Talking Points

May 08, 2026 | 12:58

Fog of War, Haze of Ceasefire, Mist of Blockade

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)

They say that attention spans are getting ever shorter, but this is ridiculous. Amid the biggest energy shock in recent history, even the oil market doesn’t seem to be all that interested… let alone other financial markets and the broader economy. Amid all of this week’s uncertainty around the status of the ceasefire, and the two-way tests of the dueling blockades, oil prices moderated on net by 6% to $96. This left WTI a bit below its average of the past two months (roughly US$98/bbl). Meantime, in what was a generally quiet week for major market moves, bond yields drifted a touch lower and the U.S. dollar barely budged. As for equities, stocks have seemingly long since moved on from the Iran conflict, with the robust Q1 earnings season helping drive the S&P 500 to record highs this week and now up nearly 30% from a year ago.

Providing some serious ballast for markets generally is evidence that the U.S. economy is holding up quite well, even in the face of the persistent run-up in fuel costs. Earlier signs hinted that the job market had actually been gathering strength in recent weeks, and the April nonfarm payroll report pounded home that reality with full force. Employment handily topped expectations with a solid 115,000 gain, building on the upwardly-revised 185,000 March advance. Just as almost everyone had become conditioned to the idea that monthly job gains were going to be much more modest than in the past due to much slower labour force growth, the economy naturally reels off triple-digit payroll gains in three of the first four months of the year. The companion household survey has been notably weaker, but the fact that the unemployment rate has been stuck at 4.3%—matching last year’s average—doesn’t highlight any serious pain.

Most of the focus of this week’s economic data was on the job market, but the other limited indicators also sent a soothing signal. True, the services ISM slipped a bit to 53.6, but that’s still well above the norm of the past two years, and, combined with a sturdy 52.7 reading on the factory ISM, suggests that growth is holding up just fine. Suffice it to say that consumers still aren’t quite seeing it that way, as the University of Michigan’s sentiment survey plunged to just 48.2 in May, a record low. For context, that’s about 40 points below what would be considered normal. Clearly, the pain at the pumps is skewering confidence, though five-year inflation expectations are not running wild at 3.4% (similar to the NY Fed’s latest finding of 3.0%).

But even as U.S. consumers are feeling very downbeat, it doesn’t seem to be weighing on actual spending activity. Auto sales held up remarkably well in April at 16.1 million units, down only slightly from the prior month and last year’s average (both clocking in at 16.3 mln). One lingering concern is that spending continues to outrun underlying income growth; over the past year, total outlays are up 5.6% y/y in nominal terms, while disposable incomes are up by just under 4% y/y. The gap has been bridged by a drop in the saving rate to 3.6% (a point below last year’s average), but also by a ramp-up in borrowing. Consumer credit saw its biggest rise in a year in March, of almost $25 billion. Still, we would note that outstandings are up a modest 2.3% from a year ago, hardly signalling a borrowing spree.

Of course, the other big factor holding the economy aloft—and “big” is almost certainly an understatement—is the relentless corporate spending on the AI build-out. Investment in related infrastructure is flattering factory orders, with computer equipment and electronics jumping 15% y/y. But the full impact on the U.S. economy is somewhat more muted, as a high portion of the necessary equipment is imported. Led by semiconductors, imports from Taiwan have gone into the stratosphere in the past year, surging 98% y/y in the first quarter of this year. In turn, this has led to the extremely unusual circumstance that the U.S. is now running a larger trade deficit with Taiwan (US$177 billion in the past 12 months) than with China ($165 billion). That’s a dramatic shift: China’s imbalance was 28x larger than Taiwan’s as recently as 2018.

The trade war also re-emerged this week, as the President followed up on last week’s threat of a 25% tariff on European autos with a broader warning to the continent to approve its earlier trade deal. Crashing the proceedings, the International Trade Court ruled the Administration’s 10% global tariff out of bounds, although it was due to expire in July in any event. There are no doubt plenty of other tariff options at the disposal of the White House, so this is far from the last word. But, the economy and markets have shown an impressive ability to navigate the twists and turns of the trade uncertainty over the past 15 months. Those skills have clearly helped them deal with the information whipsaw from this year’s war.

It’s no secret that this space has long doubted the market’s pricing of more than one rate hike by the Bank of Canada this year. But the Bank’s hawkish turn in last week’s Statement—where it openly mused about “consecutive” hikes—suddenly vindicated the market: Hawks 1, Doves 0. Let’s just say that the ongoing weakness in the Canadian job market, highlighted by the April figures, may have just tied the series.

Canada’s jobs report sent a very different signal than its U.S. counterpart in April. Unlike the quiet comeback in U.S. job trends, Canada has sounded a series of flat notes so far in 2026. The economy lost 17,700 jobs last month, the third drop in four months. Discouragingly, full-time positions have been especially weak, dragging hours worked down so far this year. While we would never over-react to any single jobs result, and the weakness does follow some surprising strength late last year, the reality is that employment is up just 0.3% y/y. And even with the big slowdown in underlying population, some slack appears to be building in the job market. True, the unemployment rate at 6.9% is back to precisely where it stood a year ago, but that is on the soft side—particularly for those aged 15-24, as the youth rate jumped to 14.3%.

The bottom line is that the economy is struggling to even get to first base on the growth front. Meantime, the early readings on housing activity in April showed only the faintest hints of a thaw, with prices still drifting lower in a variety of major markets. And, finally, there is the reality that the deep uncertainty of the USMCA review lingers, with few obvious grounds for optimism on that front. And the ongoing uncertainty continues to weigh heavily across manufacturing, but especially so in the domestic auto sector. This week brought news that the massive Honda investment in a new EV plant, heralded with much fanfare just two short years ago, has officially been put on ice. While many were quick to blame waning EV demand, and not the trade war, it’s quite clear that the wall of U.S. auto tariffs played a role in the decision. Unless and until the trade backdrop clears, we continue to assert that it seems quite misguided to be considering even one rate hike, let alone “consecutive” moves.