PrefBlog

OK, so the US PPI jumped a bit in August:

The Labor Department’s producer price index – which captures inflation before it reaches consumers – rose 5.4 per cent in August from a year ago, up from 4.8 per cent in July, the government said Thursday. Annual wholesale inflation peaked this year at 5.9 per cent in May after the Iran conflict raised energy costs. On a monthly basis, wholesale prices increased 0.4 per cent from July to August, after a 0.1-per-cent increase the previous month.

And investors were uninspired by the latest iteration of Operation Twist:

Treasury said ⁠on Wednesday ​it would buy as much as US$6 billion of debt maturing in 10 to 20 years in its next buyback operation, up from a $2 billion maximum previously. The amount was higher than the $4 billion minimum Treasury Secretary Scott Bessent outlined last month as part of an effort to improve liquidity in long-dated debt. That buyback was scheduled on Thursday.

But that was not enough ​to satisfy a market that has become increasingly concerned about the government’s capacity ‌to support longer-dated Treasuries at a time when a generally stable economy and expanding deficits are pushing yields up.

The benchmark 10-year Treasury yield rose to its highest since November 2023 after the announcement, while the 20-year yield climbed to a three-week peak, as did the 30-year yield. Yields rise when prices fall.

U.S. yields extended their rise on Thursday after producer prices increased in August, and oil prices rose above $100 per barrel.

And bond yield jumped:

U.S. Treasury yields climbed on Thursday after the latest inflation reading pushed up expectations for a Federal Reserve interest rate hike next week, while soaring oil prices exacerbated inflation worries.

Canadian bond yields largely followed along, with both five-year and 10-year government yields up about 10 basis points. The Canadian five-year – key to fixed mortgage pricing – reached 3.641% by late afternoon, its highest since mid-2024.
…
The yield on benchmark U.S. 10-year notes rose 10.93 basis points to 4.946%, hitting its highest levels since October 2023.

The 30-year bond yield rose 7.27 basis points to 5.3587%, reaching its highest point since June 2007.

The 2-year note yield, which typically moves in step with interest rate expectations for the Federal Reserve, rose ⁠13.33 basis points to 4.56%, touching its highest point since July 2024.

And equities got smacked around a bit:

North American stocks ended down on Thursday after U.S. producer price data for August and surging oil prices stoked worries the Federal Reserve will hike interest rates next week, while climbing Treasury ⁠yields made ​stocks less attractive.

With supply routes through both the Strait of Hormuz and the Red Sea disrupted by the U.S.-Israeli war on Iran, Brent crude jumped 6% to US$107 a barrel, adding ​to inflation worries and fueling expectations the Fed will raise interest rates ‌at its policy meeting on Wednesday.

Yields on 10-year U.S. Treasury notes rose to their highest in nearly three years, while 30-year Treasury yields hit their highest in more than 19 years and 2-year Treasury yields reached their highest in more than two years.

Canadian bond yields rose almost as much, with both five-year and 10-year government yields up about 10 basis points. The Canadian five-year – key to fixed mortgage pricing – reached 3.641% by late afternoon, its highest since mid-2024.
…
The S&P 500 declined 0.58% to end the session at 7,591.75 points.

The Nasdaq declined 0.65% to 26,081.73 points, while the Dow Jones Industrial Average declined 0.60% to 52,064.10 points.
…
The S&P/TSX Composite Index ended down 400.28 points, or 1.11%, at 35,506.28. It marked the fourth straight daily decline for the index, which is the longest such streak since April, ​and the lowest closing level since ‌July 31.

PerpetualDiscounts now yield 5.67%, equivalent to 7.37% interest at the standard conversion factor of 1.3x. Long corporates yielded 5.38% on 2026-09-02. Therefore the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has remained constant at the 200bp reported September 2 .

