MWW - The Dog Days of Summer, Minus the Bite

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The first half of 2026 has tested investors' resolve. Ongoing geopolitical tensions, volatility in energy markets, and uncertainty surrounding monetary policy have all contributed to a challenging backdrop. Yet despite these obstacles, both the U.S. and Canadian economies have remained surprisingly resilient, with economic growth continuing at a modest but healthy pace.

As we move into the second half of the year, our focus is centered on three areas that we believe will have the greatest influence on markets and economies alike: the labour market, energy prices, and central bank policy.

Employment Continues to Hold Up Better Than Expected

Perhaps the biggest surprise of 2026 has been the durability of the labour market. While hiring conditions have not been perfectly smooth, employment data on both sides of the border has generally exceeded expectations, supporting consumer spending and broader economic activity.

In the United States, June's employment report reinforced the notion of a labour market that remains balanced. Payrolls increased by 57,000 jobs, below expectations of 113,000, but the unemployment rate declined to 4.2%. Meanwhile, wage growth remained contained at 3.5% year-over-year, helping to limit concerns that labour costs could reignite inflation pressures.

Looking beyond a single month, hiring trends have actually strengthened compared to last year. Average monthly job gains in 2026 have been approximately 92,000, a notable improvement from the 9,700 average monthly jobs added in 2025. While consumers continue to face the burden of elevated living costs, a stable labour market remains an important pillar supporting household spending.

Canada has produced a similar story. May employment data substantially exceeded expectations, with approximately 88,000 jobs added compared to forecasts for only 10,000. The unemployment rate improved to 6.6% from 6.9%, supported largely by gains in full-time employment. Taken together, these figures suggest the Canadian economy may be on firmer footing than many anticipated earlier in the year.

Lower Oil Prices May Soon Reach Consumers

The second area attracting our attention is energy.

Despite renewed volatility in global energy markets and ongoing uncertainty surrounding U.S.-Iran relations, markets appear increasingly confident that a major supply disruption can be avoided. Shipping activity through the Strait of Hormuz has improved, while efforts to bolster global supply chains continue to ease concerns regarding availability.

As a result, oil prices have retreated sharply in recent weeks. West Texas Intermediate (WTI) crude has fallen back into the low-$70-per-barrel range, close to where prices traded before the outbreak of conflict involving Iran.

Consumers, however, have yet to experience the same magnitude of relief. Gasoline prices in both Canada and the United States have remained higher than crude oil would suggest. Historically, this lag occurs because retailers must first work through inventories purchased at higher prices before passing savings on to drivers.

If past cycles are a reliable guide, gasoline prices at the pump could begin to move lower over the next four to eight weeks. Such a decline would provide welcome support for consumers and could help ease broader inflation concerns as we move through the remainder of the year.

Central Banks Are Likely to Stay Patient

The third factor that could shape the investment landscape is the next move from central banks.

At its June meeting, the Federal Reserve left interest rates unchanged, though policymakers remained divided over the path forward. Federal Reserve Chair Kevin Warsh reiterated that inflation remains a key concern, but opinions within the committee vary regarding whether further tightening is necessary. Approximately nine members suggested one or two additional rate hikes may be appropriate this year, while another nine members favoured either maintaining current policy settings or even cutting rates once before year-end.

In Canada, expectations have shifted materially over the past several months. Earlier in the year, there was speculation that rising energy prices and inflationary pressures could force the Bank of Canada to consider additional tightening. More recently, falling energy prices and slightly negative economic growth during the first half of 2026 have reduced those concerns.

Today, most forecasts suggest that the Bank of Canada will leave rates unchanged for the remainder of the year.

Our view is that both the Federal Reserve and the Bank of Canada are likely to remain on hold through year-end. While inflation remains above target, commodity prices have moderated, and inflation expectations remain relatively well anchored. Policymakers are therefore likely to continue assessing incoming economic data before making any significant adjustments.

Portfolio Positioning

Taken together, these developments paint a reasonably constructive picture for investors. Employment remains resilient, energy prices have eased considerably from recent peaks, and central banks appear inclined to remain patient.

Against that backdrop, we continue to favour equities over fixed income. While uncertainty has hardly disappeared, the combination of a resilient labour market, moderating energy costs, and stable monetary policy provides a foundation for continued economic growth. If these trends persist, the second half of 2026 could offer a more supportive environment for risk assets than many investors anticipated at the start of the year.

 

Sources: BMO Capital Markets Economic Research- Hydration Break Recap: Win Some, Lose Some

The opinions, estimates and projections contained herein are those of the author as of the date hereof and are subject to change without notice and may not reflect those of BMO Nesbitt Burns Inc. ("BMO NBI"). Every effort has been made to ensure that the contents have been compiled or derived from sources believed to be reliable and contain information and opinions that are accurate and complete. Information may be available to BMO Nesbitt Burns or its affiliates that is not reflected herein. However, neither the author nor BMO NBI makes any representation or warranty, express or implied, in respect thereof, takes any responsibility for any errors or omissions which may be contained herein or accepts any liability whatsoever for any loss arising from any use of or reliance on this report or its contents. This report is not to be construed as an offer to sell or a solicitation for or an offer to buy any securities. BMO NBI, its affiliates and/or their respective officers, directors or employees may from time to time acquire, hold or sell securities mentioned herein as principal or agent. NBI will buy from or sell to customers securities of issuers mentioned herein on a principal basis. BMO NBI, its affiliates, officers, directors or employees may have a long or short position in the securities discussed herein, related securities or in options, futures or other derivative instruments based thereon. BMO NBI or its affiliates may act as financial advisor and/or underwriter for the issuers mentioned herein and may receive remuneration for same. A significant lending relationship may exist between Bank of Montreal, or its affiliates, and certain of the issuers mentioned herein. BMO NBI is a wholly owned subsidiary of Bank of Montreal. Member-Canadian Investor Protection Fund. Any U.S. person wishing to effect transactions in any security discussed herein should do so through BMO Nesbitt Burns Corp.