Canada's trade surplus narrowed in July as exporters braced for new US tariffs

Canada's trade surplus declined sharply last July, with energy and mineral exports declining, and imports rising, at a time when exporting companies are preparing to face the impact of new US tariffs of 50 percent, the repercussions of which are expected to appear more clearly in data for the coming months.

Statistics Canada announced on Thursday that the trade surplus fell to 769 million Canadian dollars (557 million US dollars) last July, compared to 4.2 billion Canadian dollars in the previous June, which is the highest level in 4 years. Economists polled by Reuters had expected a surplus of 3.57 billion Canadian dollars.

Exports fell by 2.3 percent, while imports rose by 2.2 percent, so that the Canadian economy continued to record a trade surplus for the fifth month in a row, despite the continuing trade dispute with the administration of US President Donald Trump.

The United States remains Canada's largest trading partner; It accounted for 66.35 percent of its total exports last July, down from 69.39 percent in June, and 72.64 percent a year ago. The share of exports destined for the American market has also declined since the beginning of the year to about 68 percent, compared to 73 percent during the same period last year.

The decline in dependence on the American market comes within the framework of Ottawa's efforts to diversify its foreign trade, but the size of the connection between the two countries makes it difficult for Canadian companies to quickly overcome the impact of the new duties.

Energy exports were the most prominent factor behind the decline in total exports in July. Its value fell by 4.4 percent, recording the third monthly decline in a row. Crude oil exports fell by 5.5 percent, as a result of a decline in both prices and quantities. Exports of metal and non-metallic (or non-ferrous) metal products also decreased by 8.5 percent, after rising by 15.8 percent during the previous month.

Total exports fell to $76.14 billion Canadian dollars, compared to $77.96 billion in June. However, the picture seemed more balanced when energy and minerals were excluded. Exports not related to these two sectors increased by 0.6 percent.

The increase in exports of aircraft and other transport equipment and parts, which jumped by 34.9 percent, helped limit the overall decline in exports.

On the other hand, imports rose to 75.37 billion Canadian dollars, from 73.76 billion dollars in June, recording the sixth consecutive monthly increase. The increase was driven in particular by an 11.4 percent increase in imports of cars and spare parts, most of which were from the United States.

The data showed that Canada's exports to the United States declined by 6.6 percent during July, while its imports from it increased by 1.8 percent. As a result, Canada's trade surplus with its largest trading partners decreased by more than 40 percent to 5.9 billion Canadian dollars.

Stuart Bergman, chief economist at the Canadian Export Development Corporation, said that the share of exports destined for the United States remaining below 70 percent represents an encouraging indicator of trade diversification efforts. He pointed out that Canada's exports to countries other than the United States increased by 7.4 percent during July, compared to an increase in imports from them by 2.8 percent.

Canada's trade deficit with the rest of the world reached 5.1 billion Canadian dollars last July, compared to 6.1 billion dollars during the previous month, an indication that alternative markets have begun to absorb part of the trade that was concentrated in the American market.

Canadian exporters, however, face a tougher test in the coming months, as the impact of new US tariffs begins to show in trade data. This comes as Ottawa tries to reduce its dependence on its southern neighbor, without it being easy to break the deep trade ties that have developed between the two countries over decades.

The Canadian dollar rose 0.35 percent against its American counterpart to 1.3792 Canadian dollars to the US dollar, or 72.51 US cents.

Major indices on Wall Street opened higher on Thursday, after Federal Reserve Governor Christopher Waller said he may support keeping interest rates unchanged this month if data confirms continued decline in price pressures.

Waller's statements contributed to traders reducing their bets on raising interest rates, at a time when the state of pessimism that had clouded the markets following the recent military tensions between the United States and Iran began to subside.

Waller said, during the Reuters Next Newsmaker event in Washington, that his decision on the appropriate stance for monetary policy “will be greatly influenced by what we know about the inflation rate in August.”

He added: “If progress towards our goal of reaching 2 percent continues, I am ready to support keeping the interest rate at its current level.”

But he pointed out that raising borrowing costs may become necessary if inflation data show continued price pressures. Traders still expect about a 48 percent chance of raising interest rates this month, according to the CME Fed Watch tool.

“I expect September to be a very volatile month,” said Kim Forrest, chief investment officer at Bouquet Capital Partners. “It is a season characterized by many fluctuations.” She added that the volatility ahead of the midterm elections, in addition to the possibility of a decrease in liquidity in September, “creates conditions for investors to act with excessive caution, and for the market to witness sharp movements up and down.”