The New York Fed released the August Survey of Consumer Expectations:

August Survey: Inflation Expectations Tick Down at Medium-Term, Remain Unchanged at Short- and Longer-Term Horizons; Unemployment
Expectations Deteriorate

• Median inflation expectations decreased by 0.1 percentage point (ppt) to 3.2 percent at the three-year-ahead horizon and were unchanged at 3.6 percent and 3.0 percent, respectively, at the one-year and five-year-ahead horizons.
• Gas price growth expectations increased again in August, rising by 1.7 ppt to 4.6 percent.
• Mean unemployment expectations—or the mean probability that the U.S. unemployment rate will be higher one year from now—increased by 1.6 ppt to 44.4 percent, its highest reading since April 2020. The mean perceived probability of finding a job if one’s current job was lost decreased by 0.8 ppt to 45.4 percent.
• The mean perceived probability of losing one’s job in the next twelve months decreased by 0.4 ppt to 13.8 percent, its lowest reading since February 2026. The mean probability of leaving one’s job voluntarily, or the expected quit rate, in the next twelve months increased by 0.9 ppt to 19.5 percent, above the series’ 12-month trailing average of 18.4 percent.

The US job numbers were good:

The US labor market in August roused from its early summer slumber by adding 162,000 jobs, more than double what economists had expected, while the unemployment rate remained at 4.1%, new data from the Bureau of Labor Statistics showed Friday.

August’s job gains – which are the strongest since March – mark a sharp rebound from July’s tally, which was revised up to a 21,000-job gain from a 23,000-job loss. June was also revised upwards, adding 31,000 positions. That’s up from the original estimate of 20,0000.
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Wage growth slowed again in August, landing at an annual rate of 3.1%, a fresh five-year low. And it’s also the fourth month in a row that Americans’ pay gains are being outpaced by overall inflation.

… while in the frozen North:

The previously hot labour market stalled out to end the summer with a loss of 42,000 jobs in August, Statistics Canada said Friday.

The unemployment rate held steady at 6.4 per cent last month, the agency said.
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StatCan said there was little change in the private sector and self-employment in August, but the public sector shed 20,000 positions in its third straight month of losses.

The business, building and other support services sector led declines, followed by public administration, natural resources and utilities.
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The manufacturing industry has been hit hard by U.S. tariffs but the sector proved to be a surprise pocket of strength in August with a gain of 22,000 jobs.

And for those seeking a little comic relief … Trump is touting a new trade war … targetting the Federal Reserve:

U.S. President Donald Trump on Friday said that unless the Federal Reserve cut interest rates, he would stop trading with countries with which the United States had a deficit.

“High interest rates put the U.S.A. at a very unfair disadvantage, and I won’t allow that to happen!” said Trump, who has repeatedly demanded that the Fed cut rates.

The Bureau of Labor Statistics on Friday reported stronger-than-expected job creation in August, prompting traders to boost bets on a hike later this month.

“We should have the LOWEST RATE of any country in the World … LOWER THE RATE OR I’LL STOP TRADING WITH COUNTRIES WITH WHICH WE HAVE A DEFICIT,” Trump said in a Truth Social post.

I must admit, I am looking forward to the waning years of this decade, when the book stores will fill up with thick political tomes from around the globe with titles like ‘What it was like to deal with Trump’.

The Bank of Canada stood pat today:

The Bank of Canada today held its target for the overnight rate at 2.25%, with the Bank Rate at 2.5% and the deposit rate at 2.20%.

The continuing conflict in the Middle East is keeping energy prices high. As well, new US tariffs and Canadian counter-measures have been announced following the breakdown of trade talks between Canada and the United States. Both situations remain fluid.

In the United States, economic growth continues to be solid, driven by consumer spending and AI-related investment. Growth in the euro area was stronger than expected in the second quarter, while China’s economy slowed. Overall, the global economy has shown resilience in the face of geopolitical headwinds, with growth broadly consistent with the July Monetary Policy Report (MPR) projection. With still-high oil prices and elevated margins for refined energy products, inflation in most countries remains high.

