| | Close
Oct 9 | Close
Oct 2 | Weekly
Change | Net Weekly
Change % |
DJIA | 51,850.55 | 51,176.96 | +673.59 | +1.32% |
Nasdaq | 27,245.90 | 27,190.86 | +55.04 | +0.20% |
S&P 500 | 7,807.24 | 7,722.72 | +84.52 | +1.09% |
| S&P TSX | 35,664.62 | 35,502.65 | +161.97 | +0.46% |
Source: Globe & Mail
Yields: Instant Karma
Douglas Porter, CFA
BMO Chief Economist
In a back-and-forth week, most major financial markets ended
little-changed on net, albeit only after the S&P 500 hit a new record, and
bond yields visited fresh 24-year highs. The first full week in October has
often marked important turning points for markets historically, with many bear
markets coming to a sudden halt around this time. However, this year is clearly
different, with the conflict with Iran seeing few offramps, the midterm
elections looming, and the AI spending boom rolling onward and upward. Given
that Friday marks John Lennon’s birthday (he would have been 86)—and, oddly,
also the date of Che Guevara’s death in 1967 (another 1960s icon, for some) —we’ll
ask the great singer-songwriter to help us sort out the many moving parts in the
global economy.
Give Peace a Chance: Oil prices pushed back above $90 for
WTI and near $104 for Brent as Iran targeted ships deep in the Persian Gulf,
and the Saudi-Houthi conflict worsened. President Trump vowed not to attack
Iran prior to the midterm elections, perhaps in response to reports that an
escalation was imminent. On balance, energy prices didn’t make a big move on
net, as oil is managing to get out of the Gulf—reportedly back to pre-war
levels, prior to the latest flare-up in violence. Still, for markets, happiness
is not a warm gun.
Help! Bond yields pulled back from midweek extremes. At one
point, the 10-year Treasury yield hit 5.36%, up from below 4% at some points
last October, and its highest since early 2002. Some solid Treasury auctions helped
cool the fires, revealing that there is real demand for bonds at yields above
5%. As well, a variety of Fed speakers indicated that there was little urgency
to hike rates immediately further, pushing many to circle the December 9 FOMC
decision as the next likely step, in line with our view. However, previously
dovish Governor Waller—he of the Give Disinflation a Chance—suggested that rate
hikes may still eventually be needed to rein in inflation.
Revolution: The focal point for the global bond sell-off has
shifted to France in recent weeks, with yields there bolting up close to 5% and
about 140 bps above their German counterparts. A weak fiscal backdrop, an
uncertain political outlook ahead of next year’s elections, and widespread
student protests bordering on civil unrest have markets doubting if borrowing
needs can be brought down enough to tame yields. “Le Spread” with bunds managed
to narrow a tad for the week, with Marine Le Pen vowing to cut spending if
elected President (and she is leading the polls).
Imagine: Besides fiscal concerns and high energy prices, the
other factor pacing yields has been the voracious demand for capital from the
AI buildout. The previously capitallight large tech companies are in the midst
of arguably the biggest capital spending boom in U.S. history. While still not
in the same league as U.S. government draws on funding—Washington’s budget
deficit widened 12% in FY26 to an estimated $2.0 trillion, or over 6% of
GDP—the scale of tech borrowing would have been unimaginable just a few short
years ago.
Strawberry Fields Forever: Perhaps not forever, with data
centre construction continuing apace in many rural areas—in the U.S., in China,
and perhaps next in Canada as well. However, said construction has met
increasing resistance in many areas, and has become a flashpoint in this year’s
midterms. It’s quite possible that a slowdown here will throw sand in the gears
of the AI buildout.
Don’t Let Me Down: Despite those very real hurdles, as well
as relentless concerns about the sustainability of the spending boom, investors
have barely blinked. Even in the face of multi-decade highs in yields, the
Nasdaq hit record highs this week, with the largest companies bouncing 13% just
from the late-July lull. But beneath that shiny surface, the vast majority of
the rest of the market is being weighed down by higher yields, especially in
the small- and mid-cap space.
A Day in the Life: Currencies are also facing a mixed
picture, with some falling in and out of favour within days. But the overriding
story has been U.S. dollar firmness since early this year. True, a
trade-weighted version of the dollar is up only modestly from a year ago, but
it has climbed more than 6% against the euro since early 2026. The Fed’s
hawkish shift and the relentless capital pull from the massive tech companies
have supported the greenback, while Europe’s fiscal woes and energy reliance
have sacked the euro.
Working Class Hero: The Canadian dollar has also been under
steady downward pressure since the spring. The flare-up in trade tensions has
weighed, as has the related widening in U.S./Canada interest rate spreads.
