Talking Points

July 31, 2026 | 12:48

When All Is Said and Done…

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)

…there’s a lot more said, than done. Perhaps not in those precise terms, but that was the general takeaway from this week’s highly anticipated FOMC meeting and Chair Warsh’s second press conference. Heading into the event, the market had an unusually high degree of uncertainty on the rate decision, in part due to the Chair’s reluctance to offer any guidance whatsoever. The on-hold outcome was largely as expected, and even the 3 dissents in favour of an immediate 25 bp rate hike weren’t a surprise. But what did raise many an eyebrow was Warsh’s tough talk on inflation, accompanied by no real indication that any actions were on offer anytime soon. In fact, the Chair implied that he was happy to let the bond market do the tightening work for now. Many analysts were quick to point out that such a strategy can only work for so long, and ultimately the Fed needs to follow through with action on short-term rates.

It may be too early to say that the Chair’s honeymoon with markets is over, but the early Treasury market reaction certainly leaned in that direction. Even as short-term yields dipped on the week on the lack of a Fed move, long-term yields rose with purpose, aggressively steepening the yield curve. Thirty-year yields famously rose to their highest level since the summer of 2007, piercing above the 5.25% threshold by Friday morning. Tens went along for the ride, pushing well above 4.7%, the highest in more than a year and up 55 bps since the start of 2026. However, before we get too wound up in talk of a bond market revolt, note that the spread between 30s and 2s is still a bit less than 100 bps, below levels prevailing just two months ago and less than the long-run average. And, aside from the yen—where authorities intervened to support the currency—the dollar dropped roughly 1% for the week.

The back-up in bond yields shook an equity market that already was wobbling on mixed Mag 7 earnings and the extreme swings in chip stocks (in the U.S. and Korea). Even with a big bounce on Thursday, the S&P 500 was struggling to avoid a third consecutive weekly loss. An index of the largest tech stocks, the Nasdaq 100, officially corrected by mid-week, and is currently down about 8% from its early June apex.

The underlying message from the latest slate of U.S. economic reports only muddied the picture, offering no clear direction. Even the Q2 real GDP release was a jumble of mixed messages. The headline 1.5% growth rate was well shy of expectations, but the downside miss was due to weak inventories and another pullback in federal government spending. Meanwhile, consumers (+3.2% a.r.) shrugged off the quarter’s high gasoline prices while AI spending helped drive overall business investment to a hearty 8.4% gain. Suffice it to say that most measures of underlying activity were solid.

A bit overlooked by the real growth figures was the reality that the U.S. GDP deflator popped at a 6.2% a.r. last quarter. The deflator reflects domestic-produced price increases, and the latest big rise is mostly due to the jump in energy. This lifted nominal GDP growth to a 7.9% clip in the quarter, and up 6.5% from a year ago. That’s the strongest non-pandemic pace of nominal GDP growth over four quarters since the summer of 2005. If you are looking for one quick reason why bond yields have risen so much over the past year, the sustained strength in nominal GDP (i.e., the combination of real growth and inflation) is certainly not a bad place to start.

There was no murkiness around Canada’s latest GDP report. The average monthly gain through the three spring months is estimated at nearly 0.4%, with Q2 on track for an annualized rise of more than 3%. That’s a far cry from the 0.1% dip in Q1 and should finally quash recession chatter. If June’s flash estimate of 0.2% growth proves correct, it will leave GDP up 1.9% from year-ago levels, in-line with its 20-year average pace. While new U.S. tariff threats cloud the outlook—the pending 50% levy is set for August 19—the nice rebound in activity in Q2 reinforces the BoC’s contention that the economy is adapting to the uncertainty. The July jobs report (due August 7^th) will provide an update on how employers are responding, and we expect a flat reading after surprising strength in the past two months.

Canada’s bond market has not avoided the widespread sell-off, with the 30-year GoC yield pushing above 4%. That’s flirting with the highest level since 2010, although 10-year yields of around 3.65% are well below the peaks hit in late 2023 (of nearly 4.3%). With short-term rates considerably lower in Canada than stateside, the curve is somewhat steeper, but again not close to extremes (the 30s-2s spread of 112 bps is actually a touch below the 30-year average). Perhaps the bigger takeaway is that Canadian yields remain firmly below their Treasury counterparts across the curve, anchored by a lower overnight rate, somewhat milder underlying inflation trends and a less-fraught fiscal landscape.

Milton Friedman was born on this day in 1912; he passed away 20 years ago, but his theories are still widely followed by free-market adherents and monetarists, and he won the Nobel Prize for economics in 1976. He popularized the phrase “there is no such thing as a free lunch”; but, may be best known for asserting that “inflation is always and everywhere a monetary phenomenon”. That latter phrase didn’t really end the debate, as it would seemingly imply that we really shouldn’t worry about inflation amid raging energy prices and supply chain shocks, as long as central banks just control the money supply! Of course, that’s easier said than done, and now even measures of the “money supply” have become hopelessly complicated with the wide variety of payments systems, access to ready credit, and even different kinds of “money” (see crypto). Even so, monetarism was partly vindicated in 2022, when the sprint in the M2 money supply in the prior two years did indeed presage the first real outbreak of inflation in four decades (Chart 1).

Friedman was also known as a fierce defender of shareholder rights—he argued that businesses had only one responsibility: to maximize shareholder returns. To quote Forbes: “Corporate executives using company funds for general social agendas are improperly spending other people’s money without owner consent.” Also pertaining to today’s world, he was a leader in the permanent-income hypothesis, which said that individuals base their spending/saving decisions on long-term income trends, not a temporary windfall—suggesting that rebates or stimulus cheques would be useless. Perhaps Friedman had never been to Vegas, and may not have fully understood human nature on that one.

We are on board with the Nobel winner’s disdain for central planning and government inefficiency. Maybe his best quote: “If you put the federal government in charge of the Sahara Desert, in five years there’d be a shortage of sand.”