By Douglas Porter

January 23, 2026

Three weeks into it, how’s your 2026 going so far? Let’s just say that this may have been a holiday-shortened week in the U.S., but it felt like a year in Europe. Kicking off before the workweek even began, eight European economies were threatened with a 10% tariff over their (seemingly reasonable) stance on Greenland, with many warning of swift retaliation.

Unsurprisingly, markets were not impressed, having assumed stable U.S./Europe trade relations for 2026, and promptly sent yields higher, and the dollar and equities lower. The renewed flare-up landed at the start of this year’s World Economic Forum, and the sudden tense standoff over Greenland turned the world’s focus on Davos, and President Trump’s speech. Abruptly calming the market squall—and likely reacting to the squall—the President avowed that the U.S. would not use military force, and, in fact, had reached the framework of a “deal” on the icy island.

The only real winners from this week’s series of unfortunate events were gold, silver and gas. The initial prospect of a flare-up in U.S./EU tariffs triggered some flight to safety, and/or a shift away from U.S. dollars, mostly to the benefit of precious metals. But, notably, the initial bump in gold kept going, with bullion rising by more than 7% this week alone to within sight of $5,000/oz. As a reminder, it was sitting around $2,600 a year ago. Silver has been on an even bigger rampage, hitting $100 on Friday, or more than triple the level of a year ago.

While spectacular, the surge in these metals has precious little impact on the economy; and it’s notable that even with the spike, overall measures of commodity prices are little-changed from a year ago. The one other resource outlier was natural gas, which spiked 70% on the week, as North America deals with its own version of ice-land.

Even with all the market drama, the net impact for both U.S. stocks and the Treasury market was limited. Ten- and 30-year yields are ending the week only slightly higher than where they left off last Friday, although both are up 30 bps from last fall’s lows.

Meantime, global bond yields were generally higher across the board this week, with all eyes on Japan. While 10-year JGB yields were up ‘only’ 8 bps to 2.26%, that is a towering 100 bps above year-ago levels, and there’s little doubt that the persistent back-up has pressured yields everywhere. Adding some spice, PM Takaichi dissolved the Lower House, with an election looming February 8, and Japan’s inflation rate pulled back to just 2.1% in December. The net impact on the yen of all these factors left it stronger near 156/US$.

Amid the geopolitical and market machinations, the economy soldiers on, and to a firmer degree than widely expected. Ahead of Davos, the IMF released its latest forecasts, and the main point there was another round of upward revisions, leaving global growth still chugging along at a perfectly normal pace of 3.3%, or so. For the U.S., we have revised up our estimate for both 2025 and 2026 GDP growth by a tick, following an upward revision to Q3 GDP to 4.4% and news that real consumer spending retained solid momentum heading into the turn of the year.

Amid the geopolitical and market machinations, the economy soldiers on, and to a firmer degree than widely expected.

To wit, Q4 spending is now on track for just over a 3% pace, and we have nudged up our call for GDP to 2.6% for this year. Jobless claims remain lodged at a low level near 200,000, and even consumer sentiment is edging up, according to the University of Michigan. It seems that even as the political noise has been seriously amped up to start the year, consumers—and the economy as a whole—are doing an admirable job of separating the signal from the noise.

Few have been better able to ignore the noise than Canada’s equity market, with the TSX reaching yet new heights this week despite the swirling storms all around. Of course, the latest surge in metals prices provided support for materials, assisted by the spike in gas and a firming in crude oil to US$61/barrel. Even with a serious wobble on Tuesday, the TSX still managed a net gain on the week, and is remarkably able to shrug off geopolitical events.

The Canadian dollar also had a strong week, rising 1.5% to 72.8 cents (or $1.371/US$). It benefitted both from a broad softening in the U.S. dollar, but also from the double-barreled strength in both gold and oil prices. After all, those two commodities are currently the number 1 and number 2 largest Canadian exports. True, the production and mining of gold may not be huge movers for the Canadian economy, but the metal is increasingly weighing into the currency’s future.

Mostly overshadowed in the midst of the Greenland tempest was the mundane reality that we have both an FOMC and Bank of Canada rate decision due Wednesday. They have been somewhat overlooked in part because neither central bank is expected to do anything. In fact, most of the discussion around the Fed this week was focused on the oral hearings before the Supreme Court on Governor Cook’s future. The quick take was that the Justices were highly skeptical of the Administration’s arguments, and that she is likely to keep her job, for the time being.

Markets are now not really expecting a Fed rate cut until June, or the first meeting after Jay Powell has left the Chair. We remain a bit more dovish than the market, expecting three 25 bp trims this year. True, real GDP growth expectations are being lifted, but it’s coming from better productivity, and the job market remains sluggish while core inflation is stable to lower.

The long-awaited PCE deflator revealed this week that core cooled to a 2.3% annualized rate over the latest three months. That’s even below the latest median projection by the FOMC members of core inflation for 2026 of 2.5%, a dovish development.

For the Bank of Canada, there is zero debate that rates will hold steady this meeting, as was the case in December. In fact, our call and the consensus is leaning to no change in BoC rates for all of 2026. We continue to believe, though, that if there is a move, it is much more likely to be a rate cut rather than a hike this year. And, after dabbling briefly with the thought of a hike late last year, the market has also shifted back into our camp, pricing in a trace chance of a rate trim at some point in the first half of the year.

Our core view is that rates are still in neutral terrain—albeit toward the lower end—yet the ongoing trade uncertainty is anything but a neutral force. Suffice it to say that this week’s dueling speeches in Davos hardly bolstered the prospects for a smooth USMCA review. Meantime, GDP growth will struggle to stay positive for Q4, employment appears to be coming back to reality after the fall fling, and underlying inflation is probably cool enough to keep the door ajar for rate cuts.

Policy Contributing Writer Douglas Porter is Chief Economist for BMO.