Canadian Economy Contracts, BoC Cuts Rates

What happened: Statistics Canada reported that the Canadian economy shrank by 0.3% in August, with declines in both goods and services sectors. The slowdown was influenced by ongoing U.S. tariffs impacting manufacturing and specific events like a work stoppage in air transportation. While preliminary data suggests a small rebound in September, annualized growth for the third quarter is now tracking at a weak 0.4%.

Why it matters: A contracting economy can lead to lower corporate earnings and more cautious consumer spending, creating a challenging environment for markets. This slowdown is already affecting specific sectors on the TSX. Cyclical industries like manufacturing and retail are feeling the pressure. Conversely, some market participants appear to be favoring defensive sectors like technology and real estate, which have shown relative strength.

What happened: The Canadian government announced it is accelerating C$6.4 billion in funding for 26 critical mineral projects. The plan is to shorten development timelines from 10-15 years down to 3-5 years. This initiative aims to build a secure domestic supply chain for minerals like graphite, rare earth elements, and scandium, which are essential for electric vehicles, clean energy, and defense technology, reducing reliance on China.

Why it matters: This government backing creates a significant long-term growth opportunity for the Canadian mining industry and related sectors. Companies directly involved in the exploration and processing of these minerals stand to benefit, with Nouveau Monde Graphite, Rio Tinto, and Ucore Rare Metals already named as recipients of support. The investment is expected to bolster the entire clean technology and EV manufacturing supply chain in Canada, but investors should remain aware of the inherent risks in the mining sector, such as project delays and commodity price swings.

What happened: The Bank of Canada cut its key interest rate by 0.25% to 2.25% to help support the economy, citing the "severe effects" of trade tensions. Alongside the cut, the central bank lowered its 2025 growth forecast to 1.2%. However, officials also signaled a higher bar for any further cuts, indicating they plan to hold rates steady if the economy performs as expected.

Why it matters: The rate cut makes borrowing cheaper for consumers and businesses but suggests a sluggish economic outlook. For investors, this creates a mixed picture. Rate-sensitive sectors like real estate, utilities, and telecoms may benefit from lower financing costs, and their dividends can become more attractive. Conversely, lower rates can squeeze the profit margins of banks. The move also puts downward pressure on the Canadian dollar, which helps exporters but raises the cost of imported goods.