Financial conditions have tightened since July. Long-term bond yields have moved up globally, including in Canada. The Canadian dollar has appreciated slightly on US-dollar weakness.

As expected, Canadian economic activity strengthened in the second quarter, with GDP up by 3.3%, following very weak growth in the first quarter. While some of the recent strength reflected temporary factors, the pick-up in activity was broad-based. Consumption showed solid gains. Following several weak quarters, there was some rebound in housing activity. Exports and business investment were up sharply. Labour market conditions have improved in recent months, with the unemployment rate edging down to 6.4% in July. Still, demand for labour remains subdued and indicators point to continued excess supply in the economy.

Overall, recent data reaffirm Governing Council’s view of a broadening recovery in Canada’s economy. However, uncertainty is high and new US tariffs and threats of further action pose risks to the sustainability of the recovery.

CPI inflation has been hovering around 3% in recent months, mainly because of persistently higher gasoline prices. So far, there has been little evidence of higher energy prices spreading to other components of inflation: excluding gasoline, inflation was 2.2% and measures of core inflation remained close to 2% in July. However, with the Middle East conflict still ongoing and little progress reopening the Strait of Hormuz, upside risks to the Bank’s inflation forecast have increased. The longer that high oil prices and elevated refinery margins persist, the greater the risk of spillover to the prices of other goods and services. New US tariffs and Canadian counter-tariffs will also raise costs for some businesses and could feed into consumer prices over time.

With the economy and inflation evolving broadly as forecast in the July MPR, Governing Council agreed to leave the policy rate unchanged. However, the upside risks to inflation have increased, while new tariffs make growth prospects more uncertain. Governing Council will assess the sustainability of the economic rebound and the outlook for inflation, and is prepared to adjust monetary policy as needed. The Bank remains committed to maintaining Canadians’ confidence in price stability through this period of global upheaval.

Mark Rendell in the Globe reports:

However, Governor Tiff Macklem struck a hawkish tone in the press conference after the rate announcement, leading bond traders to increase their bets on an interest rate hike before the end of the year.

Mr. Macklem said the central bank is navigating two major risks: the global energy price shock caused by the war in the Middle East, and the escalation in the Canada-U.S. trade war following the breakdown in negotiations last month.

Of the two, he appeared more concerned that high oil prices could feed through into other consumer prices and become generalized inflation in Canada.

“There’s been a breakdown in trade discussions with the United States, and that certainly makes [Canada’s economic] rebound more uncertain,” Mr. Macklem said.

“But as I stressed, we have to keep our eye on inflation. Inflation is running too high. The situation in the Middle East is no closer to resolution, and the longer it goes, the bigger the chance [the oil price shock] feeds through. Where we go on interest rates is really going to be guided by our inflation forecasts and our risks around that,” he said.
…
“If we felt that inflation was going to remain too high, yes, we are prepared to raise interest rates. And if it takes more than one increase, we’re prepared to do that. But that’s certainly not the only outcome,” Mr. Macklem said.

Before the rate announcement, financial markets put the odds of a quarter-point interest rate hike in December at around 60 per cent, according to Bloomberg data. After the announcement, the odds rose to almost 90 per cent, with traders now pricing in three to four quarter-point hikes by the end of next year.

The yield on five-year Government of Canada bonds – which underpin many fixed-rate mortgages – rose about a tenth of a percentage point after the announcement to 3.42 per cent. That’s the highest level since mid-2024.

Regular reports are still delayed, I’m afraid. I’ll catch up soon!

Update, 2026-9-3 & 2026-9-5: PerpetualDiscounts now yield 5.65%, equivalent to 7.34% interest at the standard conversion factor of 1.3x. Long corporates yielded 5.33% on 2026-09-02. Therefore the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has narrowed to 200bp from the 210bp reported August 26 to 200bp.

Update, 2026-9-5: