Q4 2025 market update: Hopes rising for interest rate cuts

Throughout the fourth quarter, economic, trade and artificial intelligence (AI) developments continued to shape market performance. Canadian and US equity markets reached new record highs, driven by investor optimism following central bank interest rate reductions and expectations of strong AI-driven growth. Stock markets are in solid position for the first quarter of 2026 despite trade and geopolitical issues.

• Canada’s labour market stabilizes
  • Canada’s economy added jobs over the quarter, pushing the unemployment rate to its lowest level since 2024.
  • Strong labour demand and more clarity on the impact of tariffs helped Canada’s job market.
  • The Bank of Canada (BoC) held its policy interest rate steady in December after lowering it in October.
• The U.S. Federal Reserve Board (Fed) continued to lower interest rates
  • The Fed lowered its policy interest rate by 0.50% over the quarter, taking the target range to 3.50%-3.75%.
  • Slowing economic activity and softening labour market conditions prompted the reductions.
  • U.S. inflation rate remained above the Fed’s 2% target.
  • The Fed anticipates one additional rate cut in 2026 to support employment stability.
• The U.S. and China agreed to a one-year trade truce
  • U.S. and China agreed to a one-year trade truce, reducing some trade uncertainty.
  • The U.S. agreed to lower tariffs on Chinese products, while China will remove export restrictions on rare earths metals.
  • Agreement helped alleviate investor concerns over global economic stability.

Global trade remains in the spotlight

Global business welcomed the October announcement of a one-year trade truce between the US and China, significantly reducing investor uncertainty. The U.S. agreed to lower tariffs on China, while China agreed to remove its restrictions on rare earths exports.

Canada's pursuit of a trade agreement with the US stalled when President Trump suspended trade talks. The Ontario government funded an ad that spoke about the drawbacks of tariffs. A sectoral trade deal was then off the table.

Despite these setbacks, Canada strengthened trade ties with several countries and regions, which helped improve export performance. Notable progress included discussions with China and India -two economies that have large markets and would benefit Canadian industry. However, tariffs continue to impact key sectors, including steel, automotive, lumber and aluminum. The federal government has committed to support these industries, while the “Buy Canadian” initiative may help these tariff-hit sectors and Canada’s labour market.

How are large economies doing?

• U.S. economy grew at an annualized pace of 4.3% in the third quarter (as reported in the fourth quarter).
• China’s economy grew by 4.8% year-over-year.
• Europe’s economy grew by 0.3%.
• The U.K. economy grew by 0.1%.
• Japan’s economy shrank by 2.3%, annualized.

Source: Bloomberg Finance L.P.

Equity markets advance

• Global equity markets rose over the quarter.
• North American equity markets gained and reached new record highs.
• Equities in Canada, the U.S., EAFE, emerging markets, Europe, the U.K., Japan and China gained.
• Global bond prices moved higher while bond yields were largely unchanged. Global bond investors are earning much higher income than they were pre-pandemic.
• Canadian bond prices also increased while bond yields declined.
• Oil prices moved lower. The Organization of the Petroleum Exporting Countries said it would keep raising production to help avoid a potential supply shortage. Lower oil prices could provide Canadians with some price relief at the gasoline pumps.
• Gold prices rose and reached a new record high over the quarter.

Source: Bloomberg Finance L.P.

Central banks lower interest rates

Several major central banks lowered interest rates over the quarter to support their economies. The US Fed expects one interest rate cut in 2026. The BoC may continue to hold its rates steady if economic conditions evolve as expected.

• BoC lowered its policy interest rate by 25 bps to 2.25%.
• The Fed reduced its federal funds rate to 3.50%-3.75%.
• The European Central Bank held steady.
• The Bank of England reduced its policy interest rate by 25 bps.
• The Bank of Japan increased its key interest rate to 0.75%.
• The People’s Bank of China held its loan prime rates steady.

Source: Bloomberg Finance L.P.

How is Canada’s economy doing?

Canada’s economy expanded over the third quarter of 2025, driven by higher exports and increased government capital spending. Prime minister Carney committed in the Federal Budget to transform Canada’s economy and reduce dependence on US trade, his government has strengthened relationships with international partners beyond the US. However, US household consumption declined as consumers reacted to trade.

• Canada’s economy grew by 2.6%, annualized, in the third quarter.
• Exports increased by 0.2% during over the quarter, despite ongoing trade tensions with the U.S.
• Economy benefited from higher government spending, particularly on defence.
• Household consumption declined slightly amid economic, trade and labour market uncertainty.
• Federal Budget committed billions in spending to help transform and strengthen Canada’s economy. In response to the planned spending increase, the budget will bring with it a larger-than-expected deficit.
• Unemployment rate fell to 6.5% in November, its lowest level since July 2024.
• Inflation rate was 2.2% in November, holding near the BoC’s 2% target.
• Canadian equities advanced and reached a new record high. The Materials and Consumer Discretionary sectors were the strongest performers. Real Estate posted the weakest return.
• The 10-year Government of Canada bond yield rose to 3.43% by the end of Q3 2025.Canadian bonds continue to deliver relatively strong income to investors.

Source: Bloomberg Finance L.P.