Investors, looking for positive factors, are looking forward to the jobs data scheduled to be released on Friday, but some of them warned against over-reliance on the report, in light of Federal Reserve Chairman Kevin Warsh confirming that controlling inflation remains his top priority.

The continuation of the conflict in the Middle East may also further complicate interest rate expectations, by escalating inflationary pressures. Brent crude futures rose 0.49 percent on Thursday, marking the fourth consecutive session of gains.

“Oil prices have regained some of their geopolitical risk premium, adding a potential source of inflationary pressure at a time when markets are already debating whether US interest rates need to rise,” said Daniela Hathorne, senior market analyst at Capital.com.

By 9:34 a.m. EST, the Dow Jones Industrial Average rose 394.74 points, or 0.74 percent, to 53,456.69 points, the Standard & Poor's 500 Index rose 41.29 points, or 0.54 percent, to 7,707.89 points, while the Nasdaq Composite Index rose 160.20 points. Or 0.61 percent, to 26,378.03 points.

Broadcom's shares fell 5.26 percent after its fourth-quarter revenue expectations fell short of Wall Street's optimistic expectations, an indication of the challenges faced by leading companies in the field of developing artificial intelligence technologies to maintain the strong momentum witnessed by the sector's shares.

On the other hand, Snowflake shares jumped by 25.17 percent after it expected to achieve strong annual revenues, which boosted morale in the software sector. Service Now shares rose by 5.43 percent, while Salesforce and Adobe shares increased by 3.14 percent and 3.62 percent, respectively.

With increasing geopolitical risks clouding the outlook, and the absence of clear catalysts on the corporate earnings schedule, investors may lack sufficient reasons to push stock prices to significant increases this month.

According to eToro analyst Jacob Rochlitz, September witnessed nine of the 40 largest declines in the history of the Standard & Poor's 500 index.

Gainers outnumbered losers by a ratio of 3.33 to one on the New York Stock Exchange, and by a ratio of 2.36 to one on the Nasdaq Stock Exchange.

The Standard & Poor's 500 index recorded nine new record highs in 52 weeks, compared to a new record low, while the Nasdaq Composite index recorded 29 new record highs and 28 new record lows.

US services sector activity rebounded in August, driven by strong demand that pushed new orders to their highest level in three and a half years, and also led to a rise in input prices, in an indication that inflation may continue at high levels, which may prompt the Federal Reserve to raise interest rates before the end of the year.

The Institute for Supply Management said on Thursday that the purchasing managers' index for non-manufacturing sectors rose to 55.4 last month, from 54.1 in July. A reading above 50 indicates growth in activity in the services sector, which represents more than two-thirds of US economic activity.

Economists polled by Reuters had expected the index to rise to 54.2. The current level of the index is consistent with strong economic growth during the third quarter.

The index of new orders received by service companies, according to the survey, rose to 60.9, its highest level since February 2023, compared to 57.2 in July.

This rise in orders coincides with strong domestic demand, driven in part by a boom in AI-related spending.

With demand continuing without clear signs of decline, supply chains remained under great pressure last month. The supplier deliveries index fell to 51.3, from 52.8 in July.

A reading above 50 indicates a slowdown in deliveries. The index recorded a slowdown for the twenty-first month in a row, which contributed to an increase in input prices.

Supplier deliveries were initially affected by customs duties on imports, before receiving additional pressure recently due to the war, which has entered its seventh month.

The index of input prices paid by companies, according to the survey, rose to 72.6, from 70.3 in July, indicating that inflation is likely to remain above the Federal Reserve's 2 percent target for some time.

Federal Reserve Chairman Kevin Warsh said last week that the central bank “will face challenges” if policymakers do not gain the necessary confidence that inflation is heading toward the 2 percent target.

Financial markets, according to the CME Group's Fed Watch tool, expect a probability of about 64 percent that the Federal Reserve will raise the benchmark overnight interest rate by 25 basis points at its meeting scheduled for September 15 and 16. The interest rate currently ranges between 3.50 percent and 3.75 percent.

Despite strong orders, employment in the services sector remained weak last month.

Economists say that companies are still reluctant to increase the number of their employees, in light of the uncertainty regarding economic policies. The survey's employment sub-index saw little change, standing at 47.8, indicating a possible decline in non-farm payrolls in August.

A poll of economists conducted by Reuters expects that the Ministry of Labor will announce, on Friday, an increase of 56,000 jobs last month, after a sudden decline of 23,000 jobs in July. This recovery partly reflects the return of education sector jobs in local governments.

However, some economists are preparing to record a decline in jobs, for the second month in a row, after the temporary protection system recently ended for hundreds of thousands of Haitians, affecting their work permits.