Two-year spreads now tower above 160 bps and the 10-year gap is not far from
record wides at almost 140 bps. A surprisingly weak September jobs report in
Canada further widened the gap—employment fell 68,300, a second straight big
drop, hours worked were down 1.5% m/m, and the jobless rate ticked up to 6.5%.
While an odd 37,500 decline in Quebec education jobs may have distorted the
figures, there’s no debate the result was still soft, clipping the loonie to
70.0 cents. Notably, the election of the avowedly separatist PQ party in Quebec
earlier in the week had no discernible impact on the currency, in part because
they secured just 28% of the vote and were left with a minority win.
(Just Like) Starting Over: The weak Canadian jobs report
didn’t quite force a total rethink of expectations for the Bank of Canada, but
it certainly should put the hawks on the defensive. We have long argued that
trade uncertainty could eventually weigh heavily on jobs and thus growth and
thus underlying inflation, suggesting the best course of action for the Bank is
to stand pat (as it has since late last year). Of course, 3% inflation is a
pressure point, and the September CPI (due Oct 19) along with that day’s
quarterly Business Outlook Survey will guide the next rate decision. But with
most measures of core inflation close to 2%, trade uncertainty lingering, and
the economy shedding 110,000 jobs in two months, it’s very tough to see the
rationale for the market pricing of more than 3 hikes by mid-2027. We have
often felt like a lonesome dove in recent weeks calling for no BoC hikes, but
this bird can sing after the weak jobs data.
Come Together: Next week’s focus will be on the U.S.
September CPI (due Wednesday) and retail sales the next day. Headline prices
will be juiced 0.6% by a pop in gasoline, likely lifting overall inflation a
few ticks to 3.6%. However, we expect core to edge up a moderate 0.2%, nudging
the annual rate up a tick to 2.5%—not great, but likely mild enough to stay the
Fed’s hand in late October. Before that, U.S. bonds will be closed for Columbus
Day, while Canadians will come together for Thanksgiving. Given the ongoing
turmoil in trade, energy prices, and upcoming elections, a common refrain may
be: Whatever gets you through the night, it’s alright.
Frank and Mark.
Source: Globe & Mail, BMO Capital Markets, Bank of Canada, Bloomberg.
Canada
The TSX added 0.5% last week, held back by some softness in
banks and telecom.
After years of volatility, Canada’s housing market appears
to be in a holding pattern with most regions largely balanced although
affordability is still driving some variations in performance. We expect
national home sales declined 7.5% from year-ago levels, while average prices
likely fell 1.0% over the same period. The quality-adjusted MLS HPI looks to
remain steady for the fourth straight month, but that would still leave the
index 3.0% softer than a year ago. The recent backup in fixed mortgage rates
has reignited ongoing affordability challenges and will keep a lid on prices at
least through the rest of the year.
YTD, the TSX is up 12.46%, and the benchmark 10-year yield ended the week to yield 3.88%.
U.S. & Global
Equity markets bounced back last week with little in the way
of major market-moving data, and as Treasury yields paused their relentless run
higher. The S&P 500 rose 1.2%, with gains in consumer staples, energy and
utilities leading the way.
Equities are hanging onto solid double-digit gains in North
America for the year, but we’ve now entered the crunch time that is the fourth
quarter. Here are some of the hits and misses so far on a year characterized by
surges in oil prices, yields, capital investment and earnings.
The winners: Energy stocks have led on both sides of the
border with gains topping 40% in the U.S. and near 30% in Canada. The conflict
in Iran, and a surge in WTI back above $100 in recent weeks, has been the
driving force.
The AI boom has led a near-30% rally in S&P 500
technology this year, and massive deployment of capital into the data centre
buildout has spread wide across other pockets of the market—think industrials,
equipment, utilities, etc. While higher yields have put some pressure on
valuations, high and accelerating expected earnings growth has kept the market
supported.
Financials have piggybacked the AI trade with favouable
financial conditions, deal activity and a steepening yield curve. Banks are up
more than 20% on the year in Canada and, while they’ve lagged in the U.S., they
are still up more than 10% from a year ago.
The laggards: While the broad S&P 500 has held firm in
the face of higher Treasury yields, it’s mostly thanks to the big and mostly
insulated tech names. Note that mid- and small-cap groups are flirting with
correction territory even as the large-cap S&P 100 has barely budged. The
Russell 2000 (small caps) is underperforming the big caps by roughly 10 ppts
over the past three months.
