DIARY OF A PORTFOLIO MANAGER
June 13, 2025
“When you believe in things that you don't understand
Then you suffer
Superstition ain't the way”
-Superstition, Stevie Wonder
The song lyrics above are my reference to today being Friday the 13th if that didn’t seem obvious.
What does today bring? Global equity markets had been trading near all-time highs, benefitting from a relatively quiet period on the trade front. But some volatility resurfaced in the wake of an escalating tensions in the Middle East. Your team at RBC DS will be watching closely. As well, let’s not forget an issue that was concerning a month or two ago: weak sentiment among businesses and consumers. The key question was whether this would lead to any real economic weakness. In short, the answer is no, not yet.
Soft data turns down
Some of the early damage from tariff threats emerged back in March and April in the form of significant deterioration in what is often referred to as “soft data”. The Bank of Canada’s quarterly business outlook survey revealed a sharp drop-off in how businesses were feeling. Sentiment readings in the U.S. also showed a notable decline among businesses and consumers. Recent readings suggest there has been modest improvement, but sentiment readings still sit at levels well-below historical averages. While concerning, poor sentiment has not always been a reliable precursor to weaker economic activity. I have issues with this data as a lot of it is based on phone surveys so should be taken with that in mind.
Hard data more important
When it comes to so-called “hard data” (tangible, quantifiable, objective economic metrics), there is no shortage of things to look at: trade flows, new orders, prices, and retail sales, among many other things. None are as important as jobs given the importance of the consumer and the direct impact labour markets have on economic activity. Employment figures for the month of May suggest overall employment trends have hung in so far, despite some weakening at the margin.
Employment picture in North America has been resilient so far
Canada has been the weaker of the two countries with respect to job growth. This is not new. Nevertheless, the Canadian economy added a modest number of jobs in the month of May, demonstrating some resilience in the face of a volatile trade environment. A decrease was expected. Not surprisingly, areas more vulnerable to trade headwinds like manufacturing, transport, and warehousing saw job losses. Regions across southern Ontario have borne the brunt of job losses brought on by the threat or imposition of tariffs on motor vehicle and parts exports. As a result, unemployment levels in the region are noticeably higher than the 7.0% average in the rest of the country.
South of the border, the employment picture revealed a relatively resilient job market. Similar to Canada, there was weakness in goods-producing sectors that are more impacted by trade. Services sectors like health care, leisure, and hospitality drove most of the job gains. Prior months were revised downwards, suggesting job growth this year has not been as strong as first reported. Moreover, the labour force participation rate (the number of people in the workforce) has declined, driven by a rise in retirements and an exodus of undocumented immigrants. In summary, U.S. job growth has been slowing but has not experienced any notable signs of worsening in recent months.
Only time will tell whether prevailing uncertainty and weak sentiment will translate into more meaningful layoffs and broader economic deterioration, or whether the resilience of businesses and consumers to date will persevere. Markets seem to concur with the latter view given the strong rally in stock prices since the lows reached just a few months ago.
While reassuring, we remain mindful that risks to the economic outlook remain a bit higher than normal.
Happy Friday,
