Talking Points

April 10, 2026 | 12:04

See You on the Dark Side of the Truce

Economist

Douglas Porter , CFA

Chief Economist and Managing Director
Economics

Douglas Porter brings more than three decades of experience analyzing gl... (Read more)

Douglas Porter , CFA

Chief Economist and Managing Director
Economics

Douglas Porter brings more than three decades of experience analyzing gl... (Read more)

In another week of high drama, markets ended in a calmer fashion, awaiting this weekend’s direct talks between the U.S. and Iran in Islamabad around the 14-day ceasefire. Oil prices took a big step back from above $115/barrel at the start of the week, with WTI dipping below $100, but also ending well up from the initial dive to the low-$90s following the ceasefire news. With Iran still tightly controlling the Strait of Hormuz, and precious few ships actually moving through, there is still a very large premium built into crude prices. And the damage inflicted on a variety of energy assets around the Gulf has played a role in boosting one-year futures prices by about $10 since the start of the war. Suffice it to say that we are quite comfortable with our call of an $85 average oil price for 2026, even with the ceasefire news.

The conflict began nearly six weeks ago, and despite the wild swings in oil prices over that period, perhaps the big surprise is what little impact the war made on other financial markets (Table 1). As of writing, the S&P 500 has fought its way back to within 1% of pre-conflict levels. Even at its low last Monday, it was down ‘only’ 9% from its record high, not even quite reaching official correction terrain. Compare that to the 19% bludgeoning it absorbed in the six weeks of the initial stages of the trade war almost exactly a year ago. Meantime, after correcting, the Nasdaq is now above pre-war levels, with tech very much back in favour again. The gold-heavy TSX is down about 2% from six weeks ago, but that’s barely a ripple, given that bullion prices are down more than 9% (shattering gold’s reputation as a safe harbour).

With the U.S. dollar pulling back this week, the net change in currencies since the start of the war is also microscopic. One measure of the trade-weighted dollar against the majors is now up just 1% since late February, and even at its peak it was up by less than 3%. In other words, the U.S. dollar did ultimately retain its role as a safe haven, but only just. Notably, the Canadian dollar initially held up well against the greenback—and was the only major currency to rise in the first week of the fight—but is now down a bit more than others at -1.3%; thus, somehow losing ground against the European currencies. In a word, that’s just odd—even if the loonie is viewed as a risk-driven currency, it’s also backed by massive oil & gas sales (which can still be produced and sold, unlike in the Gulf), as well as by aluminum and fertilizer.

Friday’s Canadian employment report gave a small hint at the potential support to parts of the economy from robust commodity prices. While the overall job gain was (amazingly) at consensus at 14,100, the resource sector led with a 10,300 advance—one of the biggest gains on record for that smallish sector. The mining and oil & gas group has seen employment rise 3.6% y/y, miles above the economy’s average gain of just 0.4%. Even with that small rise in jobs over the past year, which has been fraught with deep trade uncertainty, the unemployment rate has actually edged down a tick to 6.7%, as the labour force has increased even more slowly. The two big forces at play there are a wave of retiring boomers and the sudden, sharp slowdown in immigration over the past year. StatCan estimates that the population of those 15 and over has slowed to just 0.3% annualized in the past three months, the coolest on record and down from a piping hot 3.5% growth rate as recently as 2024. We view the sudden population adjustment as a net disinflationary force, and another factor which could keep the BoC at bay.

Thus, the only semi-logical case to be made for a rise in the euro and pound versus the Canadian dollar over the past six weeks is that the ECB and the BoE may actually follow through on rate hike threats. In contrast, we continue to expect the Bank of Canada to sit on its hands through this year. Markets are still not quite in sync with that view, as the one other big market mover during the conflict—besides oil and gold—has been bond yields. Even after edging down a bit this week, two-year GoC yields are up a towering 39 bps from late-February levels to almost 2.8%, or more than 50 bps above the overnight target rate. While the most aggressive moves have been washed away, the market is still priced for at least one rate hike by the Bank of Canada this year. In turn, this has also boosted 10-year yields by a sturdy 33 bps in the past six weeks to almost 3.5%, almost precisely where they stood just before the Bank first started cutting rates in June 2024.

The back-up in Treasury yields since late February has been equally notable. Even with a small dip this week, two-year yields are now up about 40 bps since the start of hostilities, and 10s are up about 35 bps to just above 4.3%. In contrast to the BoC, market expectations for the Fed are still leaning slightly to a rate trim, but only just. In contrast to our current call of two cuts late this year, the market is not fully priced for even one full cut over the next 18 months. Public statements by Fed officials give a clear picture of the battle currently raging between hawks and doves, with a variety of members clearly uncomfortable with underlying inflation, even prior to the spike in energy prices. Last Friday’s surprisingly solid rebound in payrolls likely did nothing to soothe their concerns.

This week’s slate of important U.S. data delivered a classic mixed message for the Fed, with an unusual juxtaposition of the PCE deflator (for February) and the CPI (for March) landing on back-to-back sessions. The all-important core PCE landed heavy at +0.4%, repeating its unfriendly January performance, and keeping the yearly rate at an uncomfortable 3.0% y/y. More troubling, the 3- and 6-month trends rose to 4.4% and 3.4%, respectively. However, just a day later, the CPI calmed jangled nerves, with core rising a mild 0.2% last month. The short-term trends moderated, including to just 2.3% for the three-month, a five-year low. Notably, core goods prices have risen just 1.2% in the past year; that’s up from an average yearly rise of just 0.2% in the prior three years, but hardly a large move given the trade war.

Still, the CPI will not provide much comfort for the hawks. First, there’s the small matter that overall inflation lurched higher in March, as headline prices jumped 0.9% (about as consensus expected), lifting annual inflation to a two-year high of 3.3%. Second, there are ongoing concerns about the accuracy of the CPI in the wake of the shutdown. Ultimately, the Fed tracks the PCE deflator, and it has simply been less mild than the CPI. Finally, inflation expectations have risen on the oil price jump and remain at risk of moving higher. To cite but one example, the University of Michigan reports that households’ one-year inflation call jumped a full point in early April to 4.8%. Even the five-year expectation edged up to 3.4%, compared with the average call of 2.8% over the past decade. The over-riding issue for policymakers and markets is whether this upswing persists after the conflict ends and, more immediately, whether the ceasefire indeed ends the conflict.