Rate-sensitives have been tested by the selloff in bonds,
but not totally thumped. Utilities are down by 5%-to-10% on both sides of the
border over the past three months, but the Canadian group is holding onto a
solid near-10% gain on the year. REITs have taken a 10% hit over the past three
months, with the added drag of falling residential rents across many Canadian
markets.
Looking through the remainder of the year, we see sturdy
U.S. economic growth and further tightening by the Federal Reserve (although we
don’t see a move in October). Given where yields and equity prices have come,
the resilience of very strong underlying earnings expectations looks like the
eventual test.
YTD, the DJIA is up 7.88%, the NASDAQ is up 17.23%, and the S&P 500 is up 14.05%. The 10-year Treasury yield ended the week to yield 5.24%.
Source: BMO Capital Markets
The Good:
Merchandise Trade Surplus widened to $4.2 bln (Aug.); Average
Hourly Wages +2.3% y/y (Sep.); S&P Global Services PMI +1.5 pts to 48.3
(Sep.).
The Bad:
Employment -68,300 (Sep.); Jobless Rate +0.1 ppts to 6.5%
(Sep.); Ivey PMI -6.1 pts to 58.2 (Sep.).
The Good:
Initial Claims -2k to 197k (Oct. 3 week).
The Bad:
NY Fed 1-Yr Inflation Expectations picked up to +3.9% y/y
(Sep.); ISM Services PMI -0.5 pts to
54.9 (Sep.) Goods & Services Trade Deficit widened to $105.6 bln (Aug.); Global
Supply Chain Pressure Index climbed to 1.28 (Sep.); Consumer Credit slowed to
+$8.3 bln (Aug.); U of M Consumer Sentiment -1.8 pts to 46.3 (Sep. P).
Source: Associated Press
US newlyweds tour Croatia after fans photobomb their
wedding shoot
SPLIT, Croatia (AP) — It began with a hijacked wedding photo
shoot and turned into a very unexpected but exciting trip across the world.
Ashton and Zachary Smith from Philadelphia are guests in
Croatia this week after the couple accidentally celebrated their wedding in
June with a crowd of joyful Croatian soccer fans during the FIFA World Cup in
the United States.
The Smiths had just gotten married and came out of
Philadelphia City Hall to take photos when hundreds of Croats in red-and-white
chequered jerseys joined in. Photos and videos of the couple kissing among the
fans became popular on social networks and paved the way for a new friendship.
“It was so crazy, we just finished our ceremony, we went
outside to take some pictures in front of City Hall,” Ashton Smith recalled.
“We were warned that the road was taken over but we’re like, oh, let’s just try
it anyway.”
It was “the best decision that we ever could have made”
despite the initial shock, she said.
“Everyone stormed us,” Ashton Smith added. “At first we were
like, oh my gosh I hope everyone is with us. But everyone was there, everyone
was celebrating with us and it was just amazing how welcoming they were to
complete strangers.”
Months later, the couple received an equally warm welcome in
the Croatian town of Split, located on the Adriatic Sea coast. The Croatian
National Tourist Board and the Mi Hrvati, or We Croats, fan group invited the
Smiths over for a “second honeymoon.”
“I feel amazing,” Ashton said in an interview earlier this
week. “We learned a lot of history about Croatia and now the vibes are
immaculate.”
Ashton and Zachary joined the fans’ march along the city’s
waterfront ahead of Croatia’s UEFA Nations League match against Spain on
Tuesday. A band played, the fans sang and the couple quickly fitted in. Later
in the evening, they also attended the match.
“The fans are so energetic,” Ashton said. “They brought the
same energy that they did in Philly.”
Daniel Pedisic of the Mi Hrvati association said the
spontaneous way Croatian fans reacted to the wedding in Philadelphia showed
“the kind of people we are, warm, hospitable people.”
“We were with them that day and now we brought them to
Croatia,” Pedisic added, whose association follows the team worldwide and is
known for carrying a 100-meter Croatian flag.
The trip also took the Smiths to the coastal town of Sibenik
and included a sailing trip and a tour of the stunning Krka National Park. On
Friday, the couple will travel to the famous medieval walled city of Dubrovnik
in the southern Adriatic, before ending their trip in the capital, Zagreb.
“Technically, this is our second honeymoon because we had a
pre-planned one before the wedding,” Ashton said. “The first one was laid back
and relaxing, and this one is kind of go, go, go, and we absolutely love it.”
Zachary Smith said he had never expected to visit Croatia,
which is located in southeastern Europe.
“I knew all about Croatia, where it was, the country
obviously,” he said. “But (I) never really thought that I would ever make it
here, so it’s amazing.”