Canada’s Positively Surprising Week

With homegrown teenage sensation Victoria Mboko stunning the tennis world with a Cinderella victory in the Canadian Open final Thursday, our friendly neighbors to the north are getting a lot of headlines this week. So is their economic data, which may seem a bit puzzling at first glance. July jobs data flopped, but Ivey’s Purchasing Manager’s Index (PMI) jumped. Add in June’s resilient trade data and a high-rising S&P/TSX Composite index, and you get a timely lesson in how markets work.

The employment report, out Friday, got the most attention. Maybe that is because jobs data always grab eyeballs—being relatable, but carrying dubious analytical value to investors. Or maybe it is because it was pretty bad. Or some of both. Payrolls dropped -48,000, the worst reading in years outside COVID lockdowns.^[i] That the losses followed an unexpectedly huge 83,100 payroll increase in June, netting out to mild summertime growth thus far, did little to soothe nerves.^[ii] Rather, coverage cast it as a weak start to 2025’s second half and evidence the the trend of overall slower growth (or worse) is set to continue.

Yet the PMI begged to differ. Ivey’s all-sector PMI rose to 55.8 in July, up from June’s 53.3.^[iii] Readings over 50 indicate expansion, so this implies Canada’s economy kicked it up a gear after contractionary readings in April and May. Under the hood, that springtime wobble coincided with an inventory jump as businesses stockpiled and demand cooled, almost surely a response to tariff uncertainty given all the jawboning and tense talks then. By July, companies were drawing down inventories, which speaks to normal business activity resuming. It may also point to further growth from here as businesses look to replenish. Then again, S&P Global’s Canadian PMIs paint a different picture, one of slowing declines but not actual recovery. While this shows the perils of relying on survey data alone, in concert, these show there is some degree of stabilization at the very least.

Trade data landed more on the recovery side of things, with exports to the US rising 3.1% m/m in June—snapping a four-month negative streak.^[iv] That helped total exports rise 0.9% m/m, extending May’s 1.8% rise and the rebound from April’s steep slide.^[v] It seems that as businesses are getting more clarity and fathom the preservation of tariff exemptions under the US-Mexico-Canada free-trade agreement, trade is picking back up. June’s monthly GDP, with a preliminary report of slight growth last week, also points to a nascent recovery.

Put it all together, and it seems Canada may be crawling out of a springtime soft patch, one likely heavily induced by trade uncertainty. The jobs report doesn’t contradict this. It backs it up! Employment data are always lagging indicators—often very late-lagging. PMIs, monthly GDP, trade and other metrics all showed economic decline earlier this year. It isn’t shocking that this would have a downstream effect on the job market, whether through layoffs or firms not immediately backfilling resignations and retirements. As the economy rebounds, firms will likely need more workers to meet rising demand, and growth will create a lagging jobs rebound. That is just a theory, but regardless, we have a mountain of historical data from a boatload of countries showing growth creates jobs, not the other way around, which makes employment data ultra backward-looking.

Particularly for stocks, which are forward-looking and seemingly pre-priced all of this. The S&P/TSX Composite took a hit during the post-Liberation Day freakout, dropping -10.4% in US dollars (and -11.1% in Canadian dollars) from April 2 – April 8.^[vi] That was almost as bad as the S&P 500’s fall during this stretch, illustrating Canada’s tight relationship with the US economy and perceived vulnerability to US tariffs. Since then, Canadian stocks have been on an absolute tear, surging 28.3% in US dollars (24.4% in CAD) and outperforming the S&P 500.^[vii]

We have often noted that when it comes to tariffs, markets appeared to price the worst-case scenario right after Liberation Day, then moved on and priced things not going as bad as feared. Canada surely seems a prime example. Given the US buys a huge share of Canada’s exports, fear hit Canada disproportionately relative to other trading partners. Back then, we saw a lot of talk that trade would halt, upending Canada’s economy. Instead, we saw a steep but temporary trade decline, some ripple effects through broader economic data, and now some green shoots. The weak months were far from pleasant, but just kind of bad is a far cry from utter crash. For stocks, that was enough to qualify as positive surprise and power a major rebound.

The fresh green shoots aren’t predictive, inherently. All data tell you what happened, while forward-looking indicators can at best help you form probabilities as you assess what may happen. But they do provide some evidence that markets were right to start pricing in economic recovery.

Which shouldn’t surprise. The market’s messy pricing mechanism is one of the best indicators there is, mashing everyone’s opinions, outlooks, fears and hopes into an index level. You can’t read into the day-to-day wobbles, but those wobbles even out to trends in time, and those trends are great forward-looking economic indicators. The market told us things in Canada would go better than expected. The data are starting to show it. Markets still look optimistic, notching new highs this week. Trust them.