Category: Market Action

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.
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“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!

This post will be delayed a little bit. Sorry!

I was pleased to see the following:

When European Union head Ursula von der Leyen sat alongside Donald Trump at his Turnberry golf resort in Scotland last year, she promised Europeans that accepting a blanket 15 per cent U.S. tariff on EU exports would buy the continent “predictability and stability.”

Some critics now see the trade deal as a one-sided capitulation that instead paved the way for an ongoing cycle of American economic coercion.

First came U.S. efforts to reclassify certain European industrial goods to impose higher tariffs. Now, a fresh battle has emerged over European efforts to levy a digital services tax on U.S. tech giants — a dispute that echoes Washington’s recent attempts to dictate tax terms to Ottawa.

No sooner was the Turnberry deal ratified by the European Parliament than Trump was on Truth Social, threatening to override the entire accord by slapping 100 per cent tariffs on any European nation that implements or expands tech taxes.

As European resistance to Trump’s demands stiffens, some lawmakers are looking at Mark Carney’s dramatic exit from the U.S. trade table not as a reckless gamble but as a lesson in how to stand up to a bully.

Former French ambassador to the U.S. Gerard Araud posted that “Canada should show the way to the EU: with Trump, only firmness pays off.”

I thought we gave up on the Digital Sales Tax too easily – lots of US states have one! We should be bringing it back in and coordinating our efforts, rates and definitions with the EU.

Strange goings-on in the preferred share market today, with the index plummetting at the close with TXPR (price) down 41bp on the day – on nothing but little puffs of air:

• BMO.PR.E down 1.47%
• CM.PR.S down 1.22%
• ENB.PR.T down 0.88%, almost all of it on 407 shares traded on the close
• ENB.PR.Y down a mere 0.38%, all of it on 490 shares at the close
• IFC.PR.A down 1.63%, all of it on 401 shares at the close
• NA.PR.C down 1.23%, most of it on 500 shares at the opening
• TD.PF.A down 1.22%, a big chunk of it at 4pm on 601 shares
• TD.PF.I down 1.37%, about a third of it at 4pm on 481 shares at 4pm

There’s not a lot of depth to this market!

PerpetualDiscounts now yield 5.65%, equivalent to 7.34% interest at the standard conversion factor of 1.3x. Long corporates yielded 5.24% on 2026-08-26. Therefore the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has widened to 210bp from the 200bp reported August 19 to 200bp.

The Boston Fed has published a paper by Philippe Andrade, Omar Barbiero and Alvaro Silva titled How Much Did Labor Productivity Gains Offset the Inflationary Impact of the 2025 Tariffs?:

In 2025, the average realized tariff on U.S. imports rose from about 2.5 percent to about 10 percent. The resulting increase in U.S. firms’ input costs had the potential to raise inflation significantly and explain why inflation remained significantly above the Federal Reserve’s 2 percent target last year.

On the other hand, as the tariffs took hold, U.S. workers’ productivity grew, which could have helped companies reduce their costs and thereby mitigate inflationary pressures from the tariffs. To study the extent to which productivity gains may have offset the tariff-driven cost increases, the authors construct measures of sectoral increases in input costs induced by the new tariffs and compare them with sectoral labor productivity gains.

Key Takeaways:

• In 2025, the sectors that were more affected by tariffs relative to other sectors experienced significantly greater labor productivity growth, mitigating the cost increases induced by the new trade policy.
• The sectors that were more exposed to tariffs also experienced a decline in the labor share—the proportion of a sector’s value-added that’s allocated to worker compensation—implying relatively higher profits and return to capital in these sectors.
• Mapping production costs to aggregate core inflation indicates that on net, tariffs and labor productivity gains contributed an estimated 0.5 percentage point to core PCE inflation in 2025. Wage growth added another 1.9 percentage points.
• If these cost components’ combined contribution to inflation was only 2.4 percentage points, then tariffs alone may not explain the persistence of 3 percent core PCE inflation last year.

The BoC published two new Staff Analytical Papers today.

The first, How Do Interest Rates Spur the Housing Market: Exploring Nonlinear Effects, is by Benjamin Straus, Stéphane Surprenant and Kerem Tuzcuoglu:

In this note we examine how monetary policy affects housing demand, supply and prices in Canada, and whether these effects vary with labour market conditions. Using state-dependent local projections identified with narrative monetary policy shocks, we find that lower interest rates have larger effects when unemployment is low. Easing boosts resales quickly, raises housing starts with a delay, and increases house prices persistently. Because demand tends to respond more strongly than supply, monetary policy appears unable to alleviate housing affordability pressures and may instead intensify them when labour market conditions are strong.

The second, 2025 Methods-of-Payment Survey Report: Cash in an Increasingly Digital and Mobile Economy, is by Marie-Hélène Felt, Saika Pacouloute and Angelika Welte:

The Methods-of-Payment (MOP) survey provides key insights into Canadians’ cash management and payment behaviour. In 2025, more than three in four adults report keeping cash on hand. Perceptions of cash remain positive and stable, and most Canadians do not plan to stop using it. At the same time, several indicators in the 2025 data suggest that patterns of cash use may be changing. Contactless card payments dominate in-person payments, with growing use of mobile devices.
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Key perceptions that influence payment behaviour and choice relate to acceptance, ease of use, cost and security. Overall, trends in perceptions are stable and continue the patterns observed in recent years (Chart 4). In 2025, consumers considered cash to be the least costly and most secure payment method. By contrast, contactless card payments were seen as easier to use but less secure than cash or chip and PIN card payments. Cash also continued to be viewed very positively in terms of ease of use and acceptance. However, consumer perceptions of cash have gradually declined from the post-pandemic rebound levels observed in 2022.

I’m surprised that privacy did not warrant a mention a motivation for using cash!

The US Treasury is resurrecting Operation Twist:

The Treasury Department made a surprise move Wednesday after bond yields hit their highest levels in almost two decades, doubling its planned purchases of longer-term bonds and easing pressure on the market.

Bonds rallied, driving yields lower, after the announcement, providing some relief after a sell-off earlier this week sent yields around the globe to their highest levels in years.
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The Treasury Department said it will at least double the size of buybacks from September to early November, focusing on longer-dated bonds from 10-year to 30-year Treasuries, according to a statement.

The 30-year yield dropped nine basis points to 5.2% after the announcement, providing short-term reprieve. The drop comes one day after the 30-year yield rose above 5.3%, hitting its highest level since 2007.

Buybacks from the Treasury Department are a standard operation in bond markets, but the timing of the announcement after a major sell-off highlights the Trump administration’s sensitivity to the rise in yields.

PerpetualDiscounts now yield 5.60%, equivalent to 7.28% interest at the standard conversion factor of 1.3x. Long corporates yielded 5.28% on 2026-08-18; allowing for 1bp decrease in yield due to ZLC price gains on 2026-8-19 results in 5.27% on 2026-08-19. Therefore the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has remained constant at the 200bp reported August 12 to 200bp.