steady at 2.8%, slightly above the anticipated 2.7%. Italy’s annual consumer price growth held at 1.7%, falling short of expectations, while France’s inflation rate dropped to a four-year low of 0.9% from the previous 1.8%. Concurrently, final estimates confirmed contractions in the fourth-quarter gross domestic product for both Germany (−0.2%) and France (−0.1%).

Japan: The core consumer price index in Tokyo rose by 2.2% year-on-year, slightly below forecasts, primarily due to the reintroduction of energy subsidies. Concurrently, factory activity contracted for the eighth consecutive month, with the Purchasing Managers’ Index (PMI) inching up to 49.0 from January’s 48.7, remaining below the growth threshold of 50.0. Despite these challenges, the Bank of Japan (BOJ) maintained its stance on monetary policy, indicating readiness to adjust interest rates further if inflation trends persist.

China: The government reaffirmed its commitment to achieving a 5% GDP growth target for the year, despite escalating trade tensions with the United States, which imposed additional tariffs on Chinese imports. In response, China announced retaliatory measures, including tariffs on US goods and restrictions on certain exports. Domestically, manufacturing activity showed signs of recovery, with the Purchasing Managers’ Index (PMI) expanding at its fastest pace in three months, driven by increased orders and purchasing volumes. However, external pressures from the ongoing trade disputes pose significant risks to China’s export performance and overall economic stability.

EURUSD GBPUSD USDJPY Performance – March 2025

The Portfolio Management Team