Global equity markets moved higher over the month of August. More clarity towards the global trade environment and suggestions that the U.S. Federal Reserve Board (Fed) could lower interest rates at an upcoming meeting boosted investor confidence. The U.S. economy estimate for growth in the second quarter was upwardly revised, benefiting from a steep drop in imports. Inflation remained elevated in some economies around the world, with concerns mounting that tariffs could push inflation higher.

Canada’s economy shrank over the second quarter of 2025, in large part due to a decline in exports and business investment. The labour market has shown signs of weakness in recent months, which is expected to weigh on consumer activity in the months to come. Inflation remains below the Bank of Canada’s (BoC) 2% target.

The S&P/TSX Composite Index reached a new record high at the end of August. Canada’s main index got strong performances from the materials and health care sectors. U.S. equities edged higher. Yields on 10-year government bonds in Canada and the U.S. declined. The price of oil declined, while gold prices finished higher.

At the end of the month, the U.S. Court of Appeals for the Federal Circuit upheld a May ruling by the Court of International Trade that U.S. President Donald Trump’s ‘Liberation Day’ tariffs were illegal. President Trump has said that he will appeal the decision to the U.S. Supreme Court. The decision impacts the extra duties on Canada, Mexico and China.

Canada’s economic growth slows

Canada’s gross domestic product shrank over the second quarter of 2025, which was its first decline since the third quarter of 2023. Canada’s economy contracted at an annualized pace of 1.6% over the quarter, which was deeper than the 0.7% decline economists had expected. Trade continued to have a significant impact on growth as it did in the first quarter amid trade disruptions with Canada’s largest trade partner, the U.S. The largest drag on performance was a 7.5% decline in exports. U.S. tariffs have had a significant impact on key Canadian industries such as aluminum, steel and automotives. Amid trade tensions with the U.S., business investment also pulled back during the quarter. But the news wasn’t all bad. Household spending accelerated in the second quarter compared to the first, rising by 1.1%. Canadian consumers remained relatively resilient despite uncertain economic conditions and a slowing labour market. As trade tensions with the U.S. grew, economic activity in Canada slowed. Canada’s federal government continued to work with the U.S. to try to reach a trade deal. Near the end of August, Canada removed retaliatory tariffs on most U.S. products, which might help negotiations with the U.S. The BoC appeared likely to lower interest rates again as a result of slowing economic activity, a moderating labour market and contained inflationary pressures.

U.S. Fed concerned about labour market

Fed Chair Jerome Powell delivered a speech at the end of the annual Jackson Hole Symposium. His comments raised expectations that the Fed was closing in on a rate cut. With changes to trade and tax policy from the new U.S. Presidential administration, risks are rising. And with rates still in restrictive territory, Chair Powell says that the Fed may need to change its monetary policy stance. After cutting interest rates over the second half of 2024, the Fed has held the target range for its federal funds rate steady at 4.25%-4.50% in 2025. Powell’s comments suggested the decision to lower interest rates will be a difficult one. On the one hand, inflation remained elevated, and the Fed has seen tariffs push prices higher for some goods. The Fed Chair said it is difficult to predict whether those pressures will subside relatively quickly or have a more lasting impact. On the other side of its dual mandate, the Fed Chair expressed concern about the labour market, noting that job growth has been relatively muted in recent months. While economic activity remained relatively resilient, there were significant downside risks from changes in trade policy. The speech heightened expectations for a Fed rate cut this year, possibly as early as September.

U.S.-China tariff truce extended

The tariff truce reached between the U.S. and China in June was extended for 90 days in August. In June, the U.S. and China reached a framework for a deal with more details still to be finalized. To give time to work out those details, both sides agreed to lower tariffs substantially. Both sides have yet to finalize the agreement, which is proving to be complex for not only trade but national security. The two economic powerhouses will continue to move forward on a new trade pact. Caught in the storm between the U.S. and China was NVIDIA Corp. and its AI chips. NVIDIA struck a deal to sell its H20 AI chips in China by sharing 15% of all sales with the U.S. government. Towards the end of the month, the chipmaker was reportedly trying to structure a similar deal for its Blackwell AI chips.

Despite a tariff truce, U.S.-China trade activity has waned. Exports from China to the U.S. fell by 21.7% year over year in July. This contrasted with an overall increase in Chinese exports by 7.2% year over year. Strong trade activity with the U.S. is critical for China’s economic health, which has continued to see weakness in certain pockets. Retail trade and industrial production both slowed in July on a year-over-year basis. The People’s Bank of China held its loan prime rates steady at their lowest level ever at its August fixing, but said it would maintain its relatively loose policy to help support China’s economy.

U.S. retailers feeling the pinch

Walmart Inc., the world’s largest retailer, reported revenue of US$177.4 billion over its fiscal second quarter ending July 31, which topped expectations. However, the company generated adjusted earnings per share of $0.68, which fell short of analysts’ estimates. Costs increased in part due to legal and restructuring charges. This was Walmart’s first earnings miss in three years. Walmart did raise its full-year revenue and earnings guidance but did caution costs could be higher. The company said it continues to try to find ways to keep its prices low by quickening imports and increasing rollbacks. However, the company also said that tariffs are putting upward pressure on prices. In some categories, the company has absorbed all of the tariff-related costs but in other categories, Walmart has had to pass some of the costs to consumers. Another major retailer, Target Corp., announced sales and earnings that exceeded estimates. However, sales growth has been stagnating, with Target projecting a small decline in sales over the next year. U.S. consumers could see higher prices from the end of the de minimis exemption. The tax law provision allowed shipments valued under US$800 to enter the country duty-free. However, President Trump signed an executive order to end the provision as of August 29. This left foreign retailers, both big and small, uncertain of how the end of this provision may impact their business both operationally and financially.