| Close
Dec 12 | Close
Dec 5 | Weekly
Change | Net Weekly
Change % |
DJIA | 48,458.05 | 47,954.99 | +503.06 | +1.05% |
Nasdaq | 23,195.17 | 23,578.12 | -382.95 | -1.62% |
S&P 500 | 6,827.41 | 6,870.40 | -42.99 | -0.63% |
| S&P TSX | 31,527.39 | 31,311.41 | +215.98 | +0.69% |
Source: Globe & Mail
Global Economy’s Big Theme: Artificial Trade Intelligence
Douglas Porter
Chief Economist
Around the middle of 2025, it likely began to dawn on many analysts that they may have been looking the wrong way on what was truly driving the global economy. After spending much of the first half of the year focused on (obsessed with?) the trade war, it became increasingly apparent that the ongoing and accelerating boom in AI spending was blowing past trade uncertainty and, in fact, was keeping the U.S. and global economy on a solid footing. It was also right around mid-year that the S&P 500 recouped its deep tariff-related losses, and then began climbing to new highs, culminating in a solid full-year return for equities. In turn, this resiliency set off worldwide debates on the need for further monetary easing heading into 2026.
The two big forces for the economy and markets in the past year—the trade war and the AI spending boom— will still be apparent in 2026. The debate is whether the balance will tip the same way as it did in 2025. We suspect that while trade uncertainty will linger, and even flare at times, it won’t be nearly as intense as in 2025. On the flip side, while the AI investment boom may even intensify, the rate of increase may wane and its power over the equity market may relent—as hinted at in recent days. Despite concerns about a sudden reversal in tech and about the tariff impact on global trade, we expect the global economy to post another year of GDP growth of just above 3% in 2026, not far off 2025. While a bit below the long-run average, this is still
quite resilient in the face of deep policy uncertainties.
The coming year will still bring plenty of trade drama, even if it will rank a bit lower on the wildness scale. The U.S. Supreme Court is expected to rule on the legality of the IEEPA tariffs early in the year. While the Administration has avowed that it can replace those revenues with other trade avenues, a ruling against them will limit the flexibility and scale of future tariffs. The ruling could also indirectly affect the highly anticipated USMCA review slated for mid-2026: Canadian (35%) and Mexican (25%) goods that aren’t USMCA-compliant face hefty IEEPA tariffs. It’s widely expected that the U.S. will use the threat of walking away from the agreement during negotiations. As well, the U.S. has yet to reach a lasting deal with China, although the two seem to have settled on a medium-term truce, however uneasy that may be. And note that some of the earlier ‘deals’ with others are fraying at the edges—Indonesia is the latest example.
Acting again as an important counterweight, the AI investment boom will also still be a major driving economic force. With even bigger capital spending plans in place for 2026 among the mammoth tech companies, it’s almost a given that outlays (on chips, servers, data centres, etc.) will significantly support U.S. growth. The consensus view has been slowly and steadily grinding higher; after bottoming out in the low-1% range in May, the average forecaster now expects GDP to rise by roughly 2% this year and next—and we just nudged up our 2026 call to 2% this week. The AI boom acts through two channels: the direct capital spending strength, which accounted for almost half of first-half growth; and, the wealth effect from soaring equities.
While the U.S. has been the primary beneficiary of the first force, the equity rally spanned much of the globe. Markets from Mexico to Japan to Germany jumped 20% or more, lifting sentiment. Accordingly, GDP growth in each of Japan, the Euro Area and Britain managed to pick up this year, albeit to just a little above 1% each. But that was enough to convince the ECB to stop easing, and for the BoJ to hike modestly. With the Fed moving in the opposite direction in the past three meetings, the U.S. dollar spent much of the year reversing last year’s run-up. The trade-weighted dollar fell 7% from its January peak, and we expect it to soften another 2%-to-3% in 2026, as the Fed eases further—our call is for another 75 bps—while many others head the other way.
