By Douglas Porter

July 4, 2025

There was no shortage of key economic news and events packed into this holiday-shortened week, but the most notable end result was that equity markets kept right on keeping on. The S&P 500 tacked on another 1.7% gain to record highs, lifting it to a 23.7% advance in the past 13 weeks alone (since reciprocal tariff week). A rollicking comeback in the Magnificent 7 has certainly played a role—Nvidia’s market cap is flirting with $4 trillion, for example—but this rally has been broad. So broad, in fact, that the TSX has steamrolled above 27,000 for the first time, with almost an unbroken string of advances in the past three months; it has now risen in 11 of the past 13 weeks. Globally, it’s a broadly similar tale for the MSCI All Countries index, which is now up almost 7% YTD, also reaching a record high.

In contrast to the fireworks for stocks, the bond market softened on net for the week, with the short end especially backing up. Two-year Treasury yields rose 13 bps to 3.88% as prospects for a Fed cut as soon as the July 30 meeting were smoked by the firm payrolls report. While the Administration’s assault on the Fed intensified, the case for rate cuts went into reverse on decent data and robust equity markets. A July cut seems highly improbable, but we continue to look for trims at the September and December meetings, and markets now broadly concur. Amid the shifting Fed outlook, the dollar slipped a bit further still overall, and it’s now down almost 9% on a trade-weighted basis since the start of the year.

The three major drivers for markets this week were economic news, a new budget bill, and trade developments:

1) There were more signs that the U.S. economy is readily weathering the trade uncertainty and tariffs. The June employment report was arguably just what Goldilocks would have ordered, with payrolls firm at +147,000, the jobless rate dipping a tick to 4.1%, and even wage growth cooling a tick to 3.7% y/y. Arguably all three of those readings were better than expected, albeit the job gain was flattered by a 73,000 pop in government positions. Both of the ISM results for June also came in a bit higher than consensus, with the factory reading nudging up half a point to 49.5 and services up almost a full point to 50.8. Auto sales dipped to a 15.6 million pace last month, but that’s almost exactly in line with the average of the past two years. While none of the results were strong, all are entirely respectable and consistent with an economy that is churning out trend-like growth. Reinforcing that point, the latest reading from the Atlanta Fed’s Nowcast looks for Q2 GDP growth of 2.6%.

2) The One Big Beautiful Bill Act (OBBBA) managed to work its way through the gauntlet of both the Senate—in a tie vote broken by the VP—and the House, and was signed into law on exactly the July 4 deadline (self-imposed). While there wasn’t a lot of new news or surprises in the bill for financial markets, it does provide some certainty on the fiscal front. And, although not grabbing a lot of headlines, the bill also importantly included a hefty $5 trillion hike in the debt ceiling limit, putting that potential concern to rest for at least a couple years. Foreign investors had breathed a sigh of relief last week when Section 899, the so-called revenge tax, was excised from the bill. We dig into the details and implications of the bill in Focus. In a nutshell, we assume that it will mildly support growth in 2026, though it will also somewhat boost the budget deficit trajectory on net… albeit depending on what happens to tariff revenues, as the bill did not account for potential inflows on that front.

3) And, of course, it wouldn’t be 2025 without some developments on the trade war front. Heading into the July 9 deadline for deals on the paused reciprocal tariffs, the pace of events gathered steam this week. Vietnam became the second major economy to reach a trade truce with the U.S., agreeing to a broad 20% tariff on its goods (and 40% on trans-shipments from other nations, read China), while imposing no tariff on U.S. imports. True, the 20% level is a long way from the proposed 46% tab initially proposed on Liberation Day for Vietnam, but it sets an unfortunately high bar for others. Still, Vietnam has arguably the most imbalanced trade of any economy—the country exports almost $11 of goods to the U.S. for every $1 it imports—so escaping with “just” a 20% duty may be a small win. As for all the many other countries in the queue, it now appears that the Administration has landed on a 10% base reciprocal tariff rate for 100 countries, but many others will soon learn of a higher base rate, with letters going out starting July 4.

Canada and Mexico were left off the reciprocal tariff list and remain on separate tracks. After negotiations with Canada were abruptly called off a week ago due to the Digital Services Tax, a climbdown by Ottawa on the DST got talks back on track. Both sides are aiming for an agreement by July 21, but that’s also a self-imposed deadline. While Canada’s economy has held up a bit better than we had initially expected to the trade war—in part because the average U.S. tariff on Canada is a manageable 6%—there are some signs of strain. The deep merchandise trade deficit of $5.9 billion was the second largest on record (topped only by April’s whopping $7.6 billion shortfall), and real exports were down 5% from last year’s average level.

Canada’s trade figures have been wildly skewed by tariff front-running, then a deep sag, but also by a surge in gold exports. Looking though the dense fog, it’s clear that net exports will sap Q2 GDP, probably to a greater extent than the calm monthly output figures imply. Along with a chop in oil production amid the spring wildfires, we have downgraded our call on the quarter to -0.8% a.r., although we also expect less softness in Q3 as a partial offset. If Ottawa does indeed manage to secure even a trade framework this summer, which provides some clarity, we will be upgrading our H2 growth outlook. Less uncertainty, coupled with solid financial markets, and what’s now looking like a bountiful fiscal push, could lift growth much higher than our current call of a small dip in Q3 and a 1% advance in Q4.

Policy Contributing Writer Douglas Porter is Chief Economist for BMO.