March 2025 market update

Introduction

Global equity markets declined over the month of March. Growing trade tensions and fears of a strong pullback in economic activity in response to tariffs weighed on investor sentiment. Tariffs came into effect in March, with more expected in April. The Bank of Canada (“BoC”) and European Central Bank (“ECB”) lowered interest rates over the month, citing concerns over global trade tensions.

In Canada, an uncertain outlook for the economy has begun to weigh on consumer and business activity. Consumer spending has subsided while businesses expect to slow hiring and capital expenditures. Inflation moved higher, in large part due to the end of the sales tax holiday. Manufacturing activity has weakened in recent months. Canada’s manufacturing sector could be hindered by extensive tariffs.

The S&P/TSX Composite Index declined, dragged down by the Information Technology and Industrials sectors. U.S. equities fell sharply over the month. Yields on 10-year Government of Canada bonds edged higher over the month, while those in the U.S. were largely unchanged. The price of oil moved higher. The price of gold increased to a new record high as investors searched for safety amid the economic uncertainty.

Trade tensions persist

It was another wild ride for financial markets as tariff talks intensified over the month. After a 30-day delay, the U.S. placed a 25% tariff on Canada and Mexico on March 5, along with another 10% tariff on China. Energy exports from Canada faced only a 10% tariff. This rattled markets and the outlook for Canada’s economy. However, the U.S. pulled back on some product tariffs based on exemptions in the United States-Mexico-Canada Agreement. Canada retaliated with tariffs of its own. The actual implementation of tariffs didn’t end there. Later in the month, the U.S. put a 25% tariff on all aluminum and steel imports into the U.S., with no exceptions. This garnered reactions and, in some cases, retaliatory tariffs from other economies around the world. Near the end of March, the U.S. also announced a tariff on automobile imports, which would come into effect in early April. Retaliatory tariffs are set to go into effect on April 2. All the tariffs combined are likely to have a negative impact on global economic activity. Late in March, Canadian Prime Minister Mark Carney and U.S. President Donald Trump spoke, agreeing to discuss trade and other matters after the federal election.

Tariffs weighing on global central banks’ outlook

Several major central banks held meetings in March, with most expressing concern about tariffs and how they may impact the global and domestic economies. In the U.K., the Bank of England held steady but noted its concern that tariffs may drag down economic activity. The ECB continued its path of looser monetary policy, cutting its policy interest rates by another 25 basis points. The ECB said it already sees signs of stress on Europe’s economy. Tariffs could further weigh on economic activity. In Canada, the BoC reduced its benchmark overnight interest rate by 25 basis points to 2.75%. The BoC noted that the rate cut was primarily in response to the tariffs from the U.S. All else being the same, BoC officials said they would have held steady in March. Canada’s central bank believed its previous interest rates were helping to support economic activity, but tariffs cloud its outlook. The U.S. Federal Reserve Board (“Fed”) held its federal funds rate steady at a target range of 4.25%–4.50%. However, the Fed downgraded its outlook for U.S. economic growth this year while raising its expectations for inflation. Finally, the People’s Bank of China (“PBOC”) held its loan prime rates steady in March. China’s government set its 2025 growth target at around 5%. However, there is concern that tariffs and pockets of weakness in the economy could hinder progress towards that goal. In response, the government and PBOC expect to implement more stimulus measures this year. Central banks will need to navigate the current economic environment cautiously in the months to come with tariffs expected to bring down economic activity.

Canadian consumer and business confidence plummets

While tariff-related conversations between lawmakers on both sides of the border continue, the deteriorating trade relationship with the U.S. has heightened uncertainty about the strength of Canada’s economy, dragging down consumer and business confidence. On the consumer side, the Bloomberg Nanos Canadian Confidence Index, which is a weekly survey, has dropped over 2025. There’s growing concern that Canada’s economy could weaken over the next six months, which is heightening concerns about the labour market and households’ personal financial situations. This drop in confidence may already be showing, with retail sales falling over January and February.

Concerns over trade disruptions and how they might impact sales have also weighed on business owners. The CFIB Business Barometer Index, which dates back to 2000, fell to its lowest level ever recorded in March. Many businesses expect a negative impact from tariffs, which could weigh on their hiring and capital expenditure decisions. A separate report found that many businesses are losing faith in the U.S. as a reliable trade partner. In response, businesses are looking to increase domestic investment and sales. With tariffs already in place and more looming, sentiment among consumers and businesses has soured. Recent spending and investment results suggest weaker sentiment is weighing on economic activity.

Soft U.S. retail sales growth

Consumer strength in the U.S. appears to have softened as we entered 2025. Tight financial conditions persist, and the potentially negative impact from tariffs on the U.S. economy has weighed on consumer optimism. Retail sales rose by just 0.2% in February, which fell short of expectations. This was the second straight month of disappointing retail sales after falling by 1.2% in January. A rise in sales at health and personal care stores was partially offset by a drop in sales at gasoline stations and at food services and drinking places. A separate report showed personal spending rose by 0.4% in February, missing economists’ expectations. While demand has subsided, inflation remains elevated. The headline inflation rate in the U.S. was 2.8% in February, well above the Fed’s 2% target. The personal consumption expenditure price index (“PCE”), which serves as the preferred inflation gauge for the Fed, was 2.5% in February. Core PCE accelerated. Trade and policy changes are taking a bite out of U.S. consumer confidence, with consumers also facing still-high borrowing costs and elevated inflationary pressures. Tariffs are expected to push prices higher and could weigh on U.S. economic growth.