Talking Points

April 17, 2026 | 12:23

All Quiet on the (Middle) Eastern Front?

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)

This missive marks the seventh consecutive week of starting with commentary on the conflict in Iran, and it could possibly be the last. Markets are certainly trading that way (Chart 1), with equities putting the war in the rear-view mirror by driving to new record highs, and oil pushing below $85 today to the lowest level since the early days of the war. The fact that the ceasefire is holding, a truce was reached in Lebanon, and reports are circulating that the U.S. may buy Iran’s uranium—a potentially elegant solution to two issues—are buoying the markets. Even the U.S. blockade of Iran made only a fleeting mark on crude prices, with many viewing it as a short-term tactic which could hasten the end of the conflict. Iran further fuelled the rally by declaring Friday the Strait is completely open to commercial ships, as long as the ceasefire holds (including no blockade).

While it’s obviously premature to declare the war over, we can now better assess the economic damage, particularly with oil prices simmering down notably. The IMF weighed in this week with its previously scheduled semi-annual World Economic Outlook. While the tone was downbeat, or at best cautious, what was remarkable was how little the Fund changed its global growth outlook from its January update. Based on the main mild scenario, growth is expected to cool only slightly this year to 3.1%, from 3.4% in both its initial projection and for actual growth in 2025. The Fund noted that last year’s growth rate ended up matching precisely the forecast at the start of 2025, as a variety of policy support measures offset the trade war impact—clearly a lesson for assessing the impact of this year’s war as well. We shaved our forecast for global growth a bit more than the IMF to 2.9% for this year, presumably based on a somewhat higher assumption for oil prices.

The overall tone from this week’s slate of economic data was constructive. China reported firmer-than-expected Q1 GDP at 5.0% y/y (well up from 4.5% in Q4), even with a marked cooling in exports, retail sales and industrial output in March amid the war. Even the U.K., which has been struggling heavily to grow, posted a surprisingly perky February GDP gain of 0.5%, lifting output at a 2% a.r. over the past three months. Meanwhile, U.S. indicators were mixed for March, but the really early results in April have been surprisingly upbeat. For example, both of the regional factory surveys from the Empire State and Philly popped, while the weekly ADP report shows a distinct upswing in employment in recent weeks—a tantalizing hint that the hiring lethargy around the turn of the year has truly been shaken off. We won’t sugarcoat it entirely, as both homebuilders and small businesses were much more downbeat in the latest surveys there for March, and consumers were the gloomiest ever according to the UofM’s April survey.

The rapid-fire series of events around the Gulf has shaken up the bond market and expectations for the Fed. While many of the headlines this week revolved around the ongoing drama of the Jay Powell investigation and the timing of Kevin Warsh’s nomination as Fed Chair, markets were busily pricing back in rate cuts. After the deep drop in crude costs on Friday, there are now better than even odds of at least one trim this year. Our call of two cuts by year-end is back in the realm of possibility. Two-year Treasury yields fell about 10 bps on the week to the lowest level in a month, and down 25 bps from the late-March peak. Similarly, 10s pulled back to a one-month low around 4.25%, albeit still up from just below 4% prior to hostilities breaking out.

In turn, the U.S. dollar faded further, falling almost 1% and now nearly all the way back to pre-war levels on a trade-weighted basis. The euro rose to back above $1.18, coming full circle to late February levels, after dipping to around $1.14 in mid-March. The underlying downdraft in the U.S. dollar, well in evidence a year ago, may now resume. However, the move is expected to be mild. Despite all the chatter about Sell or Hedge America, this week’s TICS data revealed that foreign holdings of Treasuries galloped ahead by $587 billion in the 12 months to February. And that was even with net selling of $171 billion by the BRICS nations (a bit more than half of which was by China). And, ultimately, these past seven weeks have shown that while the greenback’s lustre may have faded a bit, it is still seen as the safe haven.

And, finally, we would be remiss to not mention the rather spectacular rebound in the Nasdaq since late March. Currently working on its 13^th daily gain in succession, the longest streak ever apparently—which, you know, is a long time—the index has flared up by more than 16% from its recent low. Reversing a pair of nasty corrections last April and during the Iran conflict, it’s now up almost 50% from a year ago. While AI and the tidal wave of investment spending around it faded from the headlines during the conflict, it certainly never went away, a reality that is now clearly landing heavily on the markets.

The Canadian dollar rose more than 1% this week to back above 73 cents (or around $1.366/US$), firming even before the big spill in oil prices on Friday. It, too, is essentially back to pre-war levels. Besides our intervention last week, where we suggested it was “odd” that the currency had weakened against the euro while commodity prices raged higher, it may have found a morsel of support on the political front. Three by-election wins by the ruling Liberal Party pushed them into a majority government position, ending a seven-year stretch of minority governments. It’s also the first time ever that a minority government has transitioned into a majority without a full election. From a strictly neutral point of view, this can be viewed as a small positive for markets, removing one more source of uncertainty. The focus will now fall much more heavily on the actual economic results this government can deliver, given that it has now been in power for a year.

The deep drop in oil prices will take some serious steam out of the inflation outlook, and will smooth out the growth outlook on a regional basis (less positive skew to Alberta and Saskatchewan). Piling on, Ottawa announced a 10-cent cut in the federal gas tax for the next four months, which could clip 0.2 ppts from overall inflation. The March CPI on Monday is next week’s key release, with the Bank’s Business Outlook Survey and retail sales in both Canada and the U.S. playing supporting roles. As already seen elsewhere, inflation is expected to take a big step up, with prices likely rising by more than 1% last month on gasoline’s record 21% pop. This will take headline inflation from 1.8% to 2.6% (almost precisely matching the Euro Area’s experience of 1.9% to 2.6%). We will more fully review the outlook for the rest of the year when we have the March data in hand, but it’s safe to say that this week’s developments have seriously reduced the upside risks.

Even with a tamer inflation outlook than, well, just a week ago, markets are stubbornly clinging to the view that the Bank of Canada will hike rates later this year. GoC yields nudged only slightly lower this week, and the market is still priced for one full hike in 2026. True, that’s down from almost three hikes just a few weeks ago, but it still looks heavy to us. While the economy may have rebounded in February after a tough winter, GDP is up only 0.6% y/y and employment is up only 0.4% y/y. Housing remains in a deep slumber, and trade uncertainty remains high as the USMCA review looms. Our view thus continues to be that the best policy course for the Bank is to stand still, and if anything with an easing bias.