By Douglas Porter

February 13, 2026

Forget about coming for your job, Wall Street has decided that AI may be coming for your entire industry.

Various sectors are being singled out, one by one, as being particularly vulnerable to AI advances, and are getting thrashed. And even the mega tech companies are not immune, with the Nasdaq stumbling a bit more than 5% in the past two weeks, and unable to crack above the record high set way back in late October. However, other somewhat forgotten and quieter corners of the market are doing just fine, highlighted by the Dow’s recent trip above the 50,000 mark for the first time ever.

The relative strength there is led by staples, utilities and industrials, arguably the slowest-growing, most “boring” sectors. In short, we are witnessing a classic rotation from the sizzling to the silent.

This big shift in sentiment is unfolding against a shifting and mixed backdrop for the U.S. economy. Highlighting the complicated nature of the economy, two marquee data releases sent off highly contradictory signals within 24 hours of each other.

First, December retail sales pulled up well short of expectations at flat in that key month, and the control group actually fell 0.1%. Sales were up just 2.4% from a year ago, even below headline inflation. This raised all sorts of questions about the health of the consumer, especially when coupled with evidence that even middle-income groups are now struggling to repay their debts.

Yet, just a day later, the delayed January employment report was surprisingly sturdy nearly from head to toe, with private payrolls up 172,000 and the jobless rate easing a tick for the second month in a row to 4.3% (the household survey found 528,000 new jobs). True, the gains were driven by health care, but a job is a job, and average hourly earnings are still chugging along at 3.7% y/y.

Combined with the trepidation around AI, the market leaned more into the soft signals from the data—perhaps also with an eye on the massive downward revisions to last year’s jobs tallies. After all, the revised average monthly payroll gain in 2025 is now pegged at a mere 15,000, down from initial estimates of closer to 100,000. Moreover, initial jobless claims have nudged up to start this year, small business confidence has dipped, and existing home sales were frozen in January, all leaning to cooler growth.

And the final key release of the week, the January CPI, put its thumb on the softer side of the scale. While core prices were in line with consensus at +0.3% m/m, we would view that as mildly good news, given the propensity of prices to pop at the start of the year since the pandemic.

The average January rise in core CPI over the past four years was +0.44%, by far the highest month of the year (even after seasonal adjustment). Adding to the milder tone, headline prices rose just 0.2%, clipping the annual inflation rate to 2.4%, while the yearly core rate eased to 2.5%—the slowest pace in almost five years. Putting that in perspective, core CPI was running 2.4% y/y in February 2020, just before the world changed.

Granted, the CPI readings still come with some implicit warning labels, given the high degree of estimated prices, but the main story is that inflation does seem to be gradually ebbing, and the past year’s tariff frenzy has not caused a serious bump.

As a sidebar, the one area where tariffs have indeed made a measurable impact is in U.S. government revenues. Whatever one’s opinion of tariffs, there is no debating that customs duties were $27.7 billion in January versus $7.3 billion a year ago (or just before the trade war first erupted). This brought the 12-month tally to $284 billion, versus $80 billion in the prior 12 months, alone carving a bit more than $200 billion from Washington’s budget deficit.

Even so, the CBO projected this week that the deficit for the full fiscal year will rise to $1.85 trillion this year (from $1.775 trillion in FY25), keeping it steady at 5.8% of GDP. Some of that expected widening reflects the fact that the stimulus aspects of the OBBBA kick in this year, while the restrictive measures will only arrive in 2027.

Pulling these strands together, Treasury yields moved lower through the week, with the long end especially pulling back. After testing a six-month high of 4.30% just last week, the 10-year yield was approaching 4.05% by Friday morning—its lowest ebb in more than two months. (Besides domestic factors, also helping cool yields was a calming in Japan’s bond market, where 10-year JGBs have stabilized at around 2.2% in the past month after leaping 100 bps in a year.)

The short end wasn’t left out of the rally, as 2-year yields dropped almost 10 bps to 3.4%. While there is still little chance of a Fed rate cut in the next two meetings—the last two that Jay Powell will chair—markets are now pricing in a bit more than two full cuts through the rest of 2026, moving a tad closer to our call of three cuts. The balance of sluggish retail sales, cooling inflation, narrow job gains, and calmer equities all lean our way… for now.

In stark contrast to the deluge stateside, it was a data drought in Canada, with no key releases this week. Unfortunately, that did not keep the spotlight away, with Windsor Ontario somehow becoming a nexus of attention. The nearly completed Gordie Howe Bridge became the latest flashpoint in Canada/U.S. relations; while that seemed to quiet quickly, the episode hardly sends a positive signal for the upcoming USMCA review. Chiming in, U.S. Trade Representative Greer indicated that talks with Canada had been less constructive than those with Mexico.

Having dealt with a year-long barrage of trade threats, Canadian markets have become quite adept at separating the signal from the wall of noise. Accordingly, the Canadian dollar nudged up on the week, essentially moving in line with the euro. And even with one big stumble, the TSX finished higher for the week, after scaling to a record high on Tuesday.

Canadian bonds mostly mirrored the rally in Treasuries, with 10-year GoCs easing 15 bps on the week to 3.25%. But there is still little chance that the BoC will be cutting rates this year. While markets are nodding in the direction of easing, the odds are long given the overnight rate is already sitting just below inflation.

This coming week brings Canada’s January CPI report—thankfully delayed a day to Tuesday—and it could show a tick-up in the yearly rate to 2.5%. What’s notable there is such a result would leave Canada with a higher headline inflation rate than the U.S. for one of the few times in the past six years (there was a stretch in 2023 when they last crossed paths, when inflation was receding rapidly from the 2022 peaks). Needless to say, this is one race you don’t want to be winning, and it’s a tidy way to illustrate why the Fed will be cutting this year and the BoC will be holding fast.

Policy Contributing Writer Douglas Porter is Chief Economist for BMO.