US Tariffs, Shutdown, and Service Sector Weakness

What happened: The United States imposed new tariffs on Canadian exports this week: 10% on lumber and 25% on cabinets and furniture. These trade barriers increase the cost of selling Canadian products in the US market, making them less competitive against American producers. The forestry industry which is a major employer in BC and Quebec may face potential operational cutbacks and delayed capital investments.

Why it matters: The tariffs directly threaten major forestry companies that depend heavily on US sales. West Fraser Timber (TSX:WFG), Canfor Corporation (TSX:CFP), and Interfor Corporation (TSX:IFP) all derive substantial revenue from US lumber markets. Higher export costs will squeeze their profit margins and could force operational cutbacks. Beyond individual stocks, the Materials and Industrials sectors may face broader pressure as full impact is digested.

What happened: A political deadlock over healthcare spending triggered a US federal government shutdown this week. Beyond the immediate furlough of hundreds of thousands of workers, the shutdown delays release of critical economic indicators, most notably the monthly jobs report. Without this data, the Federal Reserve's next move on interest rates becomes much harder to predict.

Why it matters: The data blackout creates uncertainty about Fed policy, which increases market volatility and affects your portfolio. For Canada, this matters because US monetary policy influences the Bank of Canada's decisions and the Canadian dollar's value. If the shutdown drags on and slows US economic activity, demand for Canadian exports will decline, potentially dampening our GDP growth. The longer this lasts, the greater the economic fog for Canadian investors.

What happened: Canada's Services Purchasing Managers' Index (PMI) fell to a three-month low in September, signaling contraction in the country's largest economic sector. Businesses are cutting jobs and seeing sharp declines in new orders, with outstanding work hitting a five-year low. This suggests companies are responding to weaker demand by reducing staff and pulling back on expansion.

Why it matters: When Canada's service sector contracts, it often signals broader economic cooling ahead. Consumer Discretionary companies like Canadian Tire, Restaurant Brands International, and Air Canada are vulnerable as consumers tighten spending. Canada's major banks may see reduced loan demand and higher credit losses, though rate cuts could ease borrowing costs. Watch the next Labour Force Survey and Bank of Canada announcement, they'll confirm whether this trend is temporary or more significant.