| Close
Jan 2 | Close
Dec 26 | Weekly
Change | Net Weekly
Change % |
DJIA | 48,382.39 | 48,710.76 | -328.37 | -0.67% |
Nasdaq | 23,235.63 | 23,593.10 | -357.47 | +1.52% |
S&P 500 | 6,858.47 | 6,929.94 | -71.47 | -1.03% |
| S&P TSX | 31,883.37 | 31,799.76 | +83.61 | +0.26% |
Source: Globe & Mail
U.S. Economy: New Year, New Upgrade
Sal Guatieri
BMO Senior Economist
Our 2026 GDP growth forecast, published two weeks ago, is
already due for an upgrade after the strong Q3 GDP release. That report
confirmed two things: the economy has a good head of steam, and the AI boom is
driving this train. Real GDP growth accelerated 4.3% annualized in the quarter
and grew 2.3% over the past year. Consumer spending surged 3.5% annualized,
despite almost no increase in real disposable income. The powerful wealth
effect from the AI-fueled equity rally saw households slash their saving rate
to a near three-year low (4.2%). Meanwhile, rapid advances in business spending
on information equipment, data centres, and software reflect the build-out and
adoption of AI infrastructure and systems. Unlike households, earnings growth
supported investment, as corporate profits zoomed 18.0% annualized after a
weak, trade-war marred, first half of the year. Barring an AI-led correction in
investment or equities, the expansion should remain healthy in 2026.
Given the economy’s momentum, we have raised our Q4 GDP
growth call to 1.3% annualized (from 0.3%). Growth likely would have been at
least one percentage point higher if not for the government shutdown. The
subsequent reopening (and the assumed extension of a continuing resolution for
funding beyond January 30) should see a 2-handle in Q1. For all of 2026, we now
expect growth of 2.3%, revised up from 2.0% before the Q3 GDP report. That
marks a slight pickup from the estimated 2.2% rate of 2025 (bumped up from 1.9%
previously), which is down from 2.8% in 2024 due to the effects of the trade
war, federal government cutbacks, and immigration curbs.
Still, growth remains comfortably above long-run potential,
which begs the question: why is the jobless rate creeping higher? The answer is
that labour productivity may be accelerating, partly due to AI-driven
automation and because businesses are trying to control costs in the face of
new tariffs. Apart from supportive fiscal, regulatory, and monetary policies,
and of course the uncertainty about trade policies, the direction of the
economy and labour market in 2026 will largely depend on productivity and AI’s
influence on it. A faster AI payoff would be good for overall growth and even
inflation, but could come at the expense of continued anemic hiring. This mix
would at least help keep the Fed in the easing game.
Frank and Mark.
Source: Globe & Mail, BMO Capital Markets, Bank of Canada, Bloomberg.
Canada
Following a solid three-month run, we expect the
Canadian economy shed 10k jobs in December. Even so, the modest decline
would barely make a dent to the over 157k jobs created between June and
November. The jobless rate is expected to tick up to 6.6% but remain below
the highs seen earlier in 2025, dampened by lower population growth. Hours
worked could experience labour-disruption-related volatility as some flights
were cancelled ahead of another threatened airline strike, while the
late-month Canada Post agreement will likely not show up in these figures.
The recent firming in the labour market contributed to the Bank of Canada’s
decision to pause rate cuts. Although this report won’t be soft enough to
immediately bring cuts back onto the table, the risks in the job market
remain tilted to further weakness through the early part of 2026.
For 2025, the TSX was up 28.25%, and the benchmark 10-year yield ended the week to yield 3.46%. .
U.S. & Global
The third quarter saw a 4.3% annualized surge in real
GDP yet little increase in work hours, suggesting that the entire output
gain stemmed from improved productivity (perhaps the start of an AI
payoff?) Moreover, real nonfarm value-added grew even faster than GDP,
indicating that labour productivity accelerated about 4.7% annualized in
Q3, following an already strong 3.3% advance in the prior quarter. Assuming
sturdy growth in hourly compensation, unit labour costs likely rose a modest
0.9% annualized. Growth in the four-quarter average of this highly volatile
series should hold somewhat above 2% y/y. That’s broadly aligned with the
inflation target, reinforcing Chair Powell’s view that labour markets are
no longer a major source of inflation pressure, thus keeping the door open
for rate cuts later this year.
