09:29 AM EST, 01/13/2025 (MT Newswires) -- The main event looming over Canada's economy is Donald Trump's impending United States presidential inauguration next Monday, said TD.

Trump's tariff-focused agenda has kept anxiety rising in Canada, particularly in the wake of Prime Minister Justin Trudeau's recent resignation announcement, noted the bank. Political developments have overshadowed domestic data flow, but key updates last week on the labor market and the state of trade may help inform the Bank of Canada's (BoC's) next policy decision at the end of January.

On the financial side, the Canada 10-year government bond yield jumped 10 basis points (bps) last week, while the Canadian dollar (CAD or loonie) stayed roughly flat, after depreciating by around 7% since September, pointed out TD.

Canadian jobs data for December capped off the year with a "roar," stated TD. An employment gain of just over 90,000 was the highest print since January 2023. Meanwhile, the unemployment rate retreated by a tenth of a percentage point (ppt) -- in line with the bank's view and against the consensus view for a slight uptick --reversing some of November's labor-force-fueled jump.

Hours worked also saw their biggest jump since July 2023, providing some evidence of decent economic activity to close out the year. TD maintains the view that Canada's labor market is relatively healthy under the hood despite the overall souring sentiment on Canada's economy.

On the trade side, November data last week showed Canada tallied a ninth-consecutive trade deficit. The nation's trade balance with the U.S. has recently come into focus, as perceived trade imbalances are serving as a rationale for Trump's tariff plans.

Trump has argued that "the U.S. can no longer suffer the massive trade deficits that Canada needs to stay afloat" -- but TD thinks this view is misguided.

Canada's goods trade surplus with the U.S. in 2024 is tracking about 3.2% of Canadian gross domestic product. But looked at from the U.S. side of the ledger, it only equates to a small deficit of 0.2% of U.S. GDP. What's more, the U.S. trade deficit with Canada, when stacked against other major trading partners, is comparatively small, added the bank.

It also noted that stripping energy exports out of the equation leaves the U.S. with a healthy trade surplus with Canada. If anything, Canada's energy-heavy relationship with the U.S. highlights the importance of energy security between the two nations.

The BoC certainly has its work cut out, according to TD. The economy has started to respond to the cumulative 175bps in cuts that have been delivered so far, though downside risks are mounting.

The downside to the economy could be greatly exacerbated should Trump move forward with broad tariffs. Consensus expectations are for the BoC to lower the policy rate by 25bps in January, though it's a less likely outcome after Friday's healthy employment report.

Upcoming data on inflation and the BoC's Business Outlook Survey will be key data inputs into its decision, said the bank. The goal for the BoC now is to follow a rate path supportive enough to balance the downside risks to growth while keeping inflation steady around its 2% target.