The Weekly Bottom Line
Our summary of recent economic events and what to expect in the weeks ahead.
Date Published: May 1, 2026
- Category:
- Canada
Canadian Highlights
- Markets were mixed this week as investors digested fiscal updates and central bank signals amid elevated global uncertainty.
- The Federal Government’s Spring Economic Update delivered a modest near-term fiscal improvement, but little change to the medium-term outlook.
- The Bank of Canada signalled it is prepared to stay on hold if oil prices evolve as assumed, though risks around energy and trade remain elevated.
U.S. Highlights
- Despite elevated uncertainty, the S&P 500 reached another all-time high this week, riding its best monthly performance in six years.
- The Federal Reserve held the policy rate steady while Chair Powell confirmed he will remain on the Board of Governors until the DOJ’s probe is completely resolved.
- The U.S. economy expanded by a healthy 2% in Q1, while inflationary pressures rose to a two-year high.
Rising energy prices this week pushed government bond yields higher, while equities traded water. At the time of writing, the S&P/TSX Composite was flat relative to last week, while the Government of Canada 10-year yield rose 10 basis points over the week. Oil prices were volatile, but finished higher, up roughly 2.4%, reflecting ongoing geopolitical risks and persistent supply concerns.
Despite everything that’s going on, the near-term Canadian outlook is little changed. The Federal Government’s Spring Economic Update (SEU) didn’t materially alter the fiscal trajectory, while the Bank of Canada signalled that if its oil price assumptions prove broadly correct and the trade landscape doesn’t further deteriorate, it is content to remain on the sidelines. That said, risks are currently growing more complex, with the probability of a more sustained rise in oil prices looming large.
The SEU showed a better-than-expected starting point for the federal books, with the 2025–26 deficit coming in meaningfully lower than projected in Budget 2025. However, the fiscal outlook was essentially unchanged over the subsequent years as increased revenues from a slightly stronger economy and lower unemployment were largely offset by additional spending measures (Chart 1). Together with higher expected interest rates, the deficit plans point to rising debt servicing costs over time.
Befitting an interim budgetary update, the SEU didn’t provide any major new policy initiatives that would shift the macroeconomic outlook. The new “Canada Strong Fund”, PM Carney’s version of a sovereign wealth fund, grabbed headlines, It is meant to take equity positions in major projects, but left more questions than answers on how it will work.
Steady fiscal policy was mirrored by the Bank of Canada’s decision to leave the policy rate unchanged, emphasizing that the economy is evolving in line with expectations. The accompanying Monetary Policy Report underscored that higher oil prices are pushing inflation higher in the near term, but, under the Bank’s base-case assumption, these effects gradually fade as energy prices ease. With some slack remaining in the economy and core inflation measures still close to target, policymakers indicated that patience remains warranted. A view we have shared for some time.
That said, the Bank was clear that the outlook is highly uncertain. Ongoing tariff effects and uncertainty surrounding the upcoming CUSMA review continue to weigh on exports and investment. Meanwhile, a more prolonged or severe energy shock could broaden inflation pressures, overturning the current assumption that higher oil prices are temporary (Chart 2). The BoC highlighted that “consecutive increases in the policy rate” could be needed should oil prices not fall as expected.
Looking ahead, the Bank of Canada faces a delicate balancing act. If trade disruptions intensify and global demand softens further, excess supply could widen, opening the door to eventual rate cuts. Conversely, if elevated energy prices prove more durable and begin to feed into broader inflation expectations, multiple hikes could be in the offing. Wait and see is the mantra – for now– but the clock is ticking.
U.S. equity markets shrugged off escalating U.S.-Iran tensions and instead focused on this week’s upbeat earnings releases and signs of a still resilient U.S. economy. Further gains in the S&P 500 capped off what has been an impressive run through the month of April, with the index rising +10% m/m – its strongest performance since April 2020. The gain in equities came despite the price of oil moving back above $100 per-barrel (WTI benchmark) on reports that President Trump told aides to prepare for an extended blockade. Meanwhile, Treasury yields across the curve climbed a bit higher, as hawkish undertones in the Fed’s policy statement erased hopes of rate cuts later this year. The 10-year Treasury yield currently sits at 4.38%, while Fed futures are now showing a one-in-three chance of a rate hike by April 2027.
At the onset of the Middle East conflict, we argued that the economic impact from higher oil prices is likely to be relatively small. In large part, that was because of structural factors like the U.S. being less energy intensive and a net exporter of energy products. But we also noted that the shock was hitting the economy from a point of strength, and that was evident in this week’s reading of Q1 GDP. The economy expanded by a respectable 2%, with business investment remaining a bright spot. AI was a significant driver underpinning investment growth, though there was also evidence of some broadening to more traditional areas (Chart 1). The AI spending splurge looks to have legs, with Meta, Alphabet and Microsoft all raising guidance for 2026 planned expenditures this week. Cumulative capex by the “Magnificent 7” is now estimated to be $725 billion – a significant increase from 2025’s ~$375 billion.
Meanwhile, consumer spending was a soft spot in Q1, though some of the weakness appears transitory. The quarter got off to a rough start, as Winter Storm Fern caused major disruptions across most of the U.S. Encouragingly, the spending figures picked up as the quarter progressed, with March’s gain the strongest in fifteen months… in nominal terms. After adjusting for the sharp jump in inflation – partly due to the surge in energy prices – the gain appeared more modest. But it wasn’t only energy prices holding up inflation. Core PCE – the Fed’s preferred inflation gauge – rose 3.2% yr/yr in March, or its fastest rate of growth in over two years (Chart 2).
Rising inflationary pressures have made the FOMC more cautious on the rate outlook, with three Fed officials voting to remove the rate-cutting bias in the policy statement. The shifting sentiment comes at an interesting time for the Fed. This week’s press conference likely marked Powell’s last as chair, with Kevin Warsh expected to be in-seat for the next meeting following his nomination clearing the Senate Banking Committee earlier this week. But Powell noted at the press conference that he plans to stay on the board until the DOJ investigation is “truly over with transparency and finality”. Ultimately, this leaves the composition of the FOMC unchanged, as Warsh will fill the seat of President Trump’s appointee Stephen Miran, leaving little hope that the new Fed chair will be able to deliver on immediate rate cuts.
Disclaimer
This report is provided by TD Economics. It is for informational and educational purposes only as of the date of writing, and may not be appropriate for other purposes. The views and opinions expressed may change at any time based on market or other conditions and may not come to pass. This material is not intended to be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice. The report does not provide material information about the business and affairs of TD Bank Group and the members of TD Economics are not spokespersons for TD Bank Group with respect to its business and affairs. The information contained in this report has been drawn from sources believed to be reliable, but is not guaranteed to be accurate or complete. This report contains economic analysis and views, including about future economic and financial markets performance. These are based on certain assumptions and other factors, and are subject to inherent risks and uncertainties. The actual outcome may be materially different. The Toronto-Dominion Bank and its affiliates and related entities that comprise the TD Bank Group are not liable for any errors or omissions in the information, analysis or views contained in this report, or for any loss or damage suffered.
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