What were the most notable events in January?
Definitely that the Bank of Canada reduced its interest rate by 25 basis points. Since last June, the central bank has made six consecutive cuts, reducing the overnight interest rate from a peak of 5% to the current 3%. This decision was driven by weakening economic conditions and inflation returning to its target level.
Should we expect more cuts from the Bank of Canada? What will impact their rate cut decisions?
As you know, in early February, Trump imposed 25% tariffs on Canadian goods, only to suspend them shortly thereafter for 30 days. He then introduced a 25% tariff on Canadian steel and aluminum, which is set to take effect on March 12.
The Canadian economy is already struggling, with GDP per capita declining in eight of the last nine quarters. The potential of US tariffs are hitting our economy at a moment when it is already in a vulnerable position to begin with. The current general market expectation is that Bank of Canada will continue to cut rates as a result.
Beyond tariffs, the Bank of Canada will also consider other factors for its rate decision, including inflation, unemployment, the real estate market, consumer strength, and business activity.
Did the U.S. Federal Reserve also cut the rates?
The situation is different in the United States. Federal Reserve Chair Jerome Powell indicated that there is no immediate need to cut interest rates, preferring to wait for further signs of inflation slowing. The Fed opted to maintain its benchmark rate at 4.25%-4.5%, citing robust economic growth and a strong labor market as reasons for remaining patient.
How did the bonds do in January as a result?
The Canadian fixed-income market had a strong start to the year. The uncertainty surrounding potential tariffs and the Bank of Canada’s accommodative stance led to a decline in bond yields. Bond yields and returns moved in opposite direction, and the decline in yields resulted in positive returns for bonds in January. The Canadian Bond Universe index returned 1.2%.
How did stocks do?
Global equity markets moved higher in January. Despite the hiccup in U.S. technology heavyweight stocks (after an announcement from Deepseek, a new AI model from China that sent shockwaves through the world) and ongoing talk about tariffs, investors maintained a relatively bullish sentiment towards risk assets. US equities (S&P 500) returned 2.8% in January. Canadian Equities (S&P/TSX Composite) advanced 3.5%, led by the materials sector, which was up 10.2%, as prices of oil and gold finished higher over the month.
Head of Investments
Yelena Stepanyan is the Head of Investments at Embark. A lover of all things related to the financial markets, she is the past Chair of the CFA Society Toronto's Institutional Asset Management Committee, where she currently serves as a Senior Advisor.