Even China’s yuan appreciated by about 3% versus the dollar in 2025, although it softened against most other majors. That will become more of a flashpoint in 2026, with its trade surplus punching above $1 trillion this year—despite a wall of U.S. tariffs. One might raise an eyebrow at our forecast of China’s real GDP growth slowing to 4.5% next year from about 5.0% in 2025. After all, authorities will strive to meet the “around 5.0%” target, expected again for the coming year. But, China still faces domestic and external headwinds. Although exports have defied gravity, there may be some payback from earlier frontloading. And, trade barriers are rising not just in the U.S. but elsewhere, highlighted by Mexico’s tariffs of up to 50%. Arguably more concerning is domestic activity given housing is still struggling and the job market remains weak. It’s unlikely consumer spending will suddenly catch fire, frustrating the rest of the world’s goal of rebalancing China to a more consumption-based economy.
If it was a surprise that China’s economy held its own in the trade war, it comes as a shock that Canada has apparently done so as well. Arguably, the most surprising economic statistic of 2025 is that the number of unemployed Canadians has managed to decline in the past 12 months—recall, the trade uncertainty has been rolling for over 12 months, with the President first threatening Canada with tariffs in November 2024. Along with an upgrade to GDP growth to around 1.7% for this year, Bank of Canada Governor Macklem was inspired to suggest that the ‘R’ word was thus no longer recession, but resilience. (We will graciously forgive him for borrowing our line from 2023; imitation is, after all, the highest form of flattery.) Accordingly, the BoC signalled this week that it is on hold, and noted that the risks are now more symmetric. With trade/USMCA uncertainty lingering, we believe there is a greater chance of another rate cut than a hike in 2026, but the most likely outcome is no BoC move.
Canada’s sturdiness in the face of existential trade threats was driven by a variety of factors. First, revisions revealed better-than-expected momentum heading into 2025, with growth a bit above normal at 2% in the past two years. Second, actual U.S. tariffs on Canada were limited to specific (albeit significant) industries—metals, autos, lumber. Third, fiscal and monetary policy provided massive support. The BoC delivered another 100 bps of easing, following 175 bps in 2024. Meanwhile, Ottawa and the provinces boosted their combined budget deficits by over 2 ppts of GDP. Fourth, Canadians spent more at home, especially on travel and entertainment. Finally, the global equity rally felt right at home in the TSX, which outperformed the S&P 500 partly thanks to gold. The surge in financial asset values pushed net household wealth back above 10-times incomes, double the ratio of 35 years ago. While some of these forces will fade in 2026, we still look for Canada to avoid recession again and grind out modest growth of 1.4%. Given the past year, the risks lie on the high side of that call.
Frank and Mark.
Source: Globe & Mail, BMO Capital Markets, Bank of Canada, Bloomberg.
Canada
As we head into the home stretch of 2025, Canadian equities are holding onto a massive 28% gain, outperforming the S&P 500 by more than 10 percentage points. The TSX added 0.7%, led by health care, materials and banks, while energy backed off. Who had that on their bingo card as the trade dispute was breaking out early in the year and the AI boom south of the border was accelerating? Truth is that, as we opined late last year, Canadian equities were historically cheap on a relative basis and poised for a strong year. Of course, a lot of that relative valuation advantage has now been scrubbed out by strong rallies across materials (i.e., gold), banks, consumer stocks and energy.
Both the Bank of Canada and Federal Reserve made interest decisions last week, and neither surprised the market. The Bank of Canada left rates unchanged at 2.25%, and said as clearly as possible that they’re comfortable on hold at these levels unless something drastically changes. The market has actually pivoted to price in some tightening later next year, but we see the Bank on hold through 2026.
YTD, the TSX up 27.50%, and the benchmark 10-year yield ended the week to yield 3.42%. .
U.S. & Global
Equity markets were mixed this week as we gear down toward the end of the year. The S&P 500 dipped 0.6% as solid gains in banks and materials were
offset by weakness in technology and communication services. The AI trade lost steam with a number of peripheral names selling off sharply late last the week.
The Federal Reserve cut rates by 25 bps, to 3.625% (midpoint). The statement was relatively balanced, saying that “the extent and timing of additional
adjustments” will depend on the data flow from here—Powell argued rates are now in the neutral range, albeit at the higher end. Indeed, with core inflation still stuck around 3% (or somewhat higher), real policy rates are only modestly above zero. The market is still pricing in another 50 bps of easing in 2026. The fascinating aspect to the coming year will be how a more dovish-sounding (actual voting will be a different matter) FOMC interacts with potentially firm growth, stubborn inflation and a strong equity market. Dissents on policy, as we saw last week, may be the new norm.
YTD, the DJIA is up 13.90%, the NASDAQ is up 20.12%, and the S&P 500 is up 16.08%. The 10-year Treasury yield ended the week to yield 4.19%.
Source: BMO Capital Markets
The Good:
Merchandise Trade Balance swung to a $153 mln surplus (Sep.); Building Permits +14.9% (Oct.); Capacity Utilization +0.9 ppts to 78.5% (Q3)
The Bad:
Household Debt-to-Income edged up 0.4 ppts to 176.7% (Q3); Core Wholesale Trade Volumes -0.7% (Oct.); New Motor Vehicle Sales -0.7% y/y (Oct.)
The Good:
Employment Cost Index slowed to +0.8% (Q3); NY Fed 1-Yr Inflation Expectations edged down to +3.20% y/y (Nov.); Job Openings rose to 7,670k (Sep.); Goods & Services Trade Deficit narrowed to $52.8 bln (Sep.); Budget Deficit narrowed to $173.3 bln (Nov.); NFIB Small Business Optimism +0.8 pts to 99.0 (Nov.)
The Bad:
Initial Claims popped 44k to 236k (Dec. 6 week)
Source: Canoe.com/Associated Press
Authorities search for Pennsylvania woman who may have fallen into sinkhole
A grandmother looking for her lost cat apparently fell into a sinkhole that had recently opened above an abandoned western Pennsylvania coal mine and rescuers worked late into the night Tuesday to try and find her.
Crews lowered a pole camera with a sensitive listening device into the hole in Marguerite on Tuesday morning but it detected nothing. A camera lowered into the hole showed what could be a shoe about 30 feet (9 meters) below the surface, according to Pennsylvania State Police spokesperson, Trooper Steve Limani.
“It almost feels like it opened up with her standing on top of it,” Limani said.
The family of Elizabeth Pollard, 64, called police at about 1 a.m. Tuesday to say she had not been seen since going out Monday evening to search for Pepper, her cat.
Police said they found Pollard’s car parked near Monday’s Union Restaurant in Marguerite, about 65 kilometres east of Pittsburgh. Pollard’s 5-year-old granddaughter was found safe inside the car.
The manhole-sized opening had not been seen by hunters and restaurant workers who were in the area in the hours before Pollard’s disappearance, leading rescuers to speculate the sinkhole was new.
Authorities used an excavator to dig in the area, where temperatures dropped to below freezing overnight.
“We are pretty confident we are in the right place. We’re hoping there is still a void she could be in,” Pleasant Valley Volunteer Fire Company Chief John Bacha told Triblive.
By late afternoon, searchers were using access to a mine to try to find her and had dug a separate entrance out of concern that the ground around the sinkhole opening was not stable. Authorities vowed to keep searching for Pollard until she is found.
Pollard lives in a small neighbourhood across the street from where her car and granddaughter were located, Limani said.
The young girl “nodded off in the car and woke up. Grandma never came back,” Limani said. The child stayed in the car until two troopers rescued her. It’s not clear what happened to Pepper.
Police said sinkholes are not uncommon because of subsidence from coal mining activity in the area.
A team from the Pennsylvania Department of Environmental Protection, which responded to the scene, concluded the underground void is likely the result of work in the Marguerite Mine, last operated by the H.C. Frick Coke Company in 1952. The Pittsburgh coal seam is about 20 feet (6 metres) below the surface in that area.
Department of Environmental Protection spokesperson Neil Shader said the state’s Bureau of Abandoned Mine Reclamation will examine the scene after the search is over to see if the sinkhole was indeed caused by mine subsidence.