By Douglas Porter

January 9, 2025

The headlines in the first full week of 2026 may have been dominated by Venezuela, but financial markets forged on regardless after a banner 2025 and the U.S. economy kept on chugging.

While much of the debate focused on how long and by how much oil production could be ramped back up in Venezuela, oil prices firmed by roughly 3% on net to just above $59/barrel—suggesting the answers were “no time soon” and “only with great difficulty and cost”. Meantime, stocks mostly picked up where they left off, with the S&P 500 hitting a new record high this week and up 1.5% since the end of 2025, while the TSX has popped nearly 3%.

In general, the latest slate of economic data has not stood in the way of the equity rally, suggesting that U.S. growth remains solid, while job gains have nudged back up to a modest pace. A sudden surge in productivity in recent quarters—averaging a towering 4.5% a.r. in Q2 and Q3—helps explain the seeming conundrum of hearty GDP results amid sluggish employment. The headline report of the week ended up being a bit of a staid affair, with December payrolls just missing consensus with a tidy 50,000 gain, although the prior two months were revised heavily lower.

Arguably more meaningful was the pullback in the jobless rate to 4.4% (also from a downwardly revised 4.5% the prior month). While the employment data have been messy and heavily revised in the past year, two figures probably accurately capture something close to reality—the jobless rate is up 0.3 ppts from a year ago, and payrolls are up just a modest 0.4% y/y; both indicate that the job market has been sluggish, but not overly weak.

At the same time, this week’s raft of indicators suggested that economic activity is nonetheless holding up better than expected. Even with all the (very real) concerns around unaffordability, U.S. vehicle sales topped expectations in December at 16.4 million a.r., slightly above the average for all of 2025 (16.3 mln) and leaving them with their best full-year results since 2019.

The ISM services index was solid at 54.4 last month, washing away a small miss on the factory side (47.9). And, perhaps most notably, the U.S. trade deficit on goods & services improved massively in November to just $29.4 billion, the smallest gap since 2009 and a third of the average over the past year. While there were some special factors involved, the big narrowing prompted some heavy-duty upgrades to Q4 GDP estimates—the Atlanta Fed estimated 5.1% growth; we’re now at 2.1%.

The bigger point is that the economy continues to manage well through all the policy noise and geopolitical shifts. We now look for GDP growth to pick up this year to 2.5% from 2.2% in 2025, both a bit above the economy’s 20-year average growth (of 2.0%). That’s also above consensus, which is closer to 2.1% for the coming year, but even that’s been upgraded by nearly a full percentage point since the height of the trade war last spring. That trade uncertainty has scarcely been fully doused, with Friday bringing no news on the Supreme Court’s ruling on the emergency tariffs (but another opinion day looms on January 14).

The solid growth backdrop and the tariffs have not inflamed inflation, with low oil prices providing a dampener, so Treasury yields barely nudged this week and remain near the lower end of the range of the past year. Despite our slightly above-consensus view on growth, we see that as mostly a strong productivity story and are thus maintaining our mildly dovish view on the Fed, calling for three additional rate trims this year.

In contrast, we have seen nothing to disrupt the call that the Bank of Canada will stay on the sidelines this year. Friday’s highly anticipated Canadian employment report turned out to be a non-event, with jobs increasing a mild 8,200, but the unemployment rate backing up three ticks to 6.8%—mostly unwinding the stunning 4-tick drop in November.

Probably the biggest surprise is that the job market held onto most of the late-year strength, with the unemployment rate up just 0.1 ppt from a year ago and employment managing to churn out a decent 1.1% y/y rise for all of 2025. Perhaps a more indicative indicator is that total hours worked were up a mild 0.3% y/y, very close to the latest monthly GDP report of 0.4% y/y (in October). Unlike the U.S., there’s no great divergence between GDP and job growth in Canada, with strong productivity still a distant prospect.

Still, not unlike the U.S., the bigger story for Canada’s economy is that it has hung in there in the face of deep trade uncertainty and hefty tariffs on some key industries. Heavy support from both monetary policy—the BoC did, after all cut 100 bps in 2025, despite many protestations that they could not fix a trade war—and fiscal policy helped keep the economy on the rails.

Even trade flows showed signs of stabilizing late last year, as the net goods & services deficit was just $59 million in October (basically balanced), with exports managing to rise slightly from year-ago levels. And, like the U.S., vehicle sales churned out a small 2% rise for all of 2025, leaving them at their best annual level since 2019.

Despite the generally supportive economic data and yet another strong showing by the TSX, the Canadian dollar stumbled out of the 2026 gate, falling more than 1% this week to below 72 cents(US). In contrast to widespread views that the U.S. dollar would weaken again this year after a 7% trade-weighted drop in 2025, the greenback started the New Year on the hop. But the Canadian dollar weakened on most of the crosses as well.

The overriding view is that even if it will be an arduous and lengthy task to rev up oil production in Venezuela, it nevertheless is a direct competitor to Canadian heavy oil and a potential long-term drag on relative prices. At the very least, the prospect of revived production from the South American OPEC member could slightly cool investment inflows to Canada’s energy sector—the group saw its stock prices droop 2% this week, even as WTI prices rose.

On the flip side, calls for another pipeline to the coast intensified dramatically. We would just note that it took more than 10 years from the time of the first official application for the TMX pipeline until its opening in 2024. So, similar to the chances of a big upgrade in Venezuelan production, a new avenue for Canadian exports is likely more a story for the 2030s than the near-term horizon.

Policy Contributing Writer Douglas Porter is Chief Economist for BMO.