After two months of shutdown-related distortions,
December should bring a relatively clean jobs report. Unfortunately, it
will likely confirm the recent sluggish hiring trend, with nonfarm payrolls
expected to rise by 58,000, down from November’s pace and less than half
the long-run norm. ADP reported an 11,500 increase in the four-week moving
average of the weekly change in private-sector payrolls as of December 6
(or 46,000 at a monthly rate). Assuming some slowing in surprisingly strong
labour force growth, the unemployment rate is expected to hold steady at a
four-year high of 4.6%, as suggested by the Chicago Fed’s estimate. Though
likely to breach the Sahm Rule for recessions, the jobless rate’s climb in
the past year largely reflects cautious hiring rather than weak demand amid
uncertain trade policies and AI’s productivity-lifting potential. A
steadier jobless rate at year-end, combined with the strong Q3 GDP release,
could tilt the Fed toward a policy pause this month.
For 2025, the DJIA was up 12.97%, the NASDAQ was up 20.36%, and the S&P 500 was up 16.39%. The 10-year Treasury yield ended the week to yield 4.20%.
Source: BMO Capital Markets
The Good:
No news this week.
The Bad:
Monthly Real GDP -0.3% (Oct.)—but StatCan’s flash estimate
shows Nov. grew 0.1%; Manufacturing Sales -1.1% (Nov. A); Wholesale Trade weak
+0.1% (Nov. A); Industrial Product Prices +6.1% y/y; Raw Materials Prices +6.4%
y/y (Nov.) Construction Investment -0.5% (Oct.); Ottawa posted an $18.4 bln
deficit (Apr.-to-Oct.) —vs. $14.5 bln in same period last year.
The Good:
Real GDP +4.3% a.r. (Q3)—well above expected; Core Durable
Goods Orders +0.5% (Oct.); Industrial Production +0.2% (Nov.); Pending Home
Sales +3.3% (Nov.); S&P Cotality Home Prices (20-City) +1.3% y/y; FHFA Home
Prices +1.7% y/y (Oct.); Initial Claims -16k to 199k (Dec. 27 week).
The Bad:
Conference Board Consumer Confidence Index -3.8 pts to 89.1
(Dec.).
Wierd News
Source: Associated Press
Rhode Island firefighters rescue a yellow Lab from an icy
pond on New Year’s Day
WESTERLY, R.I. (AP) — A yellow Labrador out for a walk with
his owner in Rhode Island had to be rescued by firefighters on New Year’s Day
after he wandered onto a thin layer of ice covering a pond and fell through the
center.
According to the Misquamicut Fire Department, volunteer
firefighters and other emergency officials were dispatched early Thursday
morning for a water rescue. Once on scene, firefighters saw a dog named Phoenix
struggling and unable to move to shore in the slushy, icy water.
Members from both the Misquamicut and Watch Hill fire
departments donned ice rescue suits, which help protect the body from frigid
temperatures, to enter the pond and successfully rescue Phoenix. The National
Weather Service reported it was 26 degrees Fahrenheit around 9 a.m. on
Thursday, with the wind chill dropping the temperature to 14 degrees.
“It was the chillest dog I’ve ever seen in my life,” said
Steve Howard, deputy chief of the Misquamicut Fire Department, in a phone
interview on Friday. “The dog never made a sound. He was pretty chill.”
While the firefighters were evaluated for possible
hypothermia, they did not require treatment. The fire departments described the
incident as “a successful first call of 2026,” in a statement posted on
Facebook.
Phoenix was also declared free of injuries, but Howard made
sure to check in with his owner later Thursday.
“He got a little bit of extra food last night,” Howard said.
“And he took a little nap.”
The incident served as a reminder to treat all ice as
potentially dangerous, particularly over bodies of water, the fire department
warned.
“No ice is ever safe. Our firefighters train extensively for
cold water and ice rescues, but these situations are extremely dangerous,” the
